3 questions to smart minds

How do ESG criteria affect corporate transactions?

For this 3 questions to Christoph O. Breithaupt

SKYE PARTNERS in Frank­furt on the Main
Photo: Chris­toph O. Breithaupt
15. March 2023

The ESG crite­ria, i.e. the crite­ria rela­ting to envi­ron­men­tal, social and gover­nance issues, place special requi­re­ments on both compa­nies and inves­tors. How can ESG-rele­­vant issues be meaningfully incor­po­ra­ted into due dili­gence and contrac­tual docu­men­ta­tion for tran­sac­tions? What do you have to pay special atten­tion to?

For this 3 ques­ti­ons to Chris­toph O. Breit­haupt, foun­ding part­ner of SKYE PARTNERS in Frank­furt am Main

1. Why or to what extent do ESG crite­ria repre­sent an issue in the tran­sac­tion of compa­nies at all?

We observe that insti­tu­tio­nal inves­tors are incre­asingly asses­sing compa­nies with an increased focus on ESG compli­ance. The back­ground to this is often the ever-incre­asing demands of the finan­ciers behind the inves­tors (insu­rance compa­nies, banks, pension funds, etc.). This is because they are incre­asingly deman­ding compli­ance with corre­spon­ding crite­ria due to the growing aware­ness of ESG in society as well. Both in the context of due dili­gence and in the context of contract draf­ting, the chall­enge here is that a speci­fic (market) stan­dard does not yet exist in this area. Nevert­hel­ess, various crite­ria have alre­ady emer­ged that have a posi­tive or nega­tive impact on finan­cing and/or company valuation.

2. What impact do ESG crite­ria have, for exam­ple, on due dili­gence, purchase agree­ments, share­hol­der agree­ments or even closings?

ESG influen­ces the execu­tion of the entire tran­sac­tion from due dili­gence to closing and beyond. At the begin­ning of each tran­sac­tion, we first assess with our clients which ESG crite­ria are rele­vant to them based on the target company’s busi­ness model and the requi­re­ments they have set them­sel­ves, and what weight­ing is assi­gned to each of them. The ESG request list we have desi­gned is then adapted to the crite­ria we have identified.

Subse­quently, the infor­ma­tion provi­ded on the basis of our ques­ti­ons is incor­po­ra­ted into our Legal Due Dili­gence Report and provi­des our client with concrete advice on how to deal with the “findings”. Our recom­men­da­ti­ons for action refer to the speci­fic formu­la­tion of the purchase agree­ment, the share­hol­der agree­ment or to-do’s post-closing. For exam­ple, we are incre­asingly adding warran­ties, indem­ni­ties, earn-out clau­ses, or even MAC clau­ses rela­ted to ESG risks to purchase agree­ments. In some cases, we also work with closing condi­ti­ons that stipu­late, for exam­ple, that certain stan­dards are imple­men­ted prior to closing to estab­lish ESG compli­ance of the target company.

Since, in our expe­ri­ence, this is often not feasi­ble in the short time between signing and closing, it is not uncom­mon for share­hol­ders’ agree­ments to include a commit­ment to inte­grate ESG crite­ria into the company’s own proces­ses and to define guide­lines and stan­dards after the tran­sac­tion. In addi­tion to the usual report­ing obli­ga­ti­ons of the target company towards the inves­tor, there are now corre­spon­ding ESG report­ing obli­ga­ti­ons. What the ESG report­ing obli­ga­ti­ons look like in concrete terms is usually worked out in ESG work­shops toge­ther with the inves­tor and exter­nal consul­tants imme­dia­tely post-closing. The focus here is in parti­cu­lar on report­ing on emis­sion reduc­tions, equal pay and equal repre­sen­ta­tion on super­vi­sory bodies.

3. What are the advan­ta­ges for entre­pre­neurs who run their busi­ness in an ESG-compli­ant manner?

Corpo­rate gover­nance that is guided by ESG crite­ria has a variety of advan­ta­ges. Such entre­pre­neurs, on the one hand, have more poten­tial pros­pects who want to invest in or acquire their busi­ness. This is because a large number of inves­tors are placing an incre­asing focus on inves­t­ing in ESG-compli­ant compa­nies for poli­ti­cal, econo­mic or repu­ta­tio­nal reasons. On the other hand, this often increa­ses the value of the company, which usually leads to an increase in the purchase price. Further­more, the conside­ra­tion of ESG crite­ria redu­ces the effort of buyers as well as sellers in the context of a tran­sac­tion, which also redu­ces tran­sac­tion costs.

Since the imple­men­ta­tion of ESG guide­lines and stan­dards is not done “over­night”, we advise our clients on the seller side to deal with this topic at an early stage. Many compa­nies are curr­ently facing succes­sion chal­lenges and a sale is often the only option. In this case, addres­sing ESG issues upstream of the sales process is recom­men­ded (e.g., as part of vendor due dili­gence). We provide support in iden­ti­fy­ing ESG crite­ria, imple­men­ting them in the company and presen­ting the docu­men­ta­tion in order to opti­mize the subse­quent sales process.

About Chris­toph O. Breit­haupt

Chris­toph O. Breit­haupt is a foun­ding part­ner of SKYE PARTNERS and advi­ses in parti­cu­lar buy-out tran­sac­tions for private equity funds, entre­pre­neurs and invest­ment compa­nies (both on the buyer and seller side). He also advi­ses corpo­rate M&A clients on dome­stic and inter­na­tio­nal tran­sac­tions, inclu­ding acqui­si­ti­ons, dives­ti­tures, joint ventures and restruc­tu­rings. Before foun­ding SKYE PARTNERS, he worked for almost ten years at major inter­na­tio­nal law firms.

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