Legal Status - JUNE 2022
M&A: Rectification for hidden defects in M&A transactions
Employment: Are harassment protocols mandatory for all companies? Penalties for non-implementation
IP/Media: When is a consumer obliged to pay when ordering online?
M&A
Rectification for hidden defects in M&A transactions
GERARD LLEBOT
Senior Associate
The Provincial Court of Barcelona passed ruling number 118/2020 dated 3 June 2020, in which it analyses rectification for hidden defects and the sufficiency of the documentation provided in the context of a Due Diligence prior to the sale and purchase of a company.
Background
Mutua Universal Mugenat, Mutua de Accidentes de Trabajo y Enfermedades Profesionales de la Seguridad Social no. 10 [Mutual Society (“Mutua Universal”)] pursued a sale process for all the shares of the company Universal Prevención y Salud, Sociedad de Prevención, S.L.U. (“Unipresalud”) to the work risk prevention company IDCQ Prevención de Riesgos Laborales, S.L.U. (“IDCQ”).
To this end, a due diligence process was initiated in order to assess the overall situation of Unipresalud. This process began with a request for a series of pieces of information from the selling party in relation to Unipresalud regarding its most relevant legal and financial aspects. Following the due diligence process, IDCQ sent a new communication to Mutua Universal reiterating its interest in the purchase transaction. However, having acquired deeper knowledge of the situation of Unipresalud, certain aspects were modified, especially in relation to the initial valuation of the company.
On 30 March 2015, the parties signed a contract for the sale and purchase of shares in Unipresalud (the “SPA”), which was notarised on the same date. The calculation of the purchase price was based on the value of the company (enterprise value), from which the total adjusted net debt and other adjustments agreed by the parties in recognition of certain contingencies detected within the framework of the due diligence process were deducted, so that, after these adjustments, the price was set at 14,038,182 Euros. In this regard, it is of particular significance for the purposes of the Judgment of the ruling in question that the SPA established that in no case would all those contingencies or liabilities detected by the buyer in the due diligence process which were known and assumed by the buyer be considered hidden defects subject to compensation as they had been duly assessed for the determination of the price of the transaction.
As of April 2016, IDCQ became aware that since 31 December 2011, Unipresalud had ceased to update the multipliers corresponding to the experience bonuses of its employees, and that the Social Division of the Audiencia Nacional [Spanish National High Court], through a judgment dated 20 January 2014 (which was confirmed by a subsequent judgment of the Social Division of the Supreme Court of 11 November 2015), had recognised, in the context of a collective dispute brought by the trade unions in the sector, the automatic extension of collective agreements of the aforementioned agreement beyond its expiry date and the consequent subsistence of the duty to update the multipliers of the experience bonus. In view of this, IDCQ sued Mutua Universal.
Arguments of the parties
IDCQ claimed in the lawsuit that the contingency related to the updating of the multiplier of the experience bonus was a hidden defect of the target company that was the object of the sale and purchase, of which the purchaser was never informed, and which was not reflected in the annual accounts of Unipresalud. According to the financial expert’s report presented by the plaintiff, the impact of the aforementioned contingency amounted to 11,081,884 Euros, which meant that the purchase price had to be reduced to 2,956,298 Euros.
For its part, Mutua Universal argued that the plaintiff had access through its legal and financial advisors to all the information from Unipresalud that they considered appropriate to request and that, through that information, the alleged hidden defect could have been perfectly identified. It also states that it provided without limit the data and documentation requested by IDCQ’s financial, labour and tax advisors, including the 2009 agreement signed between Unipresalud and its employees on the freezing of salary increases, including the experience bonus from which the contingency at issue in this case arose. In short, not only was there no hidden defect prior to the sale, but if that had been the case, the purchaser was in a position to detect it through its legal and financial advisors by means of a minimum of diligence.
The Barcelona Court of First Instance no. 20 found that the obligation to pay the experience bonus constituted a hidden defect which Mutua Universal was obliged to amend, and consequently declared that the agreed purchase price, i.e., 14,038,182 Euros, should be reduced by 856,283 Euros.
Appeals
Both parties filed an appeal against the previous judgment and the Barcelona Provincial Court upheld the appeal filed by the vendor and dismissed the plaintiff’s appeal. The reasoning set out in the judgement in question, which justifies the non-viability of the rectification for hidden defects brought by IDCQ, is as follows:
(a) On the basis that the wording of the 2009 agreement between Unipresalud and its employees (an agreement of which IDCQ’s advisors were fully aware) raised some uncertainty as to the specific salary items that would be subject to freezing, it must be understood that there was no reason to prevent the purchaser’s advisors (who had identified the freezing of salary items or social benefits as being of moderate economic impact) from ascertaining whether, among the bonuses that had not been updated, the disputed experience bonus was included.
(b) The documentation provided by Mutua Universal to IDCQ was sufficient and suitable to verify this, so that either the assessors did not notice the inclusion of such documents, or they underestimated their content or scope.
(c) The Provincial Court also considered to be relevant the fact that IDCQ had previously acquired two other risk prevention companies and that in the process of due diligence and negotiation of the SPA it had been advised by leading law and financial consultancy firms. The above, according to the understanding of the Provincial Court, means that IDCQ can be considered an expert or expert witness, in the sense used by article 1484 CC, the first paragraph of which exempts the expert or expert witness who, by reason of his profession, should easily have known of them, from the duty to rectify hidden defects.
(d) Thus, the AP concludes that what is relevant for the purposes under discussion is that the contingency was detected, or at least could have been detected, since the buyer and its advisors were indisputably in a position to identify it, both because of the documentation provided by the seller, and because of the experience and professional qualifications of the advisors, all which closes the way forward for the action of rectification for hidden defects.
June 2022
TAX
Can a subsidiary be a permanent establishment of its parent company for purposes of value added Tax (VAT)?
Judgment of the Court of Justice of the EU of 7 April 2022- CASE BERLIN CHEMIE A. MENARINI SRL C-333/20
ALEJANDRO PUYO
Partner
The Court of Justice of the European Union (ECJ), on April 7, 2020, issued a judgment on the concept of permanent establishment (PE), through subsidiaries, for VAT purposes.
The case relates to a company whose registered office is in Germany and which is engaged in the marketing of pharmaceutical products in Romania, among other things.
It is worth mentioning that the German entity indirectly owns 95% of a Romanian company that is part of the same business group. The investee is mainly engaged in advising public relations and communication management, as well as in secondary activities of wholesale trade in pharmaceutical products, advice for management in the field of public relations, communication and market analysis.
The two entities concluded a contract for the provision of services by means of which the investee company (Romanian company) undertook to render various services to the German company, including promotion, marketing, advertising, and representation, as well as support in the sale of the pharmaceutical products marketed by the parent company.
In the light of the transactions concluded under the contract, both companies considered that the services were located at the headquarters of the German company (parent company) and, therefore, the invoices covering the provision of services were issued without the corresponding VAT.
The Romanian Tax Agency concluded, firstly, that the services provided were located at the headquarters of the investee company (Romania) and, secondly, that the entity with registered office in Germany had a permanent establishment in Romania, as it had various technical and human resources, which, although they belonged to the Romanian company, were used by the German entity to provide services and make supplies subject to VAT.
Due to conflicting interpretations, the Court of First Instance referred the matter to the Court of Justice of the European Union with the aim of determining whether a company established in one Member State has a permanent establishment in another Member State solely on the ground that the latter has a subsidiary that has human and technical resources in compliance with a contract for the provision of services.
Relevant aspects of the ECJ ruling
In order to settle the dispute, the ECJ interpreted the content of Article 44 of the VAT Directive and Article 11 of Implementing Regulation 282/2011.
Broadly speaking and as a general rule, the place of supply of services for the benefit of a taxable person shall be considered the place where he has his place of business.
Furthermore, as an exception to the general rule, it is considered that if the services provided take place in a different permanent establishment other than the place of the established economic activity, then the place of performance of the services shall be considered the place where that permanent establishment is situated.
On the other hand, it was stated that what characterizes a permanent establishment is that in addition to being located in a place other than the seat of economic activity, it must have a sufficient degree of permanence and an adequate structure of human and technical resources. It is therefore clear that a EP cannot be regarded as existing if there is no apparent structure justifying the existence of those means or if the structure is of an eventual or isolated nature.
In this sense, the ECJ maintained that, in accordance with the above, the fact that a parent company located in one Member State has a subsidiary in another Member State, does not imply the existence of a permanent establishment in the latter. Although it is not required that the human and technical elements are their own “it is necessary to have the right to dispose of those human and technical resources in the same way as if they were its own, on the basis, for example, of employment and leasing contracts which make those resources available to the taxable person and cannot be terminated at short notice.”
For these reasons, the ECJ concludes that, in the case brought before the Court, a permanent establishment may only be set up if the company based in Germany had the material and human resources of its subsidiary company located in Romania as if they were its own, a situation that must be verified by analyzing the clauses of the contracts that bound both companies.
On the other hand, the Court of First Instance went to the ECJ to determine whether the direct impact of the services provided by the investee (Romanian company) on the result of the economic activity of the parent company (German company) were a criterion for assessing whether there was a permanent establishment.
Regarding the previous point, the members of the Court established that the services provided by the investee company to its parent company did not in any way imply that there was a direct participation in the disposal of pharmaceutical products nor that commitments were acquired against third parties on behalf of its parent.
Additionally, it was established that the personnel provided by the Romanian subsidiary making it available to its parent company, is the same personnel that the investee company used to provide the services covered by the contracts in favor of the German company. According to the criteria of the ECJ the same human and material resources cannot be used simultaneously to provide and receive the same services.
Finally, the ECJ highlighted a relevant difference which is that it is important “to distinguish the services supplied by the Romanian company to the German company from the goods which the German company sells and supplies in Romania. They are distinct supplies of services and goods which are subject to different schemes of VAT.”
The Court stresses that the supply of services and the supply of goods in which both companies are involved are different and that they are even subject to different VAT regimes.
In accordance with the above, it is stated that there is a provision of services by the subsidiary in favor of the parent company, but in no way there is a subsequent provision of services or delivery of goods by the same means to customers located in Romania.
For these reasons, it is concluded that there is also no permanent establishment, since those services carried out in favor of the German company are not used to carry out its delivery or provision of services to customers in Romania. The latter one uses its own material and human elements which are located in Germany, to carry out its activity.
Final Comments
Therefore, from the analysis of the judgment issued by the ECJ on April 7, 2022, we can conclude the following:
• The ECJ pointed out that a permanent establishment is present when there is an adequate structure and a sufficient degree of human and technical resources, which enable it to benefit and use any of the services provided that are solely dedicated to meet the needs of the establishment.
• The ECJ established that human and technical resources can belong to a subsidiary entity as long as the parent company (belonging to the same group) can dispose them in the same way as if they were its own.
• The ECJ concludes that it cannot be considered that a permanent establishment exists only because an entity domiciled in one Member State has a subsidiary in another Member State which provides technical and human elements for the exclusive provision of various services to the parent company in the first Member State.
• The ECJ considers that - contrary to the criteria held by the Romanian Tax Agency – although human and technical resources were made available to the German company, such a situation could not be considered in any case to have a permanent establishment since the same means were used by the Romanian company to provide the services in favor of its parent company.
June 2022
EMPLOYMENT
Are harassment protocols mandatory for all companies? Penalties for non-implementation
BEATRIZ CORRAL
Associate
Is it a mandatory requirement to have a minimum number of employees for the company to implement a Harassment Protocol? The answer is no, all companies, regardless of the size of their workforce, are obliged to implement a Harassment Protocol providing not only measures to prevent harassment, but also the steps to follow in the event of harassment in the workplace.
In this regard, although companies with less than fifty employees are not legally obliged to implement the Plan de Igualdad [Equality Plan], article 48 of Organic Law 3/2007, of 22 March does indeed establish the obligation to implement a Workplace Harassment Protocol regardless of the number of people employed in the company in order to achieve effective gender equality. Therefore, it is applicable to the whole staff of a company, including even self-employed workers with employees who report to them.
In terms of its negotiation and period of application, if the company has an Equality Plan, the Harassment Protocol must be negotiated by the Negotiating Committee and will have a maximum duration of 4 years. In the case of those companies that, due to their number of employees, are not obliged to implement the Equality Plan, it will be the company and the legal representation of the workers or the trade union representation who will negotiate it. The follow-up and evaluation will be conducted periodically by an ad hoc Committee.
Not having the Harassment Protocol in place can cause considerable damage to companies beyond the very serious infringement of article 8.13 and 13 bis of the Labour Infringements and Penalties Law (LISOS), which can lead to fines of Euro 7,501 to 225,018. In addition to these penalties, victims can claim compensation for damages and even penalties for companies, preventing them from receiving any aid or subsidies from employment programmes for a period of between 2 and 6 years, and also excluding them from accessing them.
Furthermore, a lack or inadequacy of a Harassment Protocol can lead to the company being liable for surcharges on Social Security benefits as a result of occupational diseases and/or accidents at work of employees due to inadequate safety measures.
Therefore, having a Workplace Harassment Protocol has clear advantages for companies. Among others, it provides them with a defence against claims of nullity for alleged workplace harassment of employees as the absence of complaints in the complaints channel will demonstrate and prove wise and appropriate action on the part of the company.
As mentioned above, the adoption of measures to prevent harassment is mandatory. Furthermore, having a Workplace Harassment Protocol guarantees an internal, confidential and rapid means of resolving and reacting to any sexual or gender-based harassment that may occur in the workplace.
June 2022
IP/MEDIA
When is a consumer obliged to pay when ordering online?
FLORENCIA ARRÉBOLA
Senior Associate
The Court of Justice of the European Union (“CJEU”) established in its judgment of 7 April 2022 the circumstances must be taken into account in order to consider that a consumer is obliged to pay when placing an order online.
Pursuant to Article 8.2.2.2 of Directive 2011/83/EU of the European Parliament and of the Council of 25 October 2011 on consumer rights (“Directive on Consumer Rights”), transposed into Article 98.2.2.2 of the consolidated text of the Ley General para la Defensa de los Consumidores y Usuarios [General Law for the Protection of Consumers and Users (“TRLGDCU”)], The trader shall ensure that the consumer, when placing his order, explicitly acknowledges that the order implies an obligation to pay. If placing an order entails activating a button or a similar function, the button or similar function shall be labelled in an easily legible manner only with the words ‘order with obligation to pay’ or a corresponding unambiguous formulation indicating that placing the order entails an obligation to pay the trader. If the trader has not complied with this subparagraph, the consumer shall not be bound by the contract or order.
In the case in question, the CJEU decided a question referred for a preliminary ruling by a German court as to whether the only decisive factor for considering the consumer to be bound by an online contract, and thus obliged to pay, is the wording of the button or similar function. In the case in question, a consumer used an online accommodation booking platform and clicked on a particular hotel, viewing images and information concerning the rooms available, the facilities and the price offered by the hotel in a given period.
The consumer wanted to book four rooms at that hotel and, after clicking on the “I’ll Reserve” button, entered his personal details and the names of the other guests. Finally, the consumer clicked on a button reading “ Confirm Reservation”. The consumer did not show up at the hotel on the reservation date and the hotel claimed cancellation fees from the consumer. Therefore, the CJEU had to clarify whether clicking on the button with the text “Confirm Reservation” is considered sufficient to understand that a contract was concluded between the parties and, consequently, whether the hotel was entitled to claim cancellation compensation.
The CJEU considers that it is for the referring court to determine whether the wording “Confirm Reservation” can be considered, in German, to be analogous to the expression “Order with obligation to pay” pursuant to Article 8(2)(2) of the Directive on Consumer Rights. In other words, the national courts must assess in each individual case whether the expression used on the button or similar function by which the contract is confirmed, both in everyday language and for the average, reasonably well-informed and reasonably observant and aware consumer, is necessarily and systematically associated with the creation of an obligation to pay.
In the event that the national legislation transposing Article 8(2)(2) of the Directive on Consumer Rights does not contain specific examples of wording corresponding to the expression "order with obligation to pay", as is the case in Spanish law, the CJEU indicates that companies may choose any expression, provided that “consumers clearly understand on the basis only of the words appearing on the ordering button that as soon they click on that button they will be under an obligation to pay”.
Furthermore, the CJEU also considers it appropriate to clarify that national courts must assess only the text of the button in question rather than the context or the circumstances of the contracting process. In this way, the CJEU points out, consumers can accurately determine the moment when they assume an obligation to pay.
In conclusion, it should be taken into account that the text of the button or similar function in online contracting processes must clearly convey to the consumer the message that from that moment onwards a payment obligation has been entered into. Companies may use the expression “order with obligation to pay” or a “similar unambiguous wording”, as stated in Article 98.2.2.2 TRLGDCU, which indicates to the consumer that the placing of the order implies the obligation to make a payment to the company. Only then will the contracting process imply that the consumer consents to be bound not only by the distance contract, but also by this payment obligation.
June 2022