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CONTENT Editorial #MuMAC 2022: What is up with Private Equity and M&A? Dr. Nikolaus von Jacobs & Christian von Sydow REPORTS International Perspective Portfolio optimisation in turbulent times – creating and utilising windows of opportunity Tobias Huesmann, PwC & Prof. Dr. Dirk Schiereck, Technische Universität Darmstadt Driving value in M&A Aymen Mahmoud & Mark Fine, McDermott, Will & Emery Rechtsanwälte Steuerberater LLP 3 6 10 Carve-outs in a disruptive environment – disruption as a driver of economic change processes 13 Dr. Rainer Bizenberger, Birte Stamm & Manuel Szerencses, AlixPartners Implications of the UK’s National Security and Investment Act 2021 16 Tom Whelan, McDermott Will & Emery Rechtsanwälte Steuerberater LLP IMPRINT Special MuMAC 2022 Supplement to M&A REVIEW 9/2022 (Vol. 33) www.ma-review.de Editorial staff: M&A Media Services GmbH Stefan Schneider (project lead), Isabella-Alessa Bauer (Editor in Chief) Habenschadenstraße 24a, 82049 Pullach, Germany Phone: +49 (0)89 74975133 redaktion@ma-review.com Publication Organ: Bundesverband M&A e.V. c/o M&A Media Services GmbH Habenschadenstraße 16, 82049 Pullach, Germany Phone: +49 (0) 179 448 30 63 info@bm-a.de, www.bm-a.de Chairman of the Board: Prof. Dr.-Ing. Kai Lucks Cover: Photo: © jozefmicic – stock.adobe.com Publisher: M&A Media Services GmbH Habenschadenstraße 24a, 82049 Pullach, Germany Phone: +49 (0)89 74975133 redaktion@ma-review.com, www.ma-review.de Managing Director: Stefan Schneider Editor: Prof. Dr. Christoph Schalast, Frankfurt School of Finance & Management Prof. Dr. Florian Bauer, Lancaster University (UK) Layout & realization: Text & Design, Zielstattstraße 117, 81379 München Editing: Magdalena Aderhold, visavis media, Bayreuth, Printing: Joh. Walch GmbH & Co. KG, Im Gries 6, 86179 Augsburg (Germany) The content of the M&A REVIEW edition is protected by copyright. Re- printing, inclusion in online services, the Internet and duplication on data carriers such as CD-ROM, DVD-ROM etc. as well as translations into other languages may only take place, even in part, with the prior written consent of M&A Media Services GmbH. Commercial marketing of the content is prohibited. M&A Media Services GmbH is not liable for unsolicited content, manuscripts and photos. M&A Media Services GmbH assumes no responsibility for the content of external links and external content. Dataprotection: The protection of your data is important to us. The data protection declaration applies of M&A Media Services GmbH, also available on our website https://ma-review.com/data-protection 4 M&A REVIEW 2022 • Vol. 33 • MuMAC 2022

REPORT • INTERNATIONAL PERSPECTIVE Portfolio optimisation in turbulent times – creating and utilising windows of opportunity Tobias Huesmann, PwC & Prof. Dr. Dirk Schiereck, Technische Universität Darmstadt 1. Introduction Corporate environments have become increasingly volatile, uncertain, complex and ambiguous (VUCA), with new challenges emerging every year. New regula- tions, changing consumer preferences, technological shifts, new environmental threats and geopolitical con- flicts have become ubiquitous in markets around the world. To guide executives through these volatile markets and help them assess how well their corporate portfolio de- livers their corporate strategy, PwC Germany developed the portfolio optimisation approach. By assessing stra- tegic fit, one can identify both underperforming busi- ness units and areas of strategy that have not been im- plemented. Based on this assessment, executives can then decide on ongoing strategic measures to enhance their company’s competitive positioning, to ensure that corporate portfolios deliver maximum returns, and to provide robustness against future volatility. 2. Market environment Recent cases of volatility, such as the Covid-19 pandem- ic and the outbreak of war in Ukraine, illustrate the de- velopment of VUCA all around the world. This is hav- ing a severe impact on fundamental issues in corporate planning, and executives need to find ways to success- fully navigate these VUCA waters. It is unanimously predicted that future markets will become even more opaque, and that increasingly high-impact volatility will occur more frequently. Therefore, executives will need to constantly monitor and analyse key planning issues, as failure to adapt to external changes has the poten- tial to undermine corporate strategy. goals will be even more essential for long-term success. As a result, it is vital for organisations to move towards more adaptive, risk-optimising and quick-to-implement approaches to strategic management. Promoting inor- ganic growth will become more important than organ- ic growth, given its greater speed and impact. 3. Corporate strategy Executives have identified a paradigm shift in business, from the traditional market view of continuous growth in stable environments to the VUCA market view of rapidly changing market conditions. These rapid chang- es make stable forecasts and anticipating market trends more difficult, so executives need more adaptive and short term-focused corporate strategies to best exploit market opportunities and mitigate risk. As PwC’s recent portfolio management study shows1, the proactive “adapter approach” (flexibility, speed and risk optimisation) is now more common than the more traditional view and its “preserver approach” (stability, detail and profit optimisation; Fig. 1). This indicates that the need for change in overall management approach is recognised in the market, and the relevance of adapt- er criteria is especially well understood once executives are aware of the extent of VUCA. Despite this, executives lack strategic clarity and hence fail to consistently implement the adapter approach when it comes to making inevitable choices (e.g. speed vs. detail, flexibility vs. stability). Volatile market devel- opments, however, require bold strategic moves and confident leaders who won’t shy away from making choices and tackling corporate inertia to take essential measures. The ability of corporate decision-makers to quickly adapt corporate strategies to new market conditions and to ensure that corporate portfolios meet strategic 1 PwC, PwC Portfolio Management Study 2022, Optimism in uncertain times – will reality soon catch up with corporate executives?, 2022, www.pwc.de/en/deals/port- folio-management-study.html. 6 M&A REVIEW 2022 • Vol. 33 • MuMAC 2022

REPORT • INTERNATIONAL PERSPECTIVE Fig. 3 • PwC’s portfolio optimisation approach Source: Own illustration Baseline Review and optimisation Triggers Internal performance Crisis situation/ strategic goal External environment Disruption, trends, regulation Organisational change Roles, responsibilities, structures Market environment Corporate portfolio Corporate strategy Portfolio review Portfolio optimisation VUCA trends V U C A olatility ncertainty omplexity mbiguity Market drivers P E S T olitical nvironmental ocial echnological Defining the market Market size Market growth Competitive landscape Business models Operational footprint Headquarters Corporate strategy (Sum of the parts) Business purpose “Strategic fit” 1 U B 2 U B 3 U B Shared service centre Capability profile Products and services Right to win Governance Portfolio synergies BU strategy (Parts) Products Customers Channels Regions Capabilities Future business Core business Non-core business D e v e o p l N u r t u r e E x i t Corporate layer (Sum of the parts) Operational synergies Conglomerate management Valuation Tax strategy BU layer (Parts) Research & Development Digitalisation Oper./org. improvement Corporate venturing (Digital) ecosystems Repositioning/restructuring Liquidation Acquisitions Collaborations & partnerships Joint ventures IPOs Divestments O r g a n i c I n o r g a n i c Assess and monitor corporate environment and determine the relevant market Baseline assessment of operational footprint and capability profile that currently deliver products and services Define strategy at both corporate and BU level, including right to win Conduct portfolio review to assess how well corporate portfolio matches corporate strategy Ableitung und Umsetzung strategi- scher Maßnahmen zur Optimierung des Unternehmensportfolios The “PwC portfolio optimisation approach” offers a toolkit across our various areas of expertise – you can use the whole toolkit, or with focus on selective areas only egy has been implemented. Assessing strategic fit iden- tifies both underperforming business units and areas of the strategy that have not been implemented. Based on this assessment, executives can then decide on on- going measures to enhance their company’s competi- tive positioning, to ensure that corporate portfolios de- liver maximum returns, and to provide robustness against volatility strikes. PwC’s unique approach to supporting executives with portfolio reviews comprises the following fundamental steps: 1. Translate strategic goals into measurable and ob- jective evaluation criteria that, overall, approxi mate the company’s strategy (e.g. financial, strategic and operational goals). 2. Weigh up each criterion and prioritise according to the strategic goals, set hurdle rates accordingly. 3. Transform corporate goals into ambitious yet rea- listic business unit objectives. 4. Conduct a performance review that compares ac- tual performance to target performance in order to show how well the strategic goals are being achieved. Finally, all organisational units are categorised into fu- ture, core and non-core business areas, based on the strategic fit assessment. Future business areas consist of elements that are included in the company’s strate- gy, but are not yet part of the corporate portfolio. Core business areas comprise the part of the portfolio that is in line with corporate strategy, which typically make up the bulk of the business. Non-core business areas are currently part of the portfolio, but are not in line with company strategy: as a result, exit options should be evaluated for non-core units. 5. Strategic measures Once this tailored portfolio review has been carried out, strategic measures need to be developed for optimis- ing the company’s corporate portfolio. Future business areas need further development, core business areas must be nurtured and optimised, and non-core busi- ness areas should be divested to free up capital. In a VUCA market, executives are expected to make the right choices and consistently implement their deci- sions. It is important to note that there are two sides to VUCA: on the one hand, it threatens stability and adds complexity; but on the other hand, it creates windows of opportunity to foster transformative change and overcome corporate inertia. All strategies and operations in a company should sup- port long-term corporate success. Measures for organ- ic growth (e.g. R&D programmes, restructuring) utilise the company’s internal resources and limit risk expo- sure, while measures for inorganic growth (e.g. acqui- sitions, carve-outs) allow for quick, bold and high-im- pact strategic moves. Figure 4 is based on data from PwC’s latest portfolio management study 20222, and shows the main corporate development measures planned by executives over the next five years. 2 PwC, PwC Portfolio Management Study 2022, Optimism in uncertain times – will reality soon catch up with corporate executives?, 2022, www.pwc.de/en/deals/port- folio-management-study.html. 8 M&A REVIEW 2022 • Vol. 33 • MuMAC 2022

REPORT • INTERNATIONAL PERSPECTIVE Driving value in M&A Aymen Mahmoud & Mark Fine, McDermott, Will & Emery Rechtsanwälte Steuerberater LLP In recent years, global events have driven macro- economics to be increasingly difficult to predict. This has led to analysts, investors and other market partici- pants to question fundamentals through all aspects of investing but also to try to develop and articulate methods for maximising value. As with any such historic period of unpredictability, market volatility can result in financial difficulty for some players, but also provide significant opportunity elsewhere. This article will consider some of the con- siderations within the value chain as well as the types of opportunity that may represent value as time goes on. It is important to understand the dynamics that create the current environment, and how they have impacted and will continue to impact markets. Private equity and credit have enjoyed a stellar few years in terms of transacting and raising new capital and in the process, defying much of the fallout that im- pacted global economies during the Covid-19 pandem- ic. However, private equity houses now face a set of challenges not seen since the Global Financial Crisis as they deal with rising interest rates, dislocated capital markets and geopolitical uncertainty as well as supply chain shortages, valuation fears and inflation. As well as usual key investment thesis questions, the geopolit- ical factors currently at play also need careful consider- ation when considering investments. One of the key differences seen over the past couple of turbulent years compared to those of 2008-2010 has been the availability of liquidity and its many and varied impacts on the market, including most notably, the ease of transacting. Investment data company, Prequin, considers there to have been USD 63.2 billion of private credit raised in 2021 alone (compared to USD 51.5 billion in 2020). With an absence of liquidity being a real source of consternation for the markets (and therefore for growth) during the global financial crisis of 2008, the contrast of the last few years is stark. Committed, unallocated capital or “dry powder” can be found both in equity and credit markets, as well as in the form of economic intervention from governments and supra-national institutions, whether by way of Covid-19 reliefs or incentives or through quantitative easing (QE, a monetary policy whereby a central bank purchases (among other items) existing government bonds to restore liquidity in the financial system). This very liquid market has manifested its impact in various ways. Buoyant liquidity has provided private equity with easy access to the credit markets. In both leveraged buyouts and refinancings credit funds are increasingly com- peting for, and winning, market share against tradition- al underwriting banks. As seen during the ongoing uncertainty of 2022, private credit has been seen as an increasingly attractive option for many PE houses who are willing to pay a slight premium to guarantee a deal with requisite leverage, no flex and avoiding hung syndications. Where the public markets have faltered, private credit has been able to step in and help spon- sors out with financing their buy outs, whether offer- ing a complete capital solution or changing the capital structure to provide a junior debt instrument or a quasi- equity investment. These liquid markets have also allowed sponsors to refinance what might, during less liquid times, be seen as over-levered and which may not have easily attract- ed new money for a financial sponsor or company director. It has allowed buyout houses to explore new opportunities in non-traditional sectors such as pre- EBITDA technologies and renewables. Where there has been more dry powder available as a relative matter, a greater number of private equity investors have been competing for a smaller number of assets, driving valuation multiples higher. None of these consequences of markets with deep pockets is much of a secret, yet the impact of them draws a range of views, both academic and practical. Some consider that the markets may have become more reckless, while others have suggested the markets have been forced to become more efficient. 10 M&A REVIEW 2022 • Vol. 33 • MuMAC 2022

REPORT • INTERNATIONAL PERSPECTIVE age and near-term maturities. Whilst this has been the case in the last couple of years, it is clear that the equity markets have seen something of a correction for tech-related stock, suggesting that the valuations that existed were simply too high and unsustainable. It may well be that there is some truth here, or that the markets more generally are overvaluing public stocks, or there may be something of a more emotional reac- tion driving this as can be the case in public markets. The pure weight of capital provides a very strong base for creative and opportunist thinking. One way of do- ing this is to combine scale with the ability to utilise pockets of capital that can invest in both debt and equity, giving an investor the ability to participate in both parts of the capital structure. For borrowers, allowing lenders to access their equity also helps to align interests in creating upside, while also unlocking what has historically been very cheap debt capital. For lenders trying to unlock higher returns, this type of investment creates a platform to deepen relationships with borrowers without significant additional work and provides greater information about the underlying credit, all while providing those higher returns in an otherwise competitive debt market. Asset managers around the world are now invested across capital structures through other vehicles, such as private credit or private equity. It is not inconceivable that there may come a time where an LP is an equity and a debt investor in the same asset, where creating value for one necessitates removing value from the other. In these instances, it will be interesting to see if the LP community behaves any differently, or otherwise tries to inform the behaviour of the platform managing the investment for that LP despite the potential for conflicts of interest. Many PE sponsors have recently turned to “take pri- vate” (P2P) transactions during which publicly listed businesses are purchased, de-listed and driven through periods of growth ahead of secondary, or tertiary buy- outs. They allow private equity firms to look for real op- portunities to make large scale investments (most pub- lic companies are well-capitalised and of a requisite size) and implement whole hosts of savings and syner- gies that drive efficiency and help maximize value. These have become increasingly popular in the last two years. In addition, for very large, listed corporates, looking for under-performing segments of their business and divesting of those usually provides a jump in share price – many private equity institutions look for these corporate carve-outs where they are not of the size required to undertake large-scale P2Ps. For these non- core segments, there are often inefficiencies that private equity institutions are familiar with and for which they have significant skill and resource in turn- around. For those investors with access to huge sums of capi- tal, the market will continue to provide opportunity, if for no other reason than the scale of opportunity which is limited to only a few players. For others, the belief that a return to more basic product types will yield significant returns will be tested in the coming months – will food businesses and planting regener- ate significant business interest in an inflationary environment? Will ESG and other environmental con- siderations play a very large part in investment thesis? Time will tell, but what is clear is that wages, inflation, cashflow, raw material cost, supply chain and geopoli- tics can combine to cause tremendous volatility in valuations. That volatility can create as much opportu- nity as it can cause fracture – it is for the participants who have shown so much creativity in the past – to re- main flexible, thoughtful and exploratory in evaluating great and new opportunities for growth. In a world where so many investments were judged on their historic and look-forward statistical matrices, we may now see a greater focus on liquidity, margin and the ability to “stay alive” during the hard times. Whilst simplistic, the approach of maximising gains is only one half of driving value. The other half is soften- ing any losses, and this aspect may well be influential in the value chain in the coming years. After all, if one wants to consider how to maximise value, one must first accept that all value is relative. Aymen Mahmoud is the co-head of the London Finance, Restructuring and Special Situations Group at McDermott Will & Emery. He focuses his practice on complex debt financing transactions for private equity funds and their portfolio companies, hedge funds, corporate borrowers and issuers and other financial institutions including banks, direct lenders, family offices and other alternative sophisticated capital. His experience includes acting in respect of direct lend- ing, leveraged buyouts, domestic and cross-border syndicated senior, second lien and mezzanine lending, distressed debt trading, portfolio acquisitions and restructurings, emerging markets and other debt securities, including high-yield debt offerings. Aymen also has significant experience in connection with pre-EBITDA and recurring revenue financings. Aymen played a key role in first establishing the Loan Market Association forms of leveraged and high yield documentation and has been recognized in Global Restructuring Review’s global “40 under 40” rankings in 2022. Mark Fine focuses his practice on complex debt financing transactions for private equity houses, borrowers and lenders including direct lending, leveraged buy- outs, domestic and cross-border syndicated lending, junior debt issuances, high yield offerings, special situations, distressed debt trading, portfolio acquisitions and restructurings at McDermott Will & Emery. Mark has previously held the position of European General Counsel at Bain Capital Credit in London. 12 M&A REVIEW 2022 • Vol. 33 • MuMAC 2022

REPORT • INTERNATIONAL PERSPECTIVE One possible reaction to disruptive changes can be the spin-off and subsequent sale of an affected business unit, or the collaboration with a joint venture partner. In extreme cases, a wind-down or sunsetting via a struc- tured value-optimizing ramp-down might be the only viable solution to appropriately react to the situation. Indeed, 76% of the German respondents to AlixPartners’ recently released Turnaround and Transformation Survey believe that M&A transactions related to dis- tressed assets will increase2. Since affected businesses are usually heavily interlinked with other divisions, a separation by means of an op- erational and financial carve-out is usually required. A separation should also be carried out to protect the “healthy” assets of a company from deteriorating val- ues resulting from disruptions in other areas (so-called “ring-fencing”). 2.1 Clear definition of the carve-out scope and evaluation of all implications • A comprehensive clarification of the carve-out scope is crucial for ring-fencing healthy assets. • To clearly define the scope, affected assets and liabilities must be identified at an early stage and solutions for so-called hybrid locations must be de- veloped (locations that comprise several different business units – their operational separation from one another is usually very complex). • After clarifying the allocation of the assets, a de- tailed target structure needs to be developed, reflecting the effects of a new organizational and legal set-up. This approach prevents time-consu- ming changes at a later stage. 2. Critical success factors for a carve-out in a 2.2 Planning with scenarios and maximum disruptive environment flexibility Every carve-out project has its own rules and particu- larities which need to be considered during implemen- tation. However, there are certain playbooks that can be applied – slightly adapted for each project – to fa- cilitate the implementation. Careful planning and the strict implementation of defined goals are essential for a successful realization of a carve-out project. The definition of a clear target, i.e. the strategic, oper- ational and financial goals of the envisaged carve-out, is of crucial importance if working under disruptive con- ditions. Only with a clearly defined target all parame- ters and options can be properly evaluated, and deci- sions made at all times during the execution phase. In a disruptive environment, the preparation and imple- mentation of a carve-out means, above all, “working under uncertainty” – and in most cases very tight schedules need to be met. As a result, strict adherence to standardized project manuals is rather detrimental, as planning parameters and risk profiles under which the carve-out is designed and implemented are subject to constant change. The following five key success factors are crucial for the implementation of a carve-out in a disruptive environ- ment: • The development of planning scenarios helps to create a more robust basis for the carve-out project, so that decisions can be made considering all para- meters. • The developed scenarios ensure flexibility in the further course of the project, and rapid responses to changes in framework parameters are possible. This pertains to both, adjustments to the operatio- nal implementation of the carve-out and the selec- tion and implementation of exit scenarios. For ex- ample, selected exit scenarios may no longer be va- lid after some time – planned sales processes can be aborted due to a lack of interest from potential buy- ers meaning a scenario of a wind-down may need to be implemented instead. 2.3 Implementation with focus and pragmatism • As carve-outs characterized by disruption have to be implemented under time pressure and signifi- cant changes can occur at any time, the project team must ensure a “can-do/will-do” attitude. In addition, decisions need to be made without ad- hering to complex decision-making processes. • Speed of implementation must be prioritized over perfection. • An “80/20 mind-set” is essential to avoid time-con- suming analyses and discussions, enabling quick decisions and rapid implementation successes. 2 AlixPartners 17th Annual Turnaround and Transformation Survey: https://features.alixpartners.com/storm/index.html 14 M&A REVIEW 2022 • Vol. 33 • MuMAC 2022

REPORT • INTERNATIONAL PERSPECTIVE Implications of the UK’s National Security and Investment Act 2021 Tom Whelan, McDermott Will & Emery Rechtsanwälte Steuerberater LLP 1. Overview of the NSI Act Any investor (wherever based) that is proposing to invest in a “qualifying entity” or “qualifying asset” will need to take into account the UK’s NSI Act which came into force on 4th January 2022. The NSI Act was designed to give the UK government the ability to as- sess the national security implications of a broad range of acquisitions, investments, and other transactions. Under the NSI Act, the UK government has the author- ity to call in and investigate so-called “trigger events” in relation to any “qualifying entity” or a “qualifying asset”. While the NSI Act lists seventeen sectors where the UK government considers a transaction may give rise to a national risk, transactions in closely related sectors can also be called in. Whether the “trigger event” is in contemplation, in progress or completed, if any party would acquire or has acquired “control” (as defined in the NSI Act) does not impact the ability of the newly established investment security unit to review the transaction. The NSI Act defines “trigger events” broadly to cover transactions in which one party: • acquires or increases its interest in a “qualifying entity” so that it crosses any of the 25%, 50%, or 75% thresholds in relation to share or voting rights; • acquires voting rights in a “qualifying entity” that enables that party to secure or prevent the passage of any class of resolution governing the affairs of a “qualifying entity” (i.e. control); • obtains “material influence” over a “qualifying entity”; or 16 • acquires specified control rights over a “qualifying asset” (i.e. providing the ability to: use the asset, or use it to a greater extent than prior to the acquisi- tion; or direct or control how the asset is used, or direct or control how the asset is used to a greater extent than prior to the acquisition). A “qualifying entity” is any entity (other than an in- dividual), whether or not a legal person and therefore includes (but is not limited to) companies, limited lia- bility partnerships and any other bodies corporate, part- nerships, unincorporated associations and trusts. It should be noted that entities that are formed or recog- nised outside the UK are capable of constituting a “qualifying entity” if they carry on activities in the UK, or supply goods or services to persons in the UK. “Qualifying assets” comprise land, tangible (or, in Scotland, corporeal) moveable property, IP and ideas, information or techniques which have industrial, com- mercial or other economic value, and which are used in connection with either activities carried on in the UK, or the supply of goods or services to persons in the UK. It should be noted that land or moveable proper- ty located outside the UK will be a “qualifying asset” provided that it is used in connection with activities carried on in the UK, or the supply of goods or services to persons in the UK. The NSI Act therefore captures not only transactions in the UK between UK companies, but also acquisitions outside the UK for example if a non UK company acquires a UK company or a company with a UK sub- sidiary or a company that “carries on activities” or “supplies goods or services” in the UK. Non UK assets M&A REVIEW 2022 • Vol. 33 • MuMAC 2022

REPORT • INTERNATIONAL PERSPECTIVE 3 voluntary notifications. Of the 17 called in, BEIS has (to date) issued final clearance notifications on 3 of them without imposing any conditions on the parties. BEIS took an average of 24 working days between call- ing in a trigger event and issuing a final notification for these transactions. While as a matter of course call-in notices will not be made public, BEIS announced on 25th and 26th May respectively that it was reviewing Nexperia (a Chinese backed company)’s acquisition of Newport Wafer Fab where a decision is still awaited, and the acquisition by Altice of 6% of shares in BT. The remaining 14 called-in notifications remained under review as of March 31, 2022. To date, we are only aware of BEIS issuing one final order blocking a trigger event from completing which was in fact in relation to a voluntary notification as opposed to a mandatory notification. BEIS announced on 20th July that it had blocked Beijing Infinite Vision Technology (BIVT) from buying the vision sensing IP technology from the University of Manchester. For completeness, we are not aware of any orderunder the NSI Act to date requiring the parties to undertake mitigation measures prior to completion. BEIS has called in fewer than 10% of all notified transactions during the first quarter, which is within the ballpark estimated by BEIS of between 70 and 95 trigger events each year. The remaining 14 called-in notifications remained un- der review as of March 31, 2022. To date, we are not aware of BEIS issuing a final order blocking a trigger event from completing or requiring the parties to undert ake mitigation measures prior to completion. BEIS has called in fewer than 10% of all notified trans- actions during the first quarter, which is within the ball- park estimated by BEIS of between 70 and 95 trigger events each year. The sectors of the economy from which most manda- tory notifications were received were Defence, Military and Dual Use, and Critical Suppliers to Government. Voluntary notifications were most commonly received from acquisitions where the target was active in Professional, Scientific and Technical Activities, and Data Infrastructure. As regards the MoU between BEIS and the CMA, this sets out the legal framework and broad principles for collaboration on the timing of investigations, interim measures, remedies and the sharing of relevant infor- mation between the two authorities, which should help each other’s review. Examples of information that may be exchanged between the two authorities in- clude: • information on current or historical CMA cases; • information the CMA may hold on competition within a given sector; and • notifications of when the Secretary of State in- tends to impose remedies or accept undertak ings as part of a NSI review. Parties submitting applications to the CMA and BEIS as part of any transaction should therefore make sure that the information provided to both authorities re- garding the relevant transaction is consistent. 3. What clarifications have the UK Government made regarding the NSI Act? BEIS has also recently published “Market Guidance Notes” on 19 July 2022 which address and clarify a variety of substantive issues related to the NSI Act. They have clarified for example that the UK govern- ment considers that: • • • the appointment of a liquidator or receiver may be a qualifying acquisition, and in specific cases may require mandatory notification. This will depend on whether and how the circumstances of the appoint- ment meet the requirements of the NSI Act. It should be noted that the NSI Act does not treat rights that are exercisable by an administrator or by creditors while an entity is in relevant insolvency proceedings as being held by the administrator or creditors; the granting of types of share security where title to the shares is not transferred to the secured lender (or its nominee) is not a notifiable acquisition re- quiring mandatory notification, even if it involves an entity carrying on activities covered in the Noti- fiable Acquisition Regulations; internal reorganisations can be qualifying acquisi- tions where they result in an acquisition of control over a qualifying entity (as defined in Section 8 of the NSI Act), even if the ultimate beneficial owner of the entity remains the same; • they are mindful of those investors seeking to exert malign influence over sensitive businesses through the use of contractual rights and, depending on 18 M&A REVIEW 2022 • Vol. 33 • MuMAC 2022

REPORT • INTERNATIONAL PERSPECTIVE Democratisation of Alternatives Steven Haywood, McDermott, Will & Emery Rechtsanwälte Steuerberater LLP In the funds and asset management world there has been a recent flurry of activity around the so called “democratisation of alternatives”. What does that term actually mean and what is involved? who want to bring about this democratisation do this (and why would they want to) and how can individual mainstream investors invest in these alternative asset classes, like private equity, commercial real estate and infrastructure? The underlying theme seems to be a perception that for too long private markets and Alternative asset classes, notably private equity, have effectively been a closed shop, with access limited to institutional inves- tors, who with their deep pockets and ability to bear loss have been able to access returns on investments that are not generally available to individual investors, or at least at the “retail” end of the individual investor universe, as “family offices” representing ultra-high net worth individuals have for a long time invested in and co-invested alongside these funds. That may be the case, but is the fact individuals in the mainstream can’t access this asset class surely a good thing from an investor protection standpoint? However, given the recent popularity and risk appetite for the public to invest in unregulated crypto markets which are volatile, is that not in fact riskier? Isn’t an investment in a private equity fund, where in Europe at least, the managers of those funds are subject to regulation in the form of AIFMD and the fund sponsors often regu- lated in their own jurisdictions and the asset class is highly mature and professionalised actually in fact a less risky and less speculative investment proposition? And if it’s good enough and safe enough for the risk appe- tite of institutional pension funds, then isn’t it good in terms of an investment for the general public as well (whose pensions they contribute to every month from their salary may actually be partly invested in those asset classes already in any event by the pension fund providers they entrust to look after their retirement funds)? Leaving aside the risk profile and merits of the asset class of the investment itself, how can asset managers For it to be truly democratic then individual investors will need to invest alongside the institutional investors in the same assets, otherwise if it’s just a private equity fund that only individual investors can invest in (and it is just those investors, not institutional investors as well), then there could be a suggestion that the “good stuff” is still going to the institutional investors and the indi- vidual investors are just getting the leftovers in the market the institutional investors don’t want. One way to achieve this is to put the individual inves- tors on a par with the institutional ones. The key to this is aggregation. By combining the individual investors in a separate vehicle but a vehicle that is a hard wired integral part of the fund can make the individual in- vestors and the institutional investors equal, whether it’s a parallel vehicle or a specific feeder vehicle into the main fund, that vehicle can enter into a subscription agreement and be drawndown as if it was any other institutional investor, and behind the scenes the indi- vidual investors benefit from access to the same returns on the same assets as the institutional investors. Those individual investors can even benefit from “most fa- voured nations” provisions, given that depending on the popularity of the fund that individual investor vehicle could be in aggregate a similar size or bigger size to an institutional investor who may have negoti- ated preferential terms, perhaps resulting in the indi- vidual investors sharing in the benefit of lower manage- ment fees negotiated by those larger investors but capable of election for under MFN by the individual investor aggregating vehicle – which the individual in- vestors wouldn’t have been able otherwise to negoti- ate as a discount for themselves. 20 M&A REVIEW 2022 • Vol. 33 • MuMAC 2022

REPORT • INTERNATIONAL PERSPECTIVE Though investors may be electing-up to be considered as non-retail investors, what protections should these platforms offer? What needs to be disclosed to inves- tors, how is this done and do the investors truly under- stand what it is they are investing in? Careful thought needs to be given to these issues when building these democratised fund products and platforms. The terms of the aggregating vehicle and especially what happens in the case of one of their fellow aggre- gated investors defaulting is important. For example, under the terms of the main fund the whole aggre- gating vehicle would be defaulted, and if so, does every- one in the aggregating vehicle suffer the punitive de- fault provisions that closed-ended alternative asset funds generally contain? A side letter in place with the target fund agreeing to “look through” treatment in the event of default may be a solution if the target fund agrees to this. Alternatively, drawdowns may be man- aged to mitigate this risk, for example investors in the aggregating vehicle being fully drawn at the level of the aggregating vehicle on day one and the funds held within the platform until called by the target fund. This then does raise the question of how those funds are held and the consequent drag on the perfor- mance of an investment made into the aggregating vehicle. Or are drawdowns “smoothed” through the use of borrowing facilities in place at commitment level as they often are where the investors are all insti- tutional investors (and if they are, how is the borrowing base calculated)? It may also be beneficial to match the terms of the aggregating vehicle as closely as possible to that of the main fund e.g. stating in the constitu- tional documents of the aggregating vehicle that the terms of the main fund apply only changed as they need to be (other than where they specifically need to be different as a result of tailoring for the aggregating vehicle). In the private wealth world, particularly on the high net worth side, aggregating vehicles have been used previously by banks often working alongside the rele- vant fund sponsor to give their high net worth clients access to alternatives funds. Now there also seems to be a concerted regulatory recognition, broadening access to alternative investments could be a good thing. In the UK for example the FCA in August 2022 opened a consultation: “CP22/14: Broadening retail access to the long-term asset fund for marketing long term assets funds to include retail investors”. The con- sultation is centered on the use of the Long-Term Asset Fund (LTAF) (a new category of UK authorised open- ended fund). LTAFs have been designed to enable in- vestors to invest in long-term illiquid assets through an authorised fund vehicle. Such long term asset funds may be particularly suited to infrastructure funds, es- pecially timely when the economy is faced with long term challenges of creating methods of alternative energy supply, including renewables, and the long term nature of such funds aligns more closely with the long term nature of investment required for infra- structure, which often a traditional ten year life closed- ended fund with a five year investment period often doesn’t neatly correlate to. Accessing retail markets (in a regulated way) to support such investment alongside institutional investors may therefore make sense from a political, regulatory and investment standpoint, whilst perhaps giving retail investors a long term higher rate of return derived from long term assets (and provided they can bear the risk of such investments), and which may make more sense from a risk/reward perspective than cash on deposit in an inflationary environment. In broadening the access to LTAFs to include restricted re- tail investors the FCA have stated in the consultation that they intend to recategorise a unit in an LTAF as a Restricted Mass Market Investment and the FCA also note that “An ability to invest in long-term illiquid assets, through appropriately designed and managed investment vehicles, is also important to supporting economic growth and the transition to a lowcarbon economy.”1 When opening access to alternatives to mainstream investors the regulatory position of these platforms and funds, their manager and investor protections are crucial, as well as ensuring the risks are properly ex- plained to investors and disclosed. But perhaps with consultations such as those announced by the FCA then this investment environment and previously closed shop access to alternative investments may soon be- come more democratic. 1 FCA: “CP22/14: Broadening retail access to the long-term asset fund for marketing long term assets funds to include retail investors” Steven Haywood focuses his practice on private investment funds and alter- natives asset management. He has extensive experience in advising Alternative asset managers on the structuring, establishment and operation of private investment funds across alternative asset classes, including private credit and direct lending funds, private equity and private equity secondaries, infrastruc- ture and real estate funds, as well as advising institutional investors on primary and secondary fund investments and on co-investments. Prior to joining McDermott, Steven worked for a multinational professional ser- vices firm as the lead lawyer for private investment funds in their UK financial services law team. He also has a magic circle, international and offshore law firm background. In addition, Steven has significant in-house legal industry experience gained within alternatives asset management divisions of a multi- national investment bank and a multinational insurance company giving him both adviser and client perspectives. 22 M&A REVIEW 2022 • Vol. 33 • MuMAC 2022

REPORT • INTERNATIONAL PERSPECTIVE It’s crucial for a comprehensive ESG strategy at the fund level to be integrated across the entire fund life cycle. So as a first step, it’s important at the deal sourcing level to ensure that screening frameworks are applied that take conformity to the fund’s sustainability goals into account. During the subsequent due diligence, the fund strategy plays a key role as a standard for a full ESG assessment of target companies, and as a starting point for defining ESG value levers as part of a value creation program. But when introducing an ESG investment strategy in portfolio management, it becomes especially compli- cated to reflect ESG-compliant corporate goals uni- formly and monitor them consistently. The mere ques- tion of data availability and quality at the portfolio level, along with gathering, processing and analyzing the data, generally becomes an obstacle on the path to fund-wide ESG reporting. If you want to map historical developments and benchmark best practices, you must thus have at least a partially automated ESG manage- ment platform for the portfolio companies. Our clients (general partners) use our ESG Performance Monitoring Framework for this purpose. It unifies software-based and platform-based data from the general partner’s portfolio companies in a structured, standardized way. Finally, each ESG program will also bear fruit in the end. To realize generated ESG value in a successful exit process, the improvements must be convincing. What counts most of all here is an appropriate communica- tion strategy and disclosure of value potential com- pared to the peer group. 2. Each general partner’s ESG strategy should be based on the UN’s 17 Sustainable Development Goals. Each general partner’s core investment principles will always serve as the basis for defining an ESG strategy at the fund level. These internal guidelines for aspects like the environment, society and corporate govern- ance, and for compliant investment conduct, should be set up in line with the UN’s 17 Sustainable Develop- ment Goals. The UN goals are now universally acknowl- edged in the industry, and private equity fund manag- ers, depending on their own ESG strategy, are more and more taking them into account either in full, or at least as an emphasis, in their investment and ESG strategies. Moreover, for steering and for achieving goals, it’s im- portant to introduce fund-wide ESG reporting. This of- fers an opportunity to identify and realize a portfolio company’s value-enhancing potential that might not otherwise be immediately evident. On top of that, reg- ular ESG reporting can keep the general partner’s in- vestors posted about the ESG strategy and implemen- tation successes at the portfolio companies. 3. Implementing and establishing transparency with the ESG Performance Monitoring Framework for general and limited partners The ESG Performance Monitoring Framework embod- ies the technical and professional requirements for ESG reporting: • • • • • It develops a benchmark-based ESG Rating that es- tablishes comparability across the various industries of the general partner’s portfolio companies. It provides monitoring of the key figures defined in the ESG Rating, such as share of renewable energy in power consumption, employee diversity at the management level, and implementation of explicit governance policies. It implements a standardized, automated software platform that minimizes the effort of collecting, processing and analyzing data for both portfolio companies and the general partner, and makes it possible to focus on interpreting information and on follow-up measures. It provides regular reporting of fund-wide ESG de- velopment to limited partners. It incentivizes management teams of portfolio companies by way of ESG-relevant drivers. To produce the ESG Performance Monitoring Frame- work, base camp has developed a Business Intelligence Reporting system in combination with an online tool. This solution harmonizes the portfolio companies’ various databases so that all key figures and their evolution can be displayed, compared and analyzed at both the company and fund level. The following reports are the results of a GP Reporting process for the whole portfolio. Here we show extracts of information for all sorts of Environmental und Social aspects: • Carbon Footprint: CO2 emissions, etc., by energy source and type, along with CO2 offsets • Social: Numbers of employees, including by contract type and length of time with company, together with analyses of staff turnover and ab- senteeism. 24 M&A REVIEW 2022 • Vol. 33 • MuMAC 2022

REPORT • INTERNATIONAL PERSPECTIVE 4. Value creation and long-term management of the portfolio are the key to sustainable investments How well each portfolio company attains ESG goals will now be measured on the basis of its ESG Rating, and its ESG performance will be tracked over the long term. Based on the ESG Performance Monitoring Framework, first the historically available data from the portfolio companies are gathered and integrated in a standard- ized form for analysis. In the next step, sustainability goals are formulated, based on industry comparisons, and are coordinated between the portfolio companies’ management teams and the investment teams in charge. Measures for improvement can be identified on that basis and initiatives can be developed, such as: • Environmental: Rapid switch to remote work and replacing air travel with rail travel, to reduce the carbon footprint • Social: Establish a task force to promote employee diversity company-wide, and measure employee satisfaction • Governance: Expand fund-wide guidelines for com- pliance and corporate governance at portfolio companies ADVERTISEMENT Developing a strategy, and integrating the ESG Performance Monitoring Framework on that basis, can serve to steer ESG-compliant corporate governance within the fund. This ensures that all companies in the portfolio improve steadily on the basis of relevant, measurable criteria. This benefits both the portfolio company and the financial investor. Marcus Höfer is the CEO of base camp. From his years of working with multiple private equity funds and their portfolio companies, he has many years of expe- rience in management consulting, and has played a major role in various inter- national and national digitalization projects and transformations. As an early adopter of new technologies and a “digital native,” he is an ideal contact per- son for all aspects of digitalization for companies who want to venture into this important step. Marcus Höfer holds a Master of Science Information Systems from Technical University Munich, with a major in Corporate Finance. Paris – Home of Fusions & Acquisitions https://fusions-acquisitions.info Foto: © Netfalls– stock.adobe.com

REPORT • ADVERTORIAL process due to bad data and to increase the efficiency in the sourcing process. With close to 400 organisations using our European platform we, offer a personalised product that meets the specific needs of each user and can be customised for different industries or segments. With backgrounds from the M&A industry, our team aims to have a pro-active approach with our users, using our customers’ feedback to constantly improve our product offer over time. Find out more at www.valu8group.com “We see M&A driven data in the form of a pyramid. We add pri- vate company data intelligence and target sourcing efficiency in the first 80% of the sourcing se- lection process, where we make sure that the entire selection is represented, and no potential companies or targets are missed in the screening process due to bad data. The last 20% of more qualitative analysis is made by our customers.” Anders Lundgren, Founder and CEO ADVERTISEMENT MERGERS & ACQUISITIONS • Beteiligungen • Allianzen • Restrukturierungen • Divestments • Private Equity www.ma-review.de Finally interns may see daylight again Photo: © Joshua – stock.adobe.com Foto: © Dan Race – stock.adobe.com Learn from experience and follow ma-review.com

REPORT • GERMANY of large deals (between EUR 250 million and EUR 1 bil- lion) and mega deals increased by only nine from 2020 to 2021 (from 20 to 29). According to an analysis by Ernst & Young, in 2021 there were more acquisitions made in the German private equity sector than ever before. A total of 302 transactions represents an increase of 34%. The focus was on small- and medium-sized transactions, re- sulting in a slight decline in the total value of acquisi- tions (from EUR 34.2 billion to EUR 26.2 billion). With regard to exits in 2021, Ernst & Young identified 112 deals that generated EUR 30.3 billion. In 2020, only 87 exits took place, which generated a total of EUR 16.2 billion. 3. Key developments 3.1 Prolongation of the Act to Mitigate the Consequences of the Covid-19 Pandemic The Act to Mitigate the Consequences of the Covid-19 pandemic under Civil, Insolvency and Criminal Pro- cedure Law (Gesetz zur Abmilderung der Folgen der Covid-19-Pandemie im Zivil-, Insolvenz- und Strafverfah- rensrecht) (Covid-19 Act) announced in March 2020 gives stock corporations the option of shareholders’ electronic participation, absentee voting, audio and video transmission of meetings and participation by members of the supervisory board – even without a corresponding basis in the articles of association – as provided for in Section 118 of the German Stock Corporation Act (Aktiengesetz). For limited liability companies (Gesellschaft mit beschränkter Haftung, GmbH), the Covid-19 Act permits shareholder resolu- tions to be passed in text form or by submitting votes in writing, even without the consent of all the share- holders. All instruments of the Covid-19 Act were limited until the end of 2020. It was initially decided to extend the Covid-19 special provisions until the end of 2021. On 7 September 2021, the provisions were extended again until the end of August 2022. The extension does not involve any changes to the content. As in the past, the decision on whether to hold a virtual or in-person an- nual general meeting remains at the discretion of the executive board. The latter may decide (if certain con- ditions are met) that the meeting is held as a virtual general meeting without the physical presence of the shareholders or their proxies. This decision requires the approval of the Supervisory Board. Corporation Act (Aktiengesetz). The Federal Ministry of Justice states that the format of the virtual share- holders’ meeting has been well received and proven to work by practitioners. Virtual general meetings re- sulted in increasing attendance rates and an increase in the quality of responses to questions because the opportunity to ask questions in advance was imple- mented. 3.2 Distressed M&A transactions Many sectors have suffered during the Covid-19 pan- demic (e.g. travel, sports and leisure). The massive dis- ruption of global supply chains also had a significant impact. Despite this, the number of distressed M&A transactions did not increase significantly in 2021. According to Betriebs-Berater, the number of insol- vencies in 2021 corresponded to the lowest level since the introduction of the German Insolvency Statute (Insolvenzordnung) in 1999. Short-time working allow- ances, Covid-19-specific subsidies and attractive short-term loans may have delayed some companies’ need for restructuring. When Covid-19 emergency aids expire, an increase in distressed M&A transactions can be expected. The Act on the Stabilization and Restructuring Frame- work for Enterprises (Gesetz über den Stabilisierungs- und Restrukturierungsrahmen für Unternehmen) (StaRUG), which came into force on 1 January 2021, includes the possibility of carrying out reorganizations outside German insolvency law based on a restructur- ing plan accepted by most creditors. If a company has not yet become insolvent, it is possible to restructure the company based on the restructuring plan against the will of any minority shareholders. Personnel meas- ures and the unilateral termination of contracts are not possible on the basis of the StaRUG, but the use of a restructuring plan can provide security for investors in distressed M&A transactions without having to wait for the subsequent appointment of an insolvency ad- ministrator. Share and membership rights in a debtor that is a legal entity can also be structured by the re- structuring plan, and arrangements permitted under corporate law can be made or shared and membership rights can be transferred. Appropriate compensation must be provided for this intervention. This option might motivate the debtor’s shareholders to participate in an M&A transaction to avoid restructuring. 3.3 Drafting M&A transaction documents in and after Covid-19 At the beginning of 2022, the Federal Ministry of Justice (Bundesministerium der Justiz) published a draft bill providing for the introduction of virtual gen- eral meetings as a permanent regulation in the Stock The challenges associated with Covid-19 are reflected in many companies’ balance sheets. Changes occur particularly in areas that are decisive for determining the purchase price. To better represent any fluctua- 30 M&A REVIEW 2022 • Vol. 33 • MuMAC 2022

REPORT • GERMANY 2. Business relations aimed at the awarding of contracts are created with the corporation. In contrast, management participation is not to be allocated to the consulting activity if it has its own economic weight compared to the freelance activity. The fact that the respective manager has an increased chance of profit does not mean that participation in the company is to be regarded as dependent on the em- ployment and consulting relationship. According to the BFH, this can be inherent in any capital participation. In addition, the manager only receives the share of the profit attributable to the extent of their participation. 3.5 Stricter regulatory requirements Comprehensive amendments to the Foreign Trade and Payments Act (Außenwirtschaftsgesetz, AWG) and the Foreign Trade and Payments Ordinance (Außen- wirtschafts verordnung, AWV) went into force in 2020. On 1 May 2021, the 17th ordinance amending the AWV also came into force and further tightened regu- latory requirements, particularly through additional reporting obligations and the grant of additional audit powers, especially with regard to key technologies. Several simplifications have also been implemented, however, in connection with the acquisition of compa- ny shares and intra-group restructurings. Sector-specific investment control now also covers acquisitions by companies that develop, manufacture, modify or have actual control over military equipment. It is also sufficient if such activities were carried out in the past and knowledge of, or access to, the relevant technology is still available today. For cross-sectoral acquirers, AWV expanded the re- portable acquisitions by 16 case groups, particularly for future and key technologies (e.g., artificial intelligence, cybersecurity, autonomous driving and critical raw materials). In 2020, acquisitions in the areas of healthcare and in- fection control became subject to mandatory reporting. In view of this, as well as with regard to the newly introduced 16 case groups of reportable acquisitions, the 17th ordinance amending the AWV introduced a new review threshold of 20% of the voting shares. The acquisition of additional voting shares is also subject to notification if the acquirer’s direct or indirect share of voting rights in the domestic company has already reached the review threshold prior to the acquisition or if voting shares relevant under company law (25%, 50% or 75%) are exceeded as a result of the addition- al acquisition. Another significant change was the introduction of an audit power for foreign investments that take place below the percentage audit thresholds but where a non-EU citizen/entity otherwise acquires an effective interest in the control of the domestic company. An example of this is the assurance of additional seats or majorities in supervisory bodies or management or in the case of the granting of veto rights in strategic busi- ness or personnel decisions. 3.6 ESG In 2021 the importance of environmental, social and governance (ESG) in corporate transactions continued to increase. No standards have yet been established in the area of ESG, which also harbors uncertainties with regard to deal sourcing in the private equity sector. In many cases, an ESG due diligence has been estab- lished, in which the target is specifically examined with regard to ESG. No uniform standards for ESG due diligence have yet been developed, however. ESG considerations also have an impact on purchase price. Risks identified during ESG due diligence can be countered in the transaction documentation (e.g. by including indemnification clauses or special guarantees for compliance with ESG-relevant norms and stand- ards). Carve-outs are rising in importance in connection with ESG. In some cases, non-ESG-compliant parts of companies are sold off or acquired. In the absence of uniform standards, however, it is challenging to evalu- ate a company’s ESG standards and identify suitable business units to enhance its footprint. Consideration of ESG criteria is also important in pri- vate equity. The acquisition of the investment is aimed at an exit, by which time the importance of ESG likely will have increased. 3.7 Investment in SPACs Overall, 2021 was a record year for special purpose acquisition companies (SPACs), which were flooded with liquidity. The SPAC market boomed in 2021, especially in the United States. Based on strict stock corporation law and stock exchange regulations, German entities are less attractive for SPACs (at least as far as local IPOs are concerned). From an economic perspective, SPACs can be considered interesting when large sums of money are available in the market. 32 M&A REVIEW 2022 • Vol. 33 • MuMAC 2022

REPORT • GERMANY Sustainability and German MidCap Finance Market Dr. Oliver K. Hahnelt, McDermott Will & Emery Rechtsanwälte Steuerberater LLP Amidst the still lingering Covid-19 pandemic, historic production disruption and shortages in raw material, increasing inflation and the Ukraine war, finance activities continued to be very strong in Germany with a large number of transactions closed in the first half of 2022.This is in line with many other Western European jurisdiction where asset managers report a higher amount of business done in the first half of 2022 than in the first half of 2021. On the other hand, it is a clear trend that sponsors are increasingly concerned with overpaying for assets in the context of a global revaluation of public market stocks. As a consequence, sponsors on average enhance due diligence processes to assess even more thoroughly transactions risks (e.g., the impact on continuing sup- ply chain instabilities). But enhanced due diligence takes time resulting in transactions to take longer than they did over the last few years, and there is great likelihood of such trend to continue in 2022. Overall, this may lead to a lower number of closed financing transactions, at least in certain segments. Another trend is that sponsors, investors, corporates and likewise financiers put an increasing emphasis on broader corporate social responsibility and the contri- bution of investments/businesses to sustainable devel- opments. In that context, environmental, social and governance (“ESG”) issues are on the rise in making investment decisions. What has a longer history in the public markets, has now found its way in the private lending sector as well. As there is not yet implemented a legal standard neither for addressing ESG issues nor for measuring ESG compliance despite the best efforts of a large number of participants, there is no uniform approach in the German market for sustainability linked loans. However, in the German MidCap financing space most financings concur therein that addressing ESG goes beyond the measurement of mere credit risks but to incentivize a company’s environmental and social im- pact. By that means, the focus of ESG linked loans is not to finance green projects only, but to measure and monitor ESG compliance against sustainability key performance indicators (“KPI”). Those KPIs may either be very generic or very specialized, but they also link to the inclusion of environmental protections in credit documentation which had disappeared from many leveraged loans. The setting of the KPIs (as well as the number of per- formance indicators itself) is left for the participants to decide on a deal-by-deal basis. Within this dynamic, the Loan Market Association has developed Sustaina- bility Linked Loan Principles to promote the integrity of the sustainability-linked loan product in general. Where possible and as a recommendation, KPIs should be, amongst other things, (i) relevant, core and mate- rial to the borrower’s overall business, and of high stra- tegic significance to the borrower’s current and/or future operations; (ii) measurable or quantifiable on a consistent methodological basis; and (iii) able to be benchmarked. Whilst it is clear that benchmarking and measurement are key constituents of the KPI indicators, 34 M&A REVIEW 2022 • Vol. 33 • MuMAC 2022

REPORT • GERMANY Notification Obligations for Foreign Investments in the German Health Sector Jana Grieb & Deniz Tschammler, McDermott, Will & Emery Rechtsanwälte Steuerberater LLP 1. Impact of the Geopolitical Situation on Foreign Investment Control and Notification Obligations in Germany Germany and the European Union have always been open to investment by foreign companies in domestic markets. There is broad consensus among the German Government1, the Federal Ministry for Economic Affairs and Climate Action (BMWK)2, which is responsible for the review of foreign investments in Germany, and the European Commission3 that foreign direct investments are indispensable for economic growth, competitive- ness, employment and innovation. The Federal Republic of Germany’s liberal attitude towards foreign invest- ments has continued to this day. State intervention remains the exception. At the same time, foreign investment control is a mir- ror of the global foreign and security policy situation. The increase in protectionism worldwide in recent years, the Covid-19 pandemic, the Russia-Ukraine war, and the tense financial markets have left their traces. The German Government is increasingly reviewing certain investment projects with skepticism, especially when investors are based in less liberal states such as the People’s Republic of China,4 and/or investments are planned in domestic markets or infrastructure that are particularly relevant to the public good.5 1 See the response of the German Government to a request (Kleine Anfrage) from the Free Democratic Party (FDP) in BT-Drs. 19/1808, p. 7, according to which foreign in- vestments are an essential “stimulus for growth and employment in Germany as a business location”. 2 BMWK regards Germany as “an attractive destination for investment and one of the most open economies in the world”, see https://www.bmwk.de/Redaktion/EN/ Artikel/Foreign-Trade/investment-screening.html. 3 See Communication C(2020) 1981 final, p. 1. 4 The former Federal Minister of Economics Zypries already emphasized that foreign investment control also protects fair competition and that, in the sense of “recipro- city”, special attention must be paid to investors from countries “whose economic system is not as open” as that of Germany, see the BMWK press release of 12 July 2017, https://www.bmwk.de/Redaktion/EN/Pressemitteilungen/2017/20170712- zypries-besserer-schutz-bei-firmenuebernahmen.html. 5 The German Government has long considered it necessary to examine particularly critically the planned acquisitions of such infrastructures, which are of “paramount importance for co-existence,” see the BMWK press release of 19 December 2018, https://www.bmwk.de/Redaktion/DE/Pressemitteilungen/2018/20181219- staerkung-unserer-nationalen-sicherheit-durch-verbesserte-investitionspruefung. html. Against this background, the scope of application and the framework conditions of German foreign invest- ment control have been tightened several times in re- cent years. One focus of the reforms has been – among other things – the instrument of the notification obli- gation. An acquirer is obliged to notify certain foreign investments to BMWK immediately after signing of the acquisition agreement and may only complete the acquisition after the BMWK has given its approval (statutory closing condition). Such a notification obli- gation had already existed since 2002 for foreign direct investments in the armaments and defense sector (so-called sector-specific investment review). In recent times, it has also been introduced and then significant- ly extended for other sectors, i.e. within the scope of the so-called cross-sectoral investment review. 2. Overview of Notification Obligations in the German Health Sector As a result of recent reforms, many foreign direct in- vestments in the German health sector are now subject to mandatory notification and statutory closing condi- tions.6 In the following, we provide an overview of the main product and service markets that are affected by this, whereas notification obligations equally apply to share deals (above certain thresholds) and asset deals: 2.1 Foreign Investment in Critical Health Infrastructure The German regulator has introduced a notification obligation for foreign investments above and including 10 per cent of the shares in domestic companies that operate critical health infrastructures.7 6 See section 55a of the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung). 7 The concept of critical infrastructure has come into effect in July 2018 based on the 9th amendment of the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung). 36 M&A REVIEW 2022 • Vol. 33 • MuMAC 2022

REPORT • GERMANY fections carried by doctors and nurses). FFP2 protective masks have been among the first goods in short supply during the pandemic. ly notified to and reviewed by the competent ministry (BMWK). b) Medicinal Products The notification obligation for medicinal products is directed to finished drugs including vaccines as well as active ingredients or other starting materials for me- dicinal products, that are essential to public healthcare in Germany. Inter alia, this relates to drugs whose ac- tive ingredients form part of the list of supply-relevant and supply-critical active ingredients issued by the Federal Institute for Drugs and Medical Devices (Bundesinstitut für Arzneimittel und Medizinprodukte).13 Apart from that, there is no further guidance available as to which types of drugs and in which circumstances such drugs may be essential to public healthcare. As things currently stand, this needs to be assessed on a case-by-case basis, considering the needs of the German population, the supply volume of the respec- tive product and other specifics of the individual case. c) Medical Devices Moreover, the scope of the notification obligation covers medical devices as defined in Art. 2 no. 1 of Regulation (EU) 2017/745 that are intended to dia- gnose or treat life-threatening and highly contagious infectious diseases. This includes medical devices necessary for maintaining healthcare in disaster situa- tions, such as surgical masks and ventilators. d) In Vitro Diagnostics Finally, the notification obligation extends to in vitro diagnostics (“IVD”) within the meaning of Regulation (EU) 2017/746 that are designed to provide information about physiological or pathological processes or condi- tions, or to establish or monitor therapeutic interven- tions related to life-threatening and highly contagious infectious diseases. This includes diagnostic tests for the detection of an infectious agent, such as the novel coronavirus that causes Covid-19. 3. Summary and Advice for Foreign Investors German foreign investment control is marked by a sig- nificantly increasing scope of the cross-sectoral noti- fication obligation in recent years. Correspondingly, more foreign investments than ever before are current- 13 See BMWK draft of the 15th amendment of the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung), p. 11. Some of the recently introduced cases of notifiable foreign investments specifically relate to the domestic health sector: Since 2018, notification towards BMWK have been mandatory for foreign investments in certain health infrastructures or related components or soft- ware, which are critical for public healthcare. Since 2020, notification shall also be mandatory for foreign investments that relate to basic health products (i.e. PPE, drugs, medical devices and IVD) inter alia essen- tial to combat the Covid-19 or a potential future pan- demic. The purpose of such broader notification regime is to make sure that BMWK can intervene where for- eign investments might result in supply-critical health infrastructures or products leaving the German market. In that light, foreign investors should carefully review as part of their legal due diligence whether they need to notify acquisitions in the German health sector to BMWK. If that is the case, notification must be made immediately upon signing of the acquisition agree- ment. In case of legal uncertainties as to whether a no- tification obligation exists, foreign investors may strive for informal coordination with BMWK. Alternatively, in borderline cases, they may also decide to obtain approval from BMWK regardless of a notification obli- gation. Failure to notify despite notification obligation results in the parties to a transaction being unable to close. Jana Grieb specializes in health care and life sciences, with a particular focus on the pharmaceutical and medtech industry.Jana has advised numerous pharma- ceutical and medical devices companies in a variety of regulatory issues, trans- actions and contractual matters across the European Union, and has represent- ed them in litigation with regard to public procurement law, unfair competition and reimbursement by public and private payers. Prior to joining McDermott, Jana worked for an international law firm and a Munich-based law firm focus- ing on pharmaceutical law. Deniz Tschammler specializes on complex legal, commercial and strategic pro- jects in the health and life sciences sector. He advises on transactions and collaborations, disputes in and out of court, market entry and reimbursement pathways, as well as data protection and other compliance challenges of an increasingly digitized industry. His clients involve global pharmaceutical compa- nies and medical device manufacturers, early stage companies with a focus on innovative health products and disruptive business models, as well as investors in German and European health markets. 38 M&A REVIEW 2022 • Vol. 33 • MuMAC 2022

REPORT • GERMANY existing shareholders provide for authorized capital (Genehmigtes Kapital). Under such an equity invest- ment agreement, the investor invests equity into the company against a claim to subscribe for new shares provided for under the authorized capital in the con- text of a later financing round, such financing round again setting the price or amount of the investor’s shares. This structure, as a SAFE, does not have any loan element. However, in Germany, a capital increase and the sub- scription to new shares in the course of a capital in- crease have to be registered with the commercial register (Handelsregister). In the commercial register application, the managing director of the company has to assure pursuant to Section 57 para. 2 of the German Limited Liability Companies Act (GmbHG6) that the minimum contributions have been made and the contribution is finally at the free disposal of the company’s managing directors.7 The staggered timing separation of the equity investment and the later subscription for new shares might lead to difficulties for the managing director’s ability to grant the assur- ance required, as the funds, i.e., the equity invest- ment, will likely have been used at such later point in time. Therefore, in addition to the equity investment, the investor has also to pay the amount of the nominal share value in the course of the future financing round under which the investor will be admitted to subscribe for new shares from the authorized capital. Tax risks, in particular gift tax (Schenkungssteuer) risks, might arise as well at the point in time of granting of equity as well as at the later point in time of the creation of the shares. Although these risks typically are dealt with in the context of providing liquidation preferences in the waterfall,8 this might be a challenge as at the begin- ning the investor is not a shareholder and at the later point in time it might be questionable whether from a tax perspective the earlier investment can be ‘attached’ to the nominal capital paid in for the shares. 4. Implementation using preference shares Another potential mechanism to implement SAFEs in Germany is the issuance of preference shares to the investor against payment of the nominal share value in the course of a standard cash capital increase and an additional payment in the amount of the invest- ment. Since the investor will be a shareholder of the company, the additional payment can be made into the free capital reserve of the company in the meaning of Section 272 para 2 no. 4 of the German Commercial 6 German Gesetz betreffend die Gesellschaften mit beschränkter Haftung. 7 Hildegard Ziemons, Beck’scher Online-Kommentar GmbHG, (Ziemons/Jaeger/ Pöschke, 52nd edition), Section 57, ref. 15 et seq. 8 Wolfgang Weitnauer, Handbuch Venture Capital, (Weitnauer, 7th edition 2022), part E, I, ref. 15. 40 Code (HGB9). Payments into the free capital reserve are only allowed for company shareholders. In order to avoid gift tax issues and to preserve the economic rights of the investor, the equity investment of the investor will be reflected as liquidation preference in the share- holder agreement. Different to the structure using authorized capital where the investor is not a share- holder when investing, here he is. His accession to the shareholders’ agreement also safeguards his legal and economic position. The preference shares which the investor receives in the course of the capital increase, will then be con- verted into ordinary shares in the course of an equity financing round, the valuation of such financing round again setting the conversion price. The invest- ment and shareholders’ agreement will provide for de- tailed provisions regarding the conversion. Likewise opposed to the structure under authorized capital (cf. section 3 above), in this way of implemen- tation, the German capital raising provisions (Kapital- aufbringungsvorschriften) are safely maintained since the investor pays the nominal share value upon sub- scription for the new preference shares. This method of implementing SAFE mechanisms re- quires an investment and shareholders’ agreement as well as capital increase documentation, which all is to be notarized. The SAFE implementation by using preference shares also has no loan element. 5. Summary For the implementation of SAFEs in Germany, the cor- porate law particulars must be taken into account. Unlike in the U.S., in Germany, a SAFE has to meet the capital raising requirements (Kapitalauf bringungs- grundsatz). This can be challenging as the point in time of granting the investment and the point in time of creation of the ordinary shares in the context of a financing round fall apart. Therefore, the investor has to additionally pay the amount of the nominal share value once the financing round takes place. This complexity might be the reason for the scarce use of SAFEs in Germany and the overall dominance of convertible loan agreements. Furthermore, the imple- mentation of SAFEs in Germany might trigger upfront costs which exceed the costs of convertible loan agree- ments. Both techniques of implementing SAFE mecha- nisms in Germany described above require upfront advisory costs for the structuring and negotiation of the agreements, in particular the investment and 9 German Handelsgesetzbuch. M&A REVIEW 2022 • Vol. 33 • MuMAC 2022

REPORT • GERMANY The German Government’s Start-Up Strategy – Ambitious Goals, Much to Do Dr. Germar Enders, McDermott Will & Emery Rechtsanwälte Steuerberater LLP On 27 July 2022, the federal cabinet (Bundeskabi- nett) adopted the first comprehensive start-up strategy of the German federal government. The aim of the strategy is to strengthen the start-up eco-systems in Germany and across Europe. The resolution of the cabinet fulfils an electoral promise that was reflected in the coalition agreement. In particular, the Greens and the Liberals had promised their voters to break with the traditionally rather stepmotherly treatment of start-ups in Germany. The strategy represents a clear commit- ment to the relevance of start-ups for the social and economic development of the (German) society, a plea for a good investment case. What is envisaged? 1. Areas of action On 28 pages, the Federal Ministry for Economy and Climate Protection elaborates on a series of possible measures to be implemented during the current legis- lative period. Ten following areas of action have been identified: 1. Strengthen funding for start-ups, 2. Make it easier for start-ups to attract talent – make employee share programs more attractive, 3. Spark the start-up spirit - make the founding pro- cess easier and more digital, 4. Strengthen female start-up founders and promote diversity in start-ups, 5. Facilitate start-up spin-offs from academia, 6. Improve framework conditions for start-ups dedicated to the common good, 7. Mobilize start-up skills for public procurement, 8. Make it easier for start-ups to access data, 9. Strengthen real laboratories – facilitate access for start-ups, 10. Put start-ups at the center of economic policies. 2. In depth 2.1 Funding With the Future Fund (Zukunftsfonds) and its individu- al modules, the government supports innovative tech- nology-oriented start-ups in their growth phase and is making available EUR 10 billion in public funds through Kreditanstalt für Wiederaufbau (KfW) over an invest- ment period until 2030. Together with private investors, the government aims to raise EUR 30 billion in private and public capital. These funds shall be used for impor- tant, yet to be prioritized areas of innovation and transformation, in particular artificial intelligence (AI), quantum technology, hydrogen, medicine, sustainable mobility, bioeconomy and circular economy and cli- mate, energy and environmental technology. The various modules aim at the provision of equity, debt and mezzanine capital to start-ups in their early to late growth phase, partly through direct investment funds, fund-of-funds and venture debt. 42 M&A REVIEW 2022 • Vol. 33 • MuMAC 2022

REPORT • GERMANY be strengthened. It is envisaged to improve measures that reconcile family and work (expansion of childcare and modernization of parental allowance for self-em- ployed persons). New forums shall be established to im- prove networking between founders with a migration background and start-ups, established companies and scientific institutions. 2.5 Spin-Offs from academia More money shall also be made available for spin- offs in the field of science, including biotechnology. Additionally, the Federal government will provide more support for the transfer of intellectual property, includ- ing the implementation of standard solutions such as IP for (virtual) shares. Networks, including those at uni- versities, shall be strengthened, and public tenders and procurement processes shall be made easier for educa- tional institutions. 2.6 Fostering Start-Ups for the common good Start-ups dedicated to the common good shall also be provided with suitable funding opportunities and receive a broader platform for public recognition. 2.7 Public procurement In public procurement processes, start-ups shall be given more consideration in the future. Also, they should be able to present their innovations digitally on an e-marketplace which allows an enhanced public awareness. Award procedures in Germany shall be made easily accessible via a central digital announce- ment platform. 2.8 Data access On an operational level, access to data is critical for fu- ture business models. Against that background, the German government envisages the implementation of a whole range of measures: • The German government will, within the frame- work of the negotiations on the European Data Act and data rooms, advocate for appropriate incen- tives for sharing data and for selected mandatory data access. It aims at creating incentives for the economy and at the same time to ensure compli- ance with data protection standards at European and German levels. • When setting up the planned data institute, the specific needs of start-ups shall be considered. Planned instruments such as data trustees and data donations should also benefit them. • Open Data shall, as far as possible and legally per- missible, be made available via open interfaces (“app- lication programming interface”, “bulk download”) in a machine-readable form and free of charge. • The German government is planning AI vouchers for SMEs if they cooperate with start-ups in the use of AI-based technologies. SMES are often still re- luctant to implement AI projects. The vouchers are intended to reduce the SME’s financial risk by co- vering part of the project costs as a lump sum if the SME works together with a start-up. This benefits both, the SME and the start-up. Networking bet- ween start-ups and SMEs is promoted by appro- priate formats (for example, networking events or funding competitions). In addition, such formats help start-ups to get in contact with and attract new customers. • In the area of health care, a German and European legal framework should be created that enables the sensible, data protection-compliant handling of health data without hampering innovation and the improvement of care. 2.9 Access to reallabs Real labs make it possible to test innovative technolo- gies and business models in a real environment, which are still limited by the general legal framework. Within the framework of the planned Act on Reallabs, the German government aims to address specific concerns of start-ups, e.g., scalability after testing in the reallab and investment security. 2.10 Start-Ups in the centre of Economic Policies A strong start-up ecosystem requires intense network- ing of all relevant actors. The German government promises to make its contribution and place start-ups even at the center of its activities by a large number of measures, e.g., by holding a “Start-Up Summit Ger ma- ny” and by establishing a network of contact points for start-ups in all federal ministries and subordinated authorities. 3. Assessment The strategy paper which evolved from an extensive participation process with workshops and online con- sultations of involved stakeholders offers a comprehen- sive and well thought-through concept for promoting young enterprises as drivers of economic, ecological and social dynamics. Accordingly, most reactions so far have been very positive, especially among young entre- preneurs. 44 M&A REVIEW 2022 • Vol. 33 • MuMAC 2022

AGENDA • 2022 CROSS-BORDER M&A AND PRIVATE EQUITY CONFERENCE 2022 Cross-Border M&A and Private Equity Conference Game-Changer Geostrategy: The Transactional Ripple Effects September 20, 2022 – MuMAC 2022 – 8:00 am to 16:25 pm (CEST) Time Panel Session A Panel Session B Panel Session C 8.00 – 9.00 Breakfast 9.00 – 9.15 Welcome Opening Statement (Yuriy Yarmilko, Consul General of Ukraine in Munich) 9.20 – 10.00 Key Note – “The geostrategic shift” (Dr. Stefanie Babst, former head of NATO's Strategic Foresight Team) 10.05 – 10.45 M&A and Private Equity Market 2022 10.45 – 11.00 Coffee Break 11.00 – 11.40 Cross Border M&A from and to the Cross Border M&A from and United States and within Europe into Asia 11.45 – 12.25 Crisis and Pre-Crisis Management Central Eastern Europe: Life Sciences The Good is so Close 12.25 – 13.15 Lunch Break 13.15 – 13.55 Finance Function Driver of Value Creation ESG: The Operational Supply Chain 2.0: in M&A Perspective Deglobalization and Sourcing 14.00 – 14.40 Mittelstand meets Private Equity Transaction Financing 14.45 – 15.25 Case Study: IP and Patent Valuation in The War Trigger: The Geostrategic Shift as M&A Processes New Perspectives on Driver: Technology, Digital Energy and Infrastructure and AI 15.25 – 15.40 Coffee Break 15.40 – 16.25 Healthcare and Private Equity Shareholder / Post M&A Litigation and Litigation Finance 46 M&A REVIEW 2022 • Vol. 33 • MuMAC 2022

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