M E R G E R S & A C Q U I S I I T O N S · B e t e i l i g u n g e n · A l l i a n z e n · R e s t r u k t u r i e r u n g e n · i D v e s t m e n t s · P r i v a t e E q u i t y M&A Media Services GmbH · Publikationsorgan: Bundesverband Mergers & Acquisitions gem.e.V. M&A REVIEW 9/2024 Special Vol. 35 2024 # p e m a c o m 2 0 2 4 FUTURA EUROPAE . i e d w e v e r - a m w w w .

EDITORIAL pemacom 2024: Futura Europae: Souvereign or vassal? The economic outlook 1. pemacom 2024 Private Equity and M&A Community (pemacom) is the industry’s leading conference for cross-border private equity and mergers & acquisitions transac- tions. On 24 September 2024, Munich Services & Consul- ting (MuSAC), in conjunction with DealCircle and Reed Smith as main co-sponsors, will host the 2024 annual Cross-Border Private Equity M&A conference pemacom at the Hotel Bayerischer Hof in Munich. Once again, we expect to welcome some 350 par- ticipants at the conference to share knowledge and insights, connect and network, and celebrate at Oktoberfest with panelists and sponsors. 2. What is Europe’s future? In recent years, we have been faced with a vicious circle of crises. The COVID-19 pandemic, outbreak of the war in Ukraine, rising inflation and crises in the Middle East might only have been the beginning of a perpetual chain of unexpected challenges. The potential economic segregation of the United States and China resulting from competition among the world’s superpowers might not yet have materialised. The world is in disorder and it seems that the upcoming election in the United States represents a junction on the global road ahead. But what does this mean for us in Europe and where are we heading? election in the United States. How will the resulting changes impact the future of Europe’s politics and economy? During the first six months of 2024, transactional activity involving German angles was fairly stable despite the crisis environment. There was even a slight increase in the number of transactions albeit against the background of insolvency-triggered deals. But what impact will 24H2 have on us? Some market players suggest an uplift in transactional activity based on a stabilising environment and an easing of financing conditions. That might depend on whether the outcome of the U.S. election will support inves- tors’ confidence, given the clarity of the way ahead. Certainly, technological shifts resulting from artificial intelligence (AI) and confidence in the technology sector will remain important drivers. But whether they suffice to overcome geopolitical tensions and segregation of geographic markets remains to be seen. Against this background, it will be interesting to see how the mechanics of the private equity sphere will operate. Will exit pressure lead to an increase in deal activity, consequently unleashing the deployment of dry powder? pemacom 2024 will explore these areas and expec- tations. 3. The conference features Following the shifting polls in the European Union and France, we are moving towards the presidential pemacom 2024 will take into consideration the current disquieting environment. Publication Organ published by BUNDESVERBAND BUNDESVERBAND MERGERS & ACQUISITIONS GEM. E.V. ACQUISITIONS GEM. E.V. – a brand of M&A Media Service GmbH Vol. 35 • M&A REVIEW 2024 • PEMACOM 2024 3

International View NAV finance: an introduction Bronwen Jones & Dirk-Peter Flor, Reed Smith LLP The impact of rated note feeder funds on sub-line facilities Leon Stephenson & Brendan Gallen, Reed Smith LLP AI, digitalization and technology – where do we go? Peter Emmi, Reed Smith LLP Europe View Simple Agreement for Future Equity: Implementation under German law Dr. Nikolaus von Jacobs, Reed Smith LLP Reform of the EU FDI Screening Regulation – what to expect for M&A transactions? Dr. Germar Enders, Reed Smith LLP Three key regulatory considerations for buyers considering EU/UK deals Tom Whelan, Isabelle Rahman & Charles Sauvage, Reed Smith LLP Advertorial Find attractive business opportunities amongst millions of European private companies – using the latest technology Valu8 Europe View Key issues for US buyers to consider when buying private UK/EU companies Tom Whelan, Reed Smith LLP Breach of director’s duties: the largest ever wrongful trading judgment in the English courts Linton Bloomberg, Reed Smith LLP Authorised capital in the GmbH – an almost forgotten instrument for VC/PE majority investors Matthias Weingut, Reed Smith LLP The Economic Crime and Corporate Transparency Act 2023: A new era for UK company law? Sakil Suleman, Reed Smith LLP Outlook for the German M&A market in 2025 Dr. Michael R. Drill, Lincoln International GmbH Conference Agenda 2024 Private Equity and M&A Community – Ahead of Decoupling? Transactions on the eve of a new era Vol. 35 • M&A REVIEW 2024 • PEMACOM 2024 CONTENT 6 9 12 15 17 21 24 26 29 32 36 39 42 5

INTERNATIONAL VIEW • REPORT Although different types of funds may utilise NAV facilities, and use them for different purposes, the key characteristics are that they are generally pro- vided at the fund level or directly below the fund level, and the primary source of repayment is from the underlying investments. They will be structurally subordinated to senior leverage financing, so in some ways structurally similar to mezzanine financ- ing. However, NAV facilities usually have recourse against the cashflows of all or a multitude of the underlying investments, whereas mezzanine facili- ties usually only have recourse to a single underlying investment. The following paragraphs provide some of the key details of how NAV financing to the different asset classes of funds is structured. Private equity (PE) funds will have a somewhat illiquid portfolio of perhaps only 10–20 investments. The security arrangements for NAV borrowing by PE funds varies. Some PE NAV lenders are comfor- table with security only over the bank accounts of the fund into which investment proceeds flow on the disposal of investments, with an agreed regime for investment disposal on enforcement. Other PE NAV lenders require security over the shares of each individual holding companies that own an invest- ment as well as bank account security. Real estate and infrastructure funds will often also have individual asset level leverage finance in place. The security structure for these NAV financ- ings usually includes holding company share security and bank account security but may also include direct mortgages over underlying real estate or infrastructure assets. Direct asset level security is less common as it will compete with the leverage finance security at each individual asset and intercreditor discussions will be required. NAV facilities to real estate and infrastructure funds are often provided by the teams at banks who have traditionally provided leverage finance against individual assets. These teams already have a good understanding of the underlying assets individually, so it is a small step for them to understand the risks and rewards of providing portfolio-wide NAV financ- ing against multiple real estate or infrastructure investments. transferred on enforcement. This means that on an enforcement the NAV lenders often cannot quickly transfer the limited partnership interests to a third party purchaser, resulting in likely longer times to recover the full amount borrowed. Direct lending funds and credit funds that acquire and hold loans and other debt instruments may enter into NAV facilities (also called ABL facilities) and provide security over the underlying loan port- folio, the bank accounts into which loan repayments are made and often also over the shares in the subsidiary company which is the lender of record for the loans held by the fund. On enforcement, the portfolio of loans can be sold as a whole, or alterna- tively the shares in the subsidiary company holding the portfolio can be sold. A key factor in determining an appropriate security structure will be the due diligence carried out in relation to the underlying investments in the portfo- lio. The asset class concerned will set the parame- ters for the diligence exercise. For a PE fund with (say) 12 or 15 investments, relatively detailed dili- gence will usually be carried out into each invest- ment to determine things like drag and tag rights for co-investors, change of control provisions, and whether the consent of any related party is required for an enforcement sale. For a credit fund, on the other hand, with (say) 200 underlying loans, diligenc- ing every loan is unlikely to be cost efficient and so only a sample of loans may be reviewed, to confirm matters like transfer restrictions. The key financial covenant in NAV facilities is the LTV covenant. This is the financial ratio of the amount of the financial indebtedness of the borro- wer against the NAV of the investment portfolio that will be securing the facility. Depending on the asset class and the diversification of the underlying invest- ments, LTV ratios can range from 10% to as high as 60% - or higher. NAV facilities may include a “LTV grid” that allows the borrower to benefit from higher LTV ratios, and therefore a higher facility amount provided by the lender in the event that more invest- ments are included in the portfolio. Likewise, the interest rate payable on the facility may also decre- ase if the LTV decreases, and vice versa. Some NAV facilities also include cash sweep (or increased cash sweep) provisions based on a LTV grid. Secondary funds that acquire and hold limited partnership in underlying funds can borrow secured against those limited partnership interests, although limited partnership interests almost always require consent of the underlying fund before they can be Closely linked to the LTV covenant calculation is the valuation of the portfolio of investments. The start- ing point for valuations is the valuation prepared by the fund for its investors, usually quarterly, in the Vol. 35 • M&A REVIEW 2024 • PEMACOM 2024 7

INTERNATIONAL VIEW • REPORT The impact of rated note feeder funds on sub-line facilities Leon Stephenson & Brendan Gallen, Reed Smith LLP There has been a noticeable growth of particular categories of investors in the alternative investment space in recent years. The increase of participating retail investors, for example, is observed by the number of expanding platforms in the market, being provided with exposure to leading alternative asset managers and granted the opportunity to commit (modest amounts of) capital to a particular fund (relative to the sponsor’s overall fundraising target). In turn, these growing platforms are busy marketing their wares in the retail space, taking the majority of the on-boarding burden away from the alternative asset manager and in turn delivering a single subscription agreement, backed by the promises of this nascent wave of investors. Another area of rapidly growing prominence involves insurance investors. A longstanding issue with admitting insurance investors into the private credit space has been the regulatory obligations and risk- based capital requirements such investors are subject to. A fund typically issues equity interests to an investor in return for its commitment to a fund, and given that can often be prohibitively burden- some for insurance investors, the discussions with these entities usually ends swiftly. A solution that has proved workable for both insu- rance investors and alternative asset managers alike involves the “rated feeder”. While the structure here doesn’t necessarily need to be a “feeder” – a parallel partnership would also provide a functioning arrangement – it appears the rated feeder has sto- len a march on alternative structuring approaches and, to date, proven to be the preferred structuring solution. It is often the case that an alternative asset manager is in fundraising mode, raising its inaugural/ next vintage of a particular credit strategy, and the opportunity presents itself to admit insurance capi- tal. In days gone by, those discussions with insu- rance investors may have ended rather abruptly, but now the alternative asset manager has a tool in its toolbox to keep those discussions alive. Once an alternative asset manager has a prospec- tive insurance investor engaged in committing capital to ongoing fundraising efforts in the form of debt interests rather than equity interests, there are a number of things that will need to happen. Key to this is to engage with a rating agency at the earliest opportunity and start the dialogue about the process required to have an entity rated. There are prominent participants in this space well versed in the process that will need to be followed. Of course, if an alternative investment manager is in fundraising mode, it is unlikely that the fund will have made many (if any) investments. The rating agency will work with the alternative asset mana- ger based on its historical investments, along with a hypothetical basket of assets based on the fund strategy, and begin the rating process based on this. The ultimate rating achieved will be important for the insurance investor(s) and therefore the alterna- tive asset manager. As with other securitized Vol. 35 • M&A REVIEW 2024 • PEMACOM 2024 9

to be issued under such note purchase agreement is subordinate to any debt provided by a subscrip- tion line provider – effectively a waiver by the investor of any prior or competing rights it may have with the subscription line lender. Ideally, this waiver would also be contained in an investor consent letter signed between the subscription line lender, the feeder fund and the investor, if the investor is prepared to sign such letter. However, such an investor consent letter is more usual only in subscription-line facility transactions where there is a single investor or very concentrated investor base. As funds seek to access a wider range of investors and the insurance investors in particular, we expect an increase in the number of funds that will rely on rated note feeder funds as the means of drawing down investor commitments. The jurisdiction of establishment of the fund and the drafting of the constitutional documents of the feeder fund and the note purchase agreement will all be important INTERNATIONAL VIEW • REPORT factors in determining whether a subscription-line lender will be able to take account of such an investor in its borrowing base. Leon Stephenson is co-lead of the Reed Smith fund finance team, based in London. Leon and the team work with banks, other financial institutional lenders, managers, general partners and limited partners of funds on specialist fund financing transac- tions with private equity, secondaries, real estate, direct lending and infrastructure funds. Leon has particular specialist knowledge of NAV/asset-backed and hybrid facilities, secondary funds facilities, capital call facilities, co-investment and GP/ manager support facilities and other types of liquidity facilities provided to funds, and he is and recognized as a “Leading Individual” in Fund Finance by Legal 500 UK 2024. Brendan Gallen’s practice focuses on advising clients on the structuring, establishment and operation of, and investment into, alternative investment funds across all major asset classes including credit, private equity, infra- structure and real estate. He also advises in relation to spin outs, secondary transactions, GP-led restructurings, managed accounts, carried interest and other co-investment schemes. ADVERTISEMENT Paris – Home of Fusions & Acquisitions https://fusions-acquisitions.info Foto: © Netfalls– stock.adobe.com Vol. 35 • M&A REVIEW 2024 • PEMACOM 2024 11

INTERNATIONAL VIEW • REPORT The advent of generative AI has brought significant legal and ethical challenges. The legal challenges are particularly evident in recent copyright infringe- ment lawsuits such as the U.S. lawsuit filed in 2023 referred to as Concord Music Group Inc. v. Anthropic PBC (2023) under which eight music publishers sued an AI startup claiming that it improperly used their copyrighted song lyrics to train its generative AI large language model, “Claude,” with large amounts of text copied from the Internet, and the recently filed U.S. lawsuit UMG Recordings Inc. v. Suno Inc. et al. (2024) under which several major record labels including Sony Music are suing two AI startups claiming that they illegally copied the recording labels’ music to train its neural network model in order to produce outputs mimicking human sound recordings. These cases underscore the need for clear regulations and ethical guidelines to navigate AI’s legal complexities. 2. Regulatory frameworks and ethical guidelines Developing comprehensive regulatory frameworks is crucial to ensure the ethical and responsible use of AI. These frameworks must address issues such as data privacy, security, and bias mitigation while promoting transparency and accountability. Regula- ting artificial intelligence (AI) has become a pivotal focus in both the United States and the European Union, reflecting an effort to balance innovation with ethical and safe AI deployment. In the United States, the White House introduced the Blueprint for an AI Bill of Rights in October 2022 which provides guidance on ensuring equitable access and use of AI systems and aimed at creating safe and effective systems, protecting against algorithmic discrimination, ensuring data privacy, providing notice and explanation, and maintaining human alternatives and considerations in automa- ted processes. Building on this, an Executive Order was issued in August 2023 calling for the establish- ment of federal standards and requiring developers of powerful AI systems to share safety test results and critical information with the U.S. government and directing the U.S. Department of Commerce to provide guidance on content authentication and watermarking for AI-generated content. In May 2024, the Bipartisan Senate AI Working Group released an AI Roadmap, which encourages further research on AI-related issues, such as its impact on the workforce and high-risk applications. Furthering these efforts, the No AI FRAUD Act introduced in the House of Representatives in October 2023 and the NO FAKES Act introduced in the Senate at the end of July 2024 both aim to protect individuals from unauthorized digital replicas of their voice and likeness. Over 25 states have introduced AI legisla- tion to address regulatory gaps. For example, Cali- fornia proposed numerous AI-related laws in mid- 2024, while Colorado enacted legislation regulating the private sector’s use of AI in decision-making to protect consumers from discrimination. In addition, New York City passed an AI bias audit law that requires employers that use AI driven tools to aid in evaluating candidates to engage independent auditors of the tools to ensure no bias is present. The European Union enacted the EU AI Act in December 2023 (which will start taking effect on August 1, 2024 and will be fully in force on August 2, 2026) which is a comprehensive piece of AI legislation that classifies AI systems based on their risk levels and imposes stringent requirements for high-risk applications. The act ensures that AI sys- tems are safe, transparent, and respectful of funda- mental rights, with rigorous testing, documentation, and monitoring requirements, especially for AI used in critical sectors such as healthcare, transportation, and public services. The legislative measures in both the United States and the European Union reflect a shared commit- ment to creating a regulatory environment that fosters public trust and ensures AI advancements benefit society. By establishing clear guidelines and protections, these frameworks aim to promote the ethical and safe deployment of AI technologies, addressing current challenges and setting the stage for future innovations. Ethical and responsible AI development involves addressing potential biases in AI systems, ensuring transparency and accountability, and safeguarding privacy and data. Implementing comprehensive regulatory frameworks and ethical guidelines will be critical to ensuring that AI advancements are aligned with societal values and benefit all members of society. Continuous efforts in education and public awareness will empower individuals to understand, engage with, and contribute to the evolving land- scape of AI. 3. Where do we go from here AI can optimize energy usage in smart grids, pre- dict natural disasters, and assist in the development of renewable energy technologies. By analyzing vast datasets, AI systems can identify patterns and Vol. 35 • M&A REVIEW 2024 • PEMACOM 2024 13

EUROPE VIEW • REPORT Simple Agreement for Future Equity: Implementation under German law Dr. Nikolaus von Jacobs, Reed Smith LLP 1. Introduction 4. SAFE: Implementation via authorized capital SAFE, a popular form of early-stage financing in North America, is not well received in Germany. However, it does work if the right mechanism is used. 2. SAFE in the USA In the United States, the Simple Agreement for Future Equity (SAFE) has established itself as an entrepreneur-friendly and simple mechanism for the early-stage financing of start-ups. The SAFE agree- ment grants the investor the right to receive shares in a future financing round. It was introduced to the market at the end of 2013 by the start-up accelerator Y Combinator as an alternative to convertible loans and has since established itself in the United States and Canada. What explains the low use of SAFEs in the German market? One reason is that it is impossible to trans- fer the American SAFE concept one-to-one to Ger- man corporate law. However, arrangements exist that can get around that obstacle. One way to implement SAFEs in German law is to use authorized capital in combination with a participation agree- ment between the start-up, the shareholders and the investors. As part of the participation agreement, the investor provides the start-up with money and in return receives an entitlement to subscribe to new company shares, which are created when the authorized capital is allocated as part of a later financing round. The financing round in turn deter- mines the valuation. SAFEs also regularly provide for discounts and caps. This SAFE structure has no loan component. 3. Start-up financing via convertibles In Germany, SAFEs are still not very common for early-stage financing. The use of convertible loan agreements (convertibles) continues to predomi- nate. The main difference between a SAFE and a convertible is that a convertible is essentially a loan with a current interest rate and maturity date that can be converted into equity. In most cases, inves- tors choose to convert the convertible into equity for ratio purposes. For the conversion into company shares, the convertible can provide for an agreed price per company share based on a company valuation. Alternatively, the convertible can also include a discount on the valuation in a future financ- ing round. To protect investors from an excessively high valuation, convertibles regularly provide for a cap on the conversion price. 5. Challenges In Germany, however, the capital increase for cor- porations (including GmbHs) must be registered with the commercial registrar. In the commercial registration application, company management must confirm that the capital contributions have been made and are finally at the free disposal of the management. However, the staggered separation of the capital injection under the participation agree- ment from the subscription of new shares can lead to challenges when the management provides the required assurance. The funds received in the first step under the participation agreement are likely to have already been used up by the later date. There- fore, in addition to the investment already made, the investor must also pay the amount of the nominal Vol. 35 • M&A REVIEW 2024 • PEMACOM 2024 15

EUROPE VIEW • REPORT Reform of the EU FDI Screening Regulation – what to expect for M&A transactions? Dr. Germar Enders, Reed Smith LLP 1. Introduction On 24 January 2024, the European Commis- sion (“Commission) published a proposal to reform the current Regulation on Foreign Direct Invest- ment Screening (Regulation 2019/452) (“FDI Screening Regulation). The proposed draft of the revised FDI Screening Regulation (“Draft FDI Regulation”) is part of five initiatives to strengthen “European economic security” and can be seen as a response to the Commission’s evaluation report on the functioning and effectiveness of the FDI Screening Regulation. To better identify and address security or public order risks related to foreign direct investments (“FDI”) that affect at least two EU member states (“Member States”) or the EU, the reform aims at ensuring that all Mem- ber States have appropriate screening mecha- nisms in place and at addressing existing shortco- mings in the effectiveness and efficiency of the current cooperation mechanism. If the Draft FDI Regulation enters into force, FDI proceedings in Europe should become more coordinated and efficient. However, the scope of the review could be broadened and the envisaged introduction of an EU-wide post-closing screening regime could cause more legal uncertainty. 2. Background The current FDI Screening Regulation, which came into force in October 2020, created a cooperative framework for the screening of FDIs by the respec- tive authorities of Member States with regard to the impact of such investments on security and public order. Since the initial discussions about the FDI Screening Regulation, several Member States have either strengthened their already existing national control systems or introduced control systems where non existed so far. According to the Commission’s Draft FDI Regulation, the number of Member States that have introduced screening mechanisms has risen by eight additional Member States up to 21 Member States since 2017. However, the Draft FDI Regulation also highlights that a signi- ficant share of FDIs in the EU goes to Member States which do not have a screening mechanism in place (22.7% of foreign acquisitions and 20% of greenfield projects), leaving vulnerabilities because potentially critical FDIs remain undetected. Although, accord- ing to the explanatory memorandum to the Draft FDI Regulation, the Commission and relevant Member State authorities have reviewed more than 1,100 transactions since the cooperation mechanism was introduced, the management of multi-jurisdictional notifications has been challenging and raised effici- ency issues. Examples include insufficient coopera- tion between screening authorities and significant differences between screening mechanisms across the EU, particularly in terms of timing, coverage and notification procedures. 3. Key aspects of the Draft FDI Regulation The proposed reform provides for a more harmo- nised and coherent application of the various FDI regimes in place in individual Member States. It aims to close gaps which might arise by screening FDIs only at the national level, as compared to screening Vol. 35 • M&A REVIEW 2024 • PEMACOM 2024 17

EUROPE VIEW • REPORT legal situation was recently confirmed by the Euro- pean Court of Justice in its “Xella”-ruling (European Court of Justice, 13 July 2023 - C-106/22 - Xella Hungary). The proposed Draft FDI Regulation now extends the scope of the FDI Screening Regulation to investments made by a European acquirer that is controlled by a non-EU investor. While this is an extension in scope of the European screening regime, the approach proposed in the Draft FDI Regulation is still not as far reaching as that of several Member States which have regimes in place that subject even EU companies with minority non- EU shareholders to FDI screening. It remains to be seen if Member States with stricter regimes imple- ment the approach of the Draft FDI Regulation, which considers indirect control by a foreign inves- tor as the relevant criterion. Greenfield investments are now also covered by the Draft FDI Regulation. While the proposal refrains from establishing an obligation to review greenfield investments, the Commission recommends that Member States at least include them in the scope of application if they are made in sectors that are important for the security and public order of the Member State. 3.5 Obligation to introduce a post-closing screening mechanism Member States will be required to introduce post- closing screening regulations for foreign invest- ments that are not subject to any authorisation requirement where the screening authority has grounds to consider that the FDI may affect security or public order (Art. 4 para. 2 lit (c) of the Draft FDI Regulation). In this context, the screening authority will be authorised to open proceedings by its own initiative at least 15 months after completion of the transaction in question. By requesting the introduction of a post-closing review mechanism for a minimum period of 15 months post closing, the Draft FDI Regulation subs- tantially threatens deal certainty for parties to M&A transactions. If this provision comes into force, Member States should ensure that voluntary notifi- cations of FDIs and voluntary initiations of scree- nings are permitted to enable investors to secure transaction certainty. In the current draft proposal, the provision on post-closing screening procedures would even allow opening review proceedings where a transaction has already been approved. This is probably not the intention, but should be clarified in a revised draft. 3.6 Extension of reporting obligations, right to comment and own-initiative procedures The Draft FDI Regulation extends the reporting obligations of Member States to include notifications to other Member States and the Commission (Art. 5 of the Draft FDI Regulation). Phase I procedures only have to be notified under certain conditions. A notification requirement for Phase I reviews arises if the target company is involved in a project or programme of Union interest (Annex I of the Draft FDI Regulation) or is active in an area in which there is an approval requirement (Annex II of the Draft FDI Regulation) and the inves- tor (i) is controlled by a non-EU government, (ii) is subject to sanctions or (iii) was involved in a foreign investment that was previously screened by a Member State and not authorised or only authorised subject to conditions. Phase II procedures must always be notified. Where a transaction is subject to simultaneous screenings in more than one Member State (“multi- country transaction”), notifications to the relevant authorities shall occur on the same day. This requi- rement underscores the need for cooperation in the planning and timing of M&A transactions (for details on content and procedures in these cases, see Art. 6 of the Draft FDI Regulation). Art. 7 of the Draft FDI Regulation continues to allow Member States to submit comments to another Member State on planned foreign investments in that other Member State. The Member State must also forward these comments to the Commission, which continues to have the right to issue opinions. Art. 8 of the Draft FDI Regulation goes into more detail than the current FDI Screening Regulation in setting out the deadlines and procedures for provi- ding comments and opinions on notified foreign investments and extends a number of existing deadlines. Art. 9 of the Draft FDI Regulation allows a Member State to open its own procedure in relation to a for- eign investment on its own initiative (so-called “own initiative procedure”) if it considers that such foreign investment in the territory of another Member State which has not been notified to the cooperation mechanism is likely to negatively affect its security or public order. The initiating Member State has 15 months to do so after the investment has been made. Vol. 35 • M&A REVIEW 2024 • PEMACOM 2024 19

EUROPE VIEW • REPORT Three key regulatory considerations for buyers considering EU/UK deals Tom Whelan, Isabelle Rahman & Charles Sauvage, Reed Smith LLP 1. Introduction In an era of greater economic nationalism and protectionism, there are increased regulatory bur- dens for buyers generally around the globe, and the EU and UK are no exception to that, albeit fewer such barriers exist in the UK. We highlight three key ones below. 2. Merger control If the parties to a transaction meet certain well defined monetary turnover and/or market share thresholds in EU countries, then a mandatory EU merger control filing will be triggered, either on a one-stop-shop basis at the EU level (i.e., with the EU Commission) or alternatively, at the national Member States level (i.e., with national competition authorities). The EU Commission’s jurisdictional turnover based thresholds are set high and require substantial turnover in the EU to be achieved by at least two parties to a deal in order to trigger a filing. By contrast, the jurisdictional thresholds of the EU Member States tend to be lower and filings are therefore more easily triggered at the national level in practice (e.g., Ireland where a filing is required where (1) the parties’ combined turnover in Ireland is at least €60m (approx. US$64.8m), and (2) the Irish turnover of each of at least two parties is at least €10m (approx. US$10.8m)). This can lead to multiple mandatory national filing requirements which need to be carefully managed from a time and cost perspective (but note that when three EU Member States filing requirements are triggered, a deal can normally be reviewed by the EU Commis- sion by following the specific Form RS procedure). A failure to make a mandatory filing is the commis- sion of a criminal offence in certain EU countries such as Greece and Ireland, so it is important for a proper analysis to be made and advice taken. In most EU countries though, failure to file can lead to the imposition of significant fines on the party(ies) responsible for filing. In the UK, unlike the mandatory regimes of EU and national Member States, merger filings are volun- tary. This means that there are no sanctions for not filing in the UK before closing, even if the relevant jurisdictional thresholds are met, namely either (1) the target’s UK turnover exceeding £70m (approx. €82.1m/US$87.0m), or (2) a combined share of supply of 25% or more. In practice though, it is advisable to file if any of the UK relevant thresholds are met as otherwise, the risk is that the deal could be called in for investigation by the UK Competition and Markets Authority (the CMA) at its own initiative, and in a worst-case scenario set aside and un- wound even if the deal has already been closed. Merger filings in the EU and the UK require a signi- ficant amount of information on the target, the buyer and the corporate group to which it belongs and on the market(s) in which both businesses operate. Merger filings also require substantive input on why the deal will not impede competition. This means that the parties must factor in sufficient Vol. 35 • M&A REVIEW 2024 • PEMACOM 2024 21

EUROPE VIEW • REPORT The EU Commission’s FSR enforcement has so far, and it is still early days, focused mainly on Chinese subsidized business activities in the EU, but the EU has and will investigate all types of foreign subsi- dies, irrespective of the third country behind them. if any relevant thresholds are tripped or the invest- ment is in a sensitive sector, are very important. This can then inform any buyer’s approach to the deal, and whether it is worth pursuing. Detailed filings to the EU Commission in parallel to any applicable merger control filings will be required. This involves again a lot of information gathering for the buyer in making a filing and is both time consuming and costly. The timelines for obtaining clearance under the FSR have been deliberately aligned with the EU merger control rules. A straightforward case will be cleared in a Phase I investigation lasting 25 working days, and more complex cases are subject to an extended review period of an additional 90 working days (extendable). 5. Takeaways For any buyer, ultimately the costs of making the filings, if required and the length of time for obtain- ing clearance will need to be factored into the sale and purchase agreement with a suitable long stop date, and in certain cases a buyer would also want the ability to extend the period if a final clearance decision has not yet been issued, but the clearance process is well advanced. A robust upfront assessment of whether or not any such regimes are triggered, as well as a risk assess- ment on the likelihood of getting a positive outcome Tom Whelan focuses his practice on private equity and M&A, advising private equity sponsors, funds, private capital investors and corporates, on their deployment of capital across the world. Tom’s expertise covers buyouts, secondaries, take privates, co-investments, general M&A, bolt-ons, manage- ment incentive plans, restructurings and exits across all industry sectors. Isabelle Rahman is a partner in the Antitrust and Competition Team and is the managing partner of the Brussels office. She is also a member of the firm’s Retail & Consumer Goods group and has substantial experience in the applica- tion of the EU competition rules and counsels clients active in a wide range of sectors on antitrust risk and business compliance issues. She provides strategic advice regarding merger control, cartel and abuse of dominance investigations, assisting clients in EU, Member State and foreign proceedings. She also regularly counsels clients in relation to their pricing strategies and commercial ventures including distribution, licensing and joint ventures. Charles Sauvage is an EU antitrust & competition and EU regulatory lawyer based in Brussels. He acts on all aspects of EU competition law, merger control, state aid and EU regulatory. Charles regularly advises clients on cases before the European Commission and national competition authorities at EU and Member States levels and around the world. ADVERTISEMENT Our clients benefit from the depth and diversity of experience of more than 300 transactional lawyers in our 31 offices across the globe. Our broad experience and global footprint allows us to effectively handle complex cross-jurisdictional transactions. This ensures a consistency and continuity of service, wherever you are and wherever your business interests might lie. Winner Best Law Firm – Overall Private Equity Wire European Awards 2023 Ranked in Legal 500 UK and Europe 2023 in the Private Equity: Mid-Cap and Venture Capital categories Chambers Europe 2022 in the Private Equity: Venture Capital category reedsmith.com

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EUROPE VIEW • REPORT 4. Works councils Another key difference between the US and Euro- pean markets are workers’ rights, and requirements to inform/consult works councils, trade unions and employees about the deal (and the deal timetable will need to accommodate these requirements). There are different requirements across Europe, but generally these are a lot stronger in the EU. Compa- nies above a certain size, or with a certain number of employees, are required to elect and have employees sit on a works council, and which can also mean they have a seat on the board in countries such as France or Belgium. Where a company has operations in multiple EU countries it may also trigger requirements to inform/consult the European Works Council. Legislation around the rights of works councils to be consulted on possible acquisitions and to have a say on them is particularly broad in France and Belgium and relatively broad in Italy, the Nether- lands and Germany. In France you cannot sign an SPA above a certain size where a French company has 50 employees or more if you haven’t gone through a mandatory consultation process of up to 60 days. In some deals French law even requires employees to be informed about the deal 2 months before the signing, and given an opportunity to make an offer to buy the target. That 2 month period can be cut off early if each employee confirms in writing they do not intend making an offer. Any agreement reached is designed as a put and call option allowing the buyer to put the deal on the seller on the agreed terms once the 60 day process has elapsed and similarly for the seller to call on the buyer to honour the same if the buyer doesn’t exercise the put. Failure to go through this process in France is a criminal offence and the transaction can be set aside/ines can be levied of up to 2% of the purchase price. Although not the same for every country, fai- lure to consult can result in hefty fines and claims if not carried out properly. The UK tends to be less problematic absent any strong trades union issues and agreements being in place which capture M&A. 5. Use of W&I insurance Like the US, Rep and Warranty insurance (called Warranty and Indemnity insurance (“W&I”) in UK/EU) works the same way in the EU/UK and has similar limits and approach. Most, but not all EU/UK deals will have this feature as part of an auction process, resulting in sellers having a GBP£1 or EUR1 liability cap for any claim covered by the W&I, and leaving buyers having to look to the W&I for any claim. Buyers should look at the best W&I terms being offered by interested insurers as part of the auction process, but should also consider if they have any better agreed terms with any regular insurer they already work with. However, not all insurers will offer W&I across all EU markets and (where available) may also qualify the W&I coverage markedly in certain countries around perceived country risks. Costs can also differ significantly with the W&I costs on English law deals often being cheaper. W&I usually covers most warranties and provides a synthetic tax covenant to cover material unknown tax liabilities that relate to the pre-completion period, subject to standard exceptions. 6. Vendor Due Diligence (“VDD”) and Due Diligence (“DD”) in the context of W&I insurance Sellers often commission VDD reports which cover, accounting, finance, tax and commercial, as well as legal and sometimes insurance and technical DD reports. VDD can be very useful as buyers can bid on an informed basis. A buyer will (if successful) expect to get reliance on the VDD reports, and only conduct top up DD to cover updates since the date of the relevant reports, key areas of focus and/or gaps in the reports. In some cases (where a legal factbook) is produced, reliance is not given on such reports, which means there can be a gap in coverage as many top up reports from buyers, will assume the veracity of such legal fact books as part of any top up DD. As always, with W&I, the quality of cover being offered is dependent on the degree of DD undertaken by the buyer. Buyers who cover DD in house, tend not to get the cover expected as insu- rers want to see proper DD reports which cover all the key areas expected to be covered by the W&I. 7. Warranties and disclosure process In the US, typically you see warranties given at signing and closing with a disclosure schedule for- ming part of the SPA, with limited ability for a buyer to claim once closing has occurred. In the UK/EU context, sellers typically give title and capacity/ authority warranties at both signing and closing not usually subject to disclosure, with the buyer having the ability to claim for up to the full amount of the consideration paid if there is a breach of such war- ranties. Business and tax warranties tend only to be Vol. 35 • M&A REVIEW 2024 • PEMACOM 2024 27

EUROPE VIEW • REPORT Breach of director’s duties: the largest ever wrongful trading judgment in the English courts Linton Bloomberg, Reed Smith LLP 1. Introduction Directors of companies registered in England and Wales have been served a stark reminder that they need to take their duties seriously when trading in the “zone of insolvency”. On 11 June 2024, the High Court in England handed down both the lon- gest (at 533 pages) and the largest (possibly up to £133.5 million) judgment against certain directors of what was one of the most prominent department store chains in England. 2. Background British Home Stores (BHS) was a retail company that was once the cornerstone of the British high street. It sold homeware, clothing and furniture and, at its height, had over 11,000 employees. Whilst enjoying profitability for a number of years, things took a turn for the worse, and from 2009 BHS began to incur financial losses. This article looks into the case brought against certain of the directors of BHS for a breach of their director duties and the key takeaways that the case provides for a director of a company. These duties apply to investor nominated directors who are treat- ed the same under English law. The BHS Group was originally owned by the Taveta group of companies, which was itself associated with Sir Philip Green, and owned the entire share capital of Arcadia and well-known retailers including Arca- dia, Topman, Topshop, Burton and Miss Selfridge. On 11 March 2015, Taveta sold the entire issued share capital of BHS to Retail Acquisitions Limited for £1. On the same day as the sale, Dominic Chap- pell and Lennart Henningson were appointed as directors of the Group, with Dominic Chandler being appointed as a director shortly after. Following their appointment, the directors devised a turnaround plan to secure further funding for the BHS Group which included the sale of various properties including a flagship store in Oxford Street, London and entering into new financing arrangements. As part of the restructuring, a compromise with landlord creditors was proposed using a CVA (Company Voluntary Arrangement) mechanism which is tried and trusted under Eng- lish law and which ultimately received overwhelm- ing support of 95% of creditors (75% being the required number). However, just a month later, various companies in the BHS Group filed for administration with liquidators being subsequently appointed. The collapse of the BHS Group was one of the most high-profile corporate insolvencies in recent times. The Group’s demise led to reported debts of around £1.3 billion, including a pension deficit of nearly £600 million. It also led to the closure of 164 stores nationwide, sparking significant job losses. As a further mark of the significance of the collapse of the Group, a parliamentary inquiry was launched in 2016, looking into the failures that Vol. 35 • M&A REVIEW 2024 • PEMACOM 2024 29

EUROPE VIEW • REPORT 5.2 Professional advice Below are some key takeaways from the case: The case shows that merely seeking professional advice from professional advisors in the zone of insolvency will not be adequate for a director to defend a wrongful trading claim. Directors must turn their own minds to the issues in order to pro- perly discharge their duties. Furthermore, the weight that the courts will give to professional advice given to directors will depend on several factors including: • the knowledge that the professional advisors were given (which should be full and accurate); • the scope of engagement that was agreed upon; • the advice that the professional advisor gave; and • the extent that the directors relied upon this advice. 5.3 Board minutes and correspondence The judge commented that some of the board minutes used as evidence in the case were formu- laic and did not record any genuine discussion between the board members and the risk of insol- vency. There is a need to demonstrate active con- sideration of the various duties to creditors in board meetings. The courts also conducted an extensive analysis of correspondence between the directors, including looking through meeting notes, text messages and emails when considering the claims brought against the directors of the Group. 5.4 Discharging duties Finally, the judgment shows that even if a director delegates their management functions to other directors or employees, they must still monitor decisions that are made by the delegated per- sons. This is because a director could still be in breach of their duties for actions taken by others to whom they have delegated management func- tions. 6. Key takeaways The judgment is an indicator of the variety of risks and duties that confront the director of a distressed company as they try to steer a company away from insolvency. • directors should actively consider whether a particular transaction is likely to promote the success of the company, including taking into account creditors’ interests in the zone of insolvency; • directors should not expect to rely on the advice given by professional advisors in a claim brought against them, they must turn their own minds to the issue to sufficiently discharge their duties. It is the directors who have direct knowledge of state of affairs of the company, not its advisors; • when arriving at a decision in a claim brought against the directors of a company, the courts may conduct an extensive examination of correspondence between directors, including looking through text messages and emails; and • if management functions are delegated by directors to others, they must monitor decisions made by the delegated person as they could be in breach of their duties for a failure to do so. Linton Bloomberg advises corporate boards, insolvency practitioners, US and European investment banks, UK clearing banks, hedge funds and private equity houses across the full range of international and domestic restructuring and insolvency matters. His principal areas of focus include cross-border restructurings, creditor and debtor representations, out-of-court restructurings and insolvency litigation. Vol. 35 • M&A REVIEW 2024 • PEMACOM 2024 31

EUROPE VIEW • REPORT In all of these scenarios, multiple capital increases are to be expected within a certain period of time. While further financing rounds are often required in the VC sector in order to obtain fresh capital for the further development of start-ups or to convert any convertible loans into equity, buy-and-build struc- tures are primarily affected in the PE sector. These are characterised by various smaller investments during the investment phase, using a platform in order to develop a larger overall structure (and therefore a higher overall valuation) for an exit. The sellers of these individual acquisitions, as well as key emplo- yees or managing directors, are often given the opportunity to co-invest alongside the PE investor. 4. Potential challenges from the perspective of a majority investor In these cases, individual capital increases would normally require all shareholders to meet locally to pass a notarised shareholder resolution. In this respect, the shareholders are dependent on mutual cooperation. However, if a significant majority share- holder/investor is involved, they will want to avoid delays and obstructions from individual minority shareholders at these shareholders’ meetings and will therefore want to take advantage of procedural simplifications. In terms of content, all framework conditions are usually already agreed or defined in advance as part of a shareholders’ agreement. In such cases, it is not unusual for a majority investor to obtain powers of attorney from the minority shareholders or conclude voting agreements. In some cases, however, these agreements only contain contractual obligations for individual shareholders in accordance with the majority shareholder’s specifications. From the investor’s perspective, however, these agreements usually do not entirely eliminate the risk of obstruction by minority shareholders. In addition, proxy solutions are associated with a certain amount of administrative effort and can always be revoked for good cause or expire, or the original powers of attorney may be lost. Moreover, any waiver of the usual notice periods for a capital increase required at short notice also requires the presence (or representation) and con- sent of all shareholders, which may be delayed considerably by a single minority shareholder. Finally, each capital increase incurs notarisation costs for the required shareholder resolutions based on the current value of the company. 5. Procedural simplifications through authorised capital In these scenarios, authorised capital offers the fol- lowing procedural simplifications from the perspec- tive of a potential (VC/PE) majority investor: (a) no requirement for powers of attorney or voting agree- ments with existing or new shareholders, (b) elimina- tion of waiting periods or compliance with other formalities typically required for a capital increase and (c) cost savings due to the absence of notarisa- tion requirements for shareholder resolutions. Instead, the desired capital increase is carried out via a simple private resolution of the company’s management. Only the subscription of new shares is carried out similarly to a normal capital increase, by means of a notarised subscription declaration by the shareholder subscribing for the newly issued shares. According to prevailing German legal opi- nion, the necessary amendment of the articles of association required for the capital increase can also be decided and carried out by the management without notarisation (alternatively, this can be done by the notary involved). The only prerequisite for this is a corresponding authorisation in favour of the management within the framework of the provisions on authorised capital in the company’s articles of association. Such authorisation can be justified either through an analogous application of Section 179(1), sentence 2 of the German Act on Stock Corporation (AktG) or through a corresponding annex authority for the authorised capital. Without this shift in formal authority, all the advantages of authorised capital would be nullified, which would undermine its intended purpose. From a cost perspective, there are no notarisation fees for the capital increase resolutions. Only the granting of the authorisation for the authorised capital requires a notarised shareholder resolution, which typically incurs lower notarisation fees than those for individual capital increases. 6. Management as an executive body – the right to issue instructions Subject to (a) conditions/specifications in the articles of association and (b) shareholder resolutions to issue instructions, the management is the sole executive body for the formal exercise of authorised capital. Instruction resolutions offer majority shareholders in particular additional comfort and control over the issue of new shares by the management. Contrary Vol. 35 • M&A REVIEW 2024 • PEMACOM 2024 33

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EUROPE VIEW • REPORT status by Companies House before acting. Reed Smith’s corporate services team will seek to be registered as an ACSP as I expect will other firms of accountants or lawyers, or regulated trust or com- pany service providers. An individual must not act as a director unless they have verified their identity and a statement to this effect has been filed at Companies House. The new requirement will apply to all existing directors and any newly appointed directors. Breach of this requi- rement will be an offence for the director concerned, the company and any other officers in default. It is anticipated that there will be a transitional period for directors appointed before the new law is in force to verify their identity. 3. Ultimate Beneficial Owners (UBO) / Persons with Significant Control (PSC) The new requirements also apply to the UK’s UBO regime which has been in place in the UK since 2016. Each individual registrable PSC must also verify their identity and a registrable relevant legal entity (RLE) must notify Companies House of a relevant (individual) officer (director or equivalent) whose identity has been verified, and any subse- quent changes in relation to this person. Once the new law is in effect, transitional arrangements will allow existing PSCs 14 days and existing RLEs 28 days from a date (to be decided) to complete this process and to file statements to this effect at Com- panies House. Non-compliance with these provisi- ons will be an offence for the relevant PSC or RLE and every officer of an RLE in default. The Act also makes further changes to the detail of the PSC legislation, including the obligations on companies to investigate and obtain PSC/RLE infor- mation, and on registrable PSCs, RLEs and others to provide this information, and any changes to it. These will include revised obligations on companies to send information request notices for these purposes, and to notify Companies House of failures to respond (or late responses) to these notices. A company will also have to notify Companies House when it knows (or has cause to believe) someone has become a regis- trable PSC or RLE, or has ceased to have this status, or their details have changed. Companies House will also have the power to remove names and addresses of PSCs and shareholders used without consent. Previously, such individuals would have had to apply to court to remove their details. The new powers would benefit companies who have been subject to fraudulent filings. 4. Filings with Companies House The new legislation imposes new controls on per- sons who can deal with Companies House. Anyone delivering documents to Companies House for themselves must have their identity verified and confirm this to Companies House. Anyone deliver- ing documents to Companies House on behalf of a company or other firm will need to be an officer or employee of the relevant company/firm (or of a corporate officer of the relevant company/firm) whose identity has been verified, or an ACSP, or an officer or employee of an ACSP. Equivalent provisi- ons will apply when delivering documents on behalf of an individual. A disqualified person cannot deli- ver documents to Companies House other than via an ACSP (and confirmatory statements for this purpose must be made to Companies House). Breach of these provisions, in addition to involving a false statement offence, will mean the relevant document is not deemed to have been delivered to Companies House. 5. Increased powers for the Registrar The ECCTA also gives the Registrar new and enhanced powers and encourages it to become a more active gatekeeper of data concerning com- panies and other UK registered entities. Among other things, the Registrar will have new objectives aimed at maintaining the integrity of the records held at Companies House, including ensuring that the requisite information is delivered to it and is accurate and complete, and preventing and deter- ring unlawful activities. These objectives will be supplemented with enhanced powers to query suspect appointments or filings and to request further evidence or require inconsistencies to be resolved, to remove material from the register or annotate it, or reject a filing, as well as share infor- mation with other public authorities, such as HMRC for instance. There is a significant step-up in the measures available to enforce compliance with the legisla- tion, in particular existing and new Companies House filing requirements. In most cases, breach is an offence punishable by fine or, for more serious breaches, imprisonment. Where a legal entity commits an offence, in general, those officers in default will also commit an offence. Many filing obligations will now also require specific declara- tions to be made to Companies House. In a major change to the current offence (which requires knowledge or recklessness for liability), a person Vol. 35 • M&A REVIEW 2024 • PEMACOM 2024 37

EUROPE VIEW • REPORT Outlook for the German M&A market in 2025 Dr. Michael R. Drill, Lincoln International GmbH After years of growth, fears of recession, falling consumer confidence, persistently high interest rates and continuing sanctions against Russia have abruptly slowed the long boom in mergers and acquisitions. In times of great uncertainty, it is not easy for buyers and sellers to agree on company valuations. In addition, corporations have become cautious and are discreetly holding back on risky, large-scale acquisitions. The general mood on cor- porate floors and in the private equity scene is currently very subdued. At the same time, the supply of attractive targets has deteriorated. Despite this dismal environment, there are still numerous drivers for M&A activity. The need for critical mass and the growing importance of digital business models and AI applications are forcing many mid-market companies to pursue bold acqui- sition strategies or sell to a larger or financially stronger partner. Tab. 1 • Top 10 announced deals with German target companies 1 – 8 2024 Source: Lincoln International AG Target Covestro Encavis Aareon Innomotics Wiga MorphoSys Sector Chemicals Energy Software Industrials Energy Pharma Sunrise Medical GmbH Healthcare Evonik Superabsorbents Chemicals Cardior Pharmaceuticals Pharma KaDeWe property Real Estate Value (€m) Seller Buyer 14,412 4,222 3,900 3,500 3,000 2,561 1,500 1,125 1,025 1,000 Free float Abacon Advent Siemens Abu Dhabi National Oil Co KKR & Viessmann TPG KPS Capital Wintershall Dea German Federal State Free float Novartis Nordic Capital Platinum Equity LLC Evonik Private Signa ICIG Novo Nordisk Central Group Vol. 35 • M&A REVIEW 2024 • PEMACOM 2024 39

Tab. 3 • 10 Theses on the German M&A Market 2025 Source: Lincoln International AG These Number of deals with German targets about 20% higher than current year Mid-cap segment significantly more active than large cap segment (deals > EUR 1 bn) Strategic buyers still prevail although financial investors become gain momentum Valuation multiples are slightly declining despite "asset inflation“ Strongly varying transaction dynamics according to sectors The US remains most important buyer and target nation for German companies Corporate divestments by DAX and MDAX companies on the rise Holding period of private equity investments increases AI and ESG play an increasingly important role in M&A processes 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Acquisition finance becomes easier, however, remains expensive EUROPE VIEW • REPORT as it has been for the past two years. Dealmakers will continue to live with higher uncertainty and navigate a mixed macroeconomic environment and business outlook. Buyers will need to be calculated and entrepreneurial if they want to make successful deals. They should be mindful of potential risks while looking for opportunities and preparing to close a deal when the time is right. Experience shows that economic downturns can be attractive times for deal hunting. Dr. Michael R. Drill is CEO of Lincoln International in Germany, an investment bank specializing in M&A advisory with over 850 professionals worldwide. Lincoln International has its own offices in the world’s ten largest economies. In the first 7 months of 2024, Lincoln International has already successfully completed more than 15 M&A transactions in Germany. ADVERTISEMENT Vol. 35 • M&A REVIEW 2024 • PEMACOM 2024 41

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