World Law Group member firms recently collaborated on a Global Venture Capital Guide that covers more than 30 jurisdictions on investment approval processes, typical investment sectors and investment structures on Venture Capital deals (and more!).

The guide does not claim to be comprehensive, and laws in this area are quickly evolving. In particular, it does not replace professional and detailed legal advice, as facts and circumstances vary on a case-by-case basis and country-specific regulations may change.

This chapter covers Portugal. View the full guide.

PORTUGAL

PLMJ

1) In your jurisdiction, in which sectors do venture capital funds typically invest?

Although there is no specific sector in which private equity and venture capital entities typically invest and despite the history of investments actually made being difficult to ascertain (since only selected deals are disclosed), the Transactional Track Record (TTR) monthly report, issued in August 2020, highlights that the technology sectors are currently popular for private equity investment.

2) Do venture capital funds require any approvals before investing in your jurisdiction?

Private equity entities set up in Portugal are governed by the Private Equity, Social Entrepreneurship and Specialised Investment Legal Framework, approved by Law no. 18/2015 of March 4, 2015 (as amended) (“PELAW”).

This legal regime specifically stipulates that the setting-up of private equity entities is subject to (i) prior registration[1]with the Portuguese Securities Market Commission (“CMVM”), or (ii) prior authorisation from and registration[2] with the CMVM.

The most common private equity entities are:

a. Private equity companies (sociedades de capital de risco)[3] / Management entities of private equity funds (sociedades gestoras de fundos de capital de risco)[4]: incorporated as private limited companies by shares;

b. Private equity investors: incorporated as sole shareholder private limited companies by quotas; and

c. Private equity funds: autonomous funds with no legal personality which can be managed by (i) private equity companies, (ii) management entities of private equity funds (sociedades gestoras de fundos de capital de risco), or (iii) entities legally qualified to manage closed alternative investment undertakings.

Under the PELAW, private entities set up in Portugal are subject to strict rules related to their organisation and operation (especially their asset valuation), remuneration policy, subcontracting, and depositary and transparency duties.

Once set up in accordance with Portuguese law, and before undertaking an investment, private equity entities must follow their internal procedures for the approval of the investment in the target company.

Foreign private equity entities are not required to obtain any approval (other than those specifically triggered by the investment/transaction) before investing in a Portuguese target company. Nevertheless, if the purpose of the foreign private equity entity is to operate in Portugal (rather than investing), certain regulatory conditions must be complied with beforehand.

3) Are there any legal limitations to an offshore venture capital fund acquiring control or influencing the business, operations, or governance of an investee entity?

The Portuguese normative framework is guided by the principle that investment is not discriminated on the grounds of nationality, which means that there is no requirement to have a national partner and there are no limitations on the distribution of profits or dividends abroad.

Nevertheless, for tax compliance reasons, the holder of a stake in a Portuguese company must have a Portuguese taxpayer number.

4) Would an investor be required to undertake an antitrust analysis prior to investment? When would such a requirement be triggered?

In Portugal, some practices restricting competition, abuse of a dominant market position or predatory agreements are prohibited by law.

Under the Portuguese Competition Act, notice of concentration must be provided to the Portuguese Competition Authority if one of the following criteria is met:

a. As a consequence of the concentration, a market share equal to or greater than 50% of the domestic market in a specific product or service, or in a substantial part of it, is acquired, created or reinforced; or

b. As a consequence of the concentration, (i) a market share equal to or greater than 30% but smaller than 50% of the domestic market in a specific product or service, or in a substantial part of it, is acquired, created or reinforced, and (ii) the individual turnover in Portugal in the previous financial year for both the purchaser’s group and the target company is greater than EUR 5 million, net of taxes directly related to such turnover; or

c. The purchaser group and the target company (i) have reached an aggregate turnover in Portugal in the previous financial year greater than EUR 100 million, net of taxes directly related to such turnover, provided that (ii) the individual turnover in Portugal for both the purchaser group and the target company is above EUR 5M.

In accordance with the Portuguese Competition Act, only the turnover relating to the part of the business that is the subject of the concentration must be considered with respect to the target company. With respect to the purchaser, however, the turnover for the whole group must be considered.

5) What are the preferred structures for investment in venture capital deals? What are the primary drivers for each of these structures?

All transactions are different, and their respective investment structures unique. The structures that are designed in the context of an investment essentially have the aim of (i) seeking limitation of liability, (ii) ring-fencing the risk associated with each investment (segregating each investment by each SPV), and (iii) allowing flexibility for different exit strategies.

In view of this, certain private equity entities design their investment structures around the new limited liability companies (sociedades por quotas or sociedades anónimas) that they incorporate for this purpose (“SPV”) and through which the funds will be provided for the target companies.

Investment in the target company can be made either through (i) the acquisition of the direct or indirect shareholding in the target company from its direct or indirect shareholders, or (ii) investing in the target company through a share capital increase with other equity or debt instruments (or a combination of both).

With respect to equity instruments (other than holding ordinary shares), the most commonly used are so-called supplementary capital contributions or ancillary capital contributions (subject to the supplementary capital contributions regime), both of which must be accounted for as the target company’s equity, whereas shareholders’ loans are the most commonly used debt instruments.

In addition, private equity entities also resort to other instruments when investing in target companies, such as preferred shares, convertible bonds or warrants issued by the target companies, among others.

As published in a 2018 report by the CMVM on private equity, except for the acquisition of shareholdings in the companies, most investment was made through equity and debt instruments, and in particular through ancillary capital contributions (subject to the supplementary capital contributions regime).

6) Is there any restriction on rights available to venture capital investors in public companies?

According to the PELAW, private equity entities set up in Portugal are not allowed to invest more than 50% of their assets in securities subject to trading on a regulated market.

In addition, both for private equity entities set up in Portugal and foreign private equity entities that invest in Portugal, the Portuguese Securities Code stipulates that:

a. Any shareholder of a listed company that reaches or exceeds a shareholding of 10%, 20%, 1/3, 50%, 2/3 and 90% of the voting rights corresponding to the share capital of a listed company that is subject to Portuguese law or any party that reduces its shareholding to a value lower than these limits must, within certain parameters, inform the CMVM and the company in which the shares are held of this fact.

b. With a few exceptions, anyone whose shareholding in a limited company exceeds 1/3 or 50% of the voting rights corresponding to the share capital must make a compulsory offer to acquire all shares and other securities issued by the company that afford the right to subscription or acquisition. Making such an offer is not required when, if the limit of 1/3 has been exceeded, the party that would be required to make the offer proves to the CMVM that it does not have control over the target company (and does not have a group relationship with it).

c. Any party who holds at least 90% of the share capital or the respective voting rights thereto, both in the case of listed companies and private companies (the latter meaning those not having capital open to public investment), may acquire the remaining shares through a squeeze-out procedure. If successful, such an investor will then hold the entire share capital of the target company.

7) What protections are generally available to venture capital investors in your jurisdiction?

The protections available to private equity entities are generally the same as for any other investor in a Portuguese target company.

In addition to (i) the general rule that only the target company’s (and not the shareholders’) assets can be seized by creditors to settle the debts thereof, (ii) the contractual and pre-contractual liability set out in Portuguese Civil law, and/or (iii) minority rights granted by the Portuguese Companies Law (i.e., the need for qualified majorities for certain resolutions, information rights and the possibility of convening general meetings), protection mechanisms are typically sought under contractual arrangements (binding between the parties).

To that end, there are different mechanisms to protect investors that are usually agreed upon in the context of the negotiation for the transaction and which may vary in accordance with the transaction document at issue (e.g., Sale and Purchase Agreements or an Investment and Shareholders’ Agreement).

The terms of the contractual protections will largely depend on the private equity entity’s position with respect to the investment in the target company (e.g., if a minority or majority shareholding will be held, or the amount to be invested compared with the total investment sought by the target company).

The following are the most typical protections under a Sale and Purchase Agreement:

· Price methodology/adjustment: Investors may seek protection by implementing different price methodology/adjustment mechanisms depending on the risk of the deal. The most common are (i) locked box, where the parties agree to the purchase price before completion, and (ii) completion accounts, where the purchase price is determined with reference to the completion accounts. These can be combined with other mechanisms, such as earn-outs, where part of the consideration is determined with reference to the target company’s future profitability.

· Representations and warranties: Inclusion of a complete and thorough list of the seller’s representations and warranties. Depending on the type of representations and warranties being breached, they may bring about the seller’s liability, termination rights for the investor or price adjustments.

· Conditions Precedent and Interim Period: When the deal is not signed and completed simultaneously, investors may seek restrictions on the target company’s management during the period between signing and completion. This means that operations must be carried out in accordance with the ordinary course of business and past practices or that management decisions are conditional on prior consent from the investor.

· Specific indemnities: Inclusion of a list of potential contingencies for which the seller undertakes to be liable during a certain timeframe and up to a predetermined threshold.

· Limitation of liability: With the objective of reducing the sellers’ liability for specific aspects of the company or business after the sale is complete.

· MAC Clause (material adverse changes): Inclusion of a MAC clause, in accordance with which investors can walk away from the transaction if certain events that have (or may have) a detrimental impact on the target company’s business take place.

· Penalty clauses: Inclusion of penalties linked to noncompliance with obligations undertaken by a party in the deal. These are intended to work as an incentive both to comply with the agreement and to compensate the nonbreaching party for a breach.

The following are the most typical protections under an Investment and Shareholders’ Agreement:

· Governance: Depending on how hands-on an investor is (and the amount invested), the investor’s appointment of a number of directors to the target company’s management may be negotiated to ensure control over its strategic and key decisions.

· Reserved matters: Whereby a qualified majority or a specific party’s consent is required for certain key matters to be approved at the corporate bodies.

· Covenants: In accordance with which the target company must comply with certain financial covenants and ratios in order to continue to be an eligible investee. Breach of these covenants may trigger an early exit mechanism for the investor.

· Exit provisions: Which may vary among call and put options, drag and tag-along provisions, deadlock clauses and liquidation events. The aim is to allow investors to walk away from the investment if certain events take place and/or conditions are met.

· Information Rights: In accordance with which the target company must keep the investor informed on a regular basis, and the investor has the right to ask for information it deems appropriate to monitor the target company’s activity.

8) Is warranty and indemnity insurance common in your jurisdiction? Are there any legal or practical challenges associated with obtaining such insurance?

Warranty and indemnity insurance solutions have become very common in Portugal in recent years, particularly in cross-border transactions, and the market trend clearly shows these solutions have been increasingly sought in different deals relating to various sectors.

There are no specific legal or practical challenges in Portugal associated with warranty and indemnity insurance.

9) What are common exit mechanisms adopted in venture capital transactions, and what, if any, are the risks or challenges associated with such exits?

The choice of exit route cannot be determined in advance as it will depend on the market conditions and the main features of the investment.

As indicated above, transaction documents will be drafted to prepare the grounds for an exit route that should be simple and have reduced costs and potential liabilities associated with it.

The main options are:

· Sale of the target company’s shares: Either to another company or another investor. The sale is usually preceded by a competitive sale procedure.

· IPO: Please refer to our comment in Question 10 below.

· Liquidation of the target company: This may be done through a decision by the shareholders, in which case, depending on the assets/liabilities held by the target company, the process may be quite swift or via judicial proceedings, which includes the context of insolvency proceedings.

In Portugal, notwithstanding mechanisms that may be sought in the Investment and Shareholders’ Agreement, an auction sale of the target company’s shares to another (foreign) company is commonly adopted as an exit mechanism.

10) Do investors typically opt for a public market exit via an IPO? Are there any specific public market challenges that need to be addressed?

An IPO is one of the exit routes open to investors and in the last few years we have seen some small companies choosing to go public. However, this is not as common as in other jurisdictions and is often only used when an investor holds a minority stake.

Euronext provides specific solutions for smaller companies (Euronext Growth and Euronext Access) with lower requirements and has often been chosen as the listing venue by small and first-time issuer companies.

However, the exit is typically made through the target company’s shares being sold to the former holders or third parties, and not on the stock market.

[1] For companies managing assets with an aggregate amount below the following thresholds:

EUR 100 million, when using leverage; or

EUR 500 million if no leverage is used and there are no redemption rights with a maturity of up to 5 (five) years as from the initial investment date.

[2] For companies managing assets with an aggregate amount above the thresholds mentioned in the previous footnote.

[3] For companies managing assets with an aggregate amount below the following thresholds:

(i) EUR 100 million, when using leverage; or

(ii) EUR 500 million if no leverage is used and there are no redemption rights with a maturity of up to 5 (five) years from the initial investment date.

[4] For companies managing assets with an aggregate amount above the thresholds mentioned in the previous footnote.