Typical due diligence issues

The focus of the legal due diligence will largely depend on the target company's business. Therefore, as a first step, it is advisable to precisely determine the target company's business to ensure an efficient legal due diligence review.

In the vast majority of cases, the following issues are considered in legal due diligence: corporate matters (e.g., title to shares), commercial contracts (e.g., change of control or exclusivity provisions), financing/loan agreements (e.g., change of control provisions), real estate (e.g., lease agreements), employment and pension matters, regulatory/public law matters (e.g., repayment of granted funds), litigation (e.g., pending lawsuits) and IP/IT/software matters (e.g., data protection compliance). Increasingly, compliance and ESG matters are receiving increased attention in due diligence exercises.

Vendor due diligence reports and legal fact books are becoming more common in auction processes involving larger target companies in Austria.

For quite some time now, warranty and indemnity (W&I) insurance is becoming increasingly popular for mid-cap or small-cap transactions, as well as the larger transactions. Typically, parties will consider at an early stage of a transaction whether W&I insurance will be sought as this will have implications on the scope, depth and reporting of the due diligence exercise.

Issues identified in the due diligence are typically dealt with by: (i) having them rectified by the seller before signing/closing (e.g., obtaining waivers from third parties if change-of-control provisions have been identified in commercial contracts);(ii) specific indemnities regarding specific known risks identified in the course of the due diligence (e.g., environmental risks, ongoing/threatened litigation); or (iii) general representations and warranties (e.g., existence and ownership of title to sold shares).

Pricing and payment

Austrian purchase agreements commonly provide for escrows (i.e. a portion of the purchase price may either be withheld or placed in an escrow account for a fixed period as security for the payment of any claims under the representations and warranties to meet any warranty or indemnity claims) but not for deposits.

Acquisition methods

Austrian businesses are acquired mainly by means of a share deal. For the acquisition of smaller businesses and, in particular, in distressed situations (that is, where the relevant company faces financial adversity), buyers also choose to undertake asset deals. The choice of the transfer method will depend on a number of considerations, in particular, tax implications, the scope and complexity of the target business, and liability risks connected with the acquisition.

Share sale

The acquisition of a corporation (that is, a limited liability company or a stock corporation) by means of a share deal may be effected by purchasing all or part of its shares, or by increasing its share capital and subscribing to new shares. In share deals, the legal entity of the target company remains unchanged and all rights and obligations of the target company are transferred uno actu by way of universal succession (Gesamtrechtsnachfolge). The buyer of a share is usually not liable for the debts of the target company, but if the share capital is not fully paid up or has been repaid, the buyer may be liable to pay up the remainder. For buyers of shares in an Austrian limited liability company (Gesellschaft mit beschränkter Haftung (GmbH)), this would even include liability for the remainder of other shareholders.

Transfers of title to shares

An Austrian notarial deed is required for the purchase of shares in a GmbH and the transfer thereof. However, pursuant to Section 90a of the Notarial Code, the required notarial deed may be performed digitally. The articles of association may subject the transfer to additional conditions (which would also have effect vis-à-vis third-party acquirers), such as prior consent requirements, drag-along and tag-along rights, put and call options. The GmbH must be notified of the transfer to allow the new shareholders to exercise their rights against the company.

In principle, for Austrian stock corporations (Aktiengesellschaft (AG)), no specific form requirements apply to the transfer of shares. Shares in non-listed companies must be issued in the form of registered shares (Namensaktien). Registered shares are transferred by means of written endorsement by the seller. The company must be notified of the transfer of registered shares. The articles of association of a company may impose additional shareholder consent requirements for registered shares but, due to the principle of free disposal of shares, the Austrian Stock Corporation Act (Aktiengesetz (AktG)) does not provide for the possibility of preemptive rights for other shareholders or third parties in the articles of association. However, a shareholders' agreement may provide for preemptive rights.

As described in further detail below (see "Common deal structures—What are the different types of limited liability companies?"), a new company form was introduced into Austrian company law as of 1 January 2024, the Austrian flexible company (FlexCo). The transfer of shares in a FlexCo may be effected by way of an Austrian notarial deed, or by way of a private deed.

Asset sale

In an asset deal, all or part of the assets of a going concern are acquired. Through an asset deal, ownership is transferred to the buyer by way of singular succession (Einzelrechtsnachfolge), which means that the acquisition has to be contractually agreed on between the buyer and the seller for each asset individually and further specify all relevant individual assets and contracts in an itemized form as well as specify all relevant in-rem acts to transfer the transferred assets in accordance with the relevant civil and property law (see also below). In addition, certain statutory liabilities apply in an asset deal. As a result, asset acquisitions often entail more complex issues than share acquisitions. However, asset deals can be attractive to buyers for tax reasons and because of the opportunities to carve out only certain parts of a legal entity. An asset sale does not typically require notarization unless the seller is selling all or the majority of its assets.

Transfers of title to assets

Austrian corporate and civil law does not contain any comprehensive set of provisions relating to the acquisition of a business as a going concern. In principle, every single asset must be transferred in compliance with the transfer and form requirements applying to such asset (for exemptions, see below). As such, the following transfer requirements apply:

• Property rights must be transferred according to applicable property law provisions (e.g., transfer of real estate must be recorded in the real estate register).
• Claims need to be transferred by means of an assignment, which is subject to notification requirements.
• Tangible assets are transferred by physical delivery, if physical delivery is not possible or only possible with unreasonable effort, a symbolic delivery will suffice.
• Intangible property rights must be entered into the relevant public registers according to applicable intellectual property laws.

The rights of a contractual party can be transferred only by assumption of contractual rights, with the approval of all other contractual parties. However, the Austrian Commercial Code (Unternehmensgesetzbuch (UGB)) facilitates this requirement by adopting a legal presumption of approval by the contractual parties (see Section 38 of the UGB).

Some contracts/rights will transfer automatically by operation of law to the buyer (e.g., employment contracts, some insurance contracts and certain tenancy rights) subject to a notification to the buyer. A shareholders' resolution is required to approve the transfer by a GmbH or an AG of all its assets. The resolution in these two cases will require approval by a majority of at least three-quarters of the nominal capital represented or by a greater quorum if required by the articles of association. This approval requirement also applies where a substantial part of the company's business is to be transferred (according to legal academics).

Signing/closing

Due to regulatory approval requirements (in particular foreign investment approval and/or merger control clearance requirements or other regulatory approval requirements depending on the business, e.g. banking supervisory law approvals) signing and closing regularly do fall apart and do not occur simultaneously. Hence, a separate closing appointment often takes place. At the closing, the share transfer or asset transfer takes place and the purchase price is paid.

Foreign investment restrictions

Austria has a mandatory and suspensory foreign investment screening procedure, which means that transactions that meet the relevant criteria need to be notified to the relevant authority and cleared before they can be completed.

The foreign investment review regime is targeted at certain sectors. For further information, see the more detailed section on "Foreign investment restrictions".

Antitrust/merger control

Austria has a mandatory and suspensory merger control regime which means that transactions which meet the relevant criteria need to be notified to the competition authority and cleared before they can be completed. It is also necessary to consider EU merger control rules. Mergers involving companies active in several Member States and reaching certain turnover thresholds are examined at European level by the European Commission. This allows companies trading in different EU Member States to obtain clearance for their mergers in one go. As of 12 October 2023, the EU Foreign Subsidies Regulation (FSR) requires qualifying transactions, and bids in response to certain large public tenders in the EU, to be notified for upfront clearance by the European Commission where the companies involved have benefited from foreign financial contributions (a broad concept) that exceed certain (low) thresholds. Acquisitions of a target with annual revenues in the EU of at least EUR 500 million will trigger FSR deal notifications. Acquisitions of smaller targets will not, regardless of deal value. Outright mergers and large joint ventures will trigger a notification requirement if the EUR 500 million EU-wide revenue threshold is met by one of the merging parties or the joint ventures. 

For further information, see the more detailed section on "Antitrust/merger control".

Other regulatory or government approvals

With respect to target companies that are subject to specific regulatory supervision, additional approvals may be required in connection with a share transfer or asset deal, e.g. in case of financial institutions approvals by the relevant financial market authority.

General

In share acquisitions, the employment conditions of the target company's employees remain unchanged as the employer remains the same entity.

An asset acquisition will likely qualify as a transfer of business pursuant to Austrian TUPE rules. Where a business transfer takes place, the affected employees are automatically transferred by operation of law to the buyer, which becomes the new employer. Generally, the employees transfer with all existing rights and obligations.

Transfer of business

Employers must inform the works council (where there is one) of any proposed transfer of business prior to the transfer.

If no works council exists, the transferor or transferee must inform affected employees in writing before the transfer. That information must include the date of the transfer, the reasons for the transfer, as well as legal, economic and social consequences that may be triggered due to the transfer for the employees, and any measures that may be taken as a result of the transfer.

Mergers also qualify as a transfer of business, triggering notification and/or consultation requirements.

Approval or consultation requirements

In the course of corporate restructuring, the works council obtains further participation rights. Hence, employers must inform the works council (where there is one) of potential operational changes to the business. Examples of operational changes (see Section 109 (1) Labor Constitution Act (Arbeitsverfassungsgesetz (ArbVG))) include, among others, the downsizing or closure of a business or parts of the business, or merger with other companies. Such information has to be provided vis-à-vis the works council in a timely and effective manner that enables it to evaluate possible effects and conduct meaningful consultation before such changes become implemented. If certain conditions are met, the works council may also enforce social plans mitigating detrimental effects on the workforce.

Acquisition of shares

Following the abolishment of capital transfer tax (Gesellschaftsteuer) on 1 January 2016, equity contributions of a direct shareholder in its Austrian subsidiary are no longer taxable. However, waivers on impaired receivables may trigger corporate income tax at the level of the Austrian subsidiary.

Acquisition of assets

The transfer of real estate generally triggers a real estate transfer tax (RETT) of 3.5% of the purchase price of any property located in Austria. Registration fees add on at least an additional 1.1%.

RETT, in the amount of 0.5%, may also apply to a share deal if 95% or more of the shares in a domestic entity owning real estate is acquired (i) by one buyer or (ii) by members of the same tax group (within the meaning of Section 9 of the Austrian Corporate Income Tax Act (Körperschaftsteuergesetz)). In this event, RETT may be avoided by transferring a minor share (more than 5%) in the Austrian subsidiary to a second shareholder.

Austria also imposes stamp duty on various legal transactions, such as assignments of receivables (0.8%) or lease agreements (1%) — whereas lease agreements concerning living space concluded  are no longer subject to stamp duty. In practice, these fees can be avoided by undertaking appropriate structuring.

Mergers

Under certain conditions, a merger is exempt from capital transfer tax and value-added tax (VAT), and the rate of RETT can be lowered.

VAT

There is no exemption from VAT for the transfer of a going concern, so asset acquisitions are subject to VAT at statutory rates (i.e., 10%, 13% or 20%, depending on the relevant goods or service) unless assets that are exempt from VAT (i.e., receivables) are transferred. The export of goods is zero-rated and intra-community supplies are exempt from Austrian VAT, but intra-community acquisitions trigger VAT at the statutory rates. Intragroup services supplied within a domestic group are disregarded for VAT purposes.

Share sales are usually exempt from VAT.

OECD's Two Pillar Solution

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in a large number of jurisdictions.

Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.

For information on post-acquisition integration matters, please see our Post-acquisition Integration Handbook.