In spite of the M&A downturn both globally and in the healthcare industry in particular, 2008 saw a twofold increase in the volume of deals involving biotech firms. Judging from the news that emerged during 2009 and in light of recent surveys, this trend looks set to continue and the outlook is undoubtedly rosy, above all in pharmaceutical R&D.

This is of course by no means the first time that a boom in the biotech industry has been forecast. It has escaped no one's notice that the biotechnology business is a particularly regulated industry and one that poses risks at various levels. It remains to be seen, first of all, whether the above trend will also be embraced by SMEs. We will also need to wait and see whether such an outlook holds true for the Spanish market, the development of which is noteworthy, albeit, as is common knowledge, not free from certain idiosyncrasies.

In any event, the relatively cycle-proof nature of the healthcare sector and the growing need of major pharmaceutical companies to diversify their pipeline ought to be grounds for optimism, so the experts say. Many of them predicted that the pharmaceutical corporations, enjoying an enviable financial position, would be unable to resist the lure of the more than reasonable valuations offered by many biotech firms, and data gathered internationally would appear to bear out such predictions.

Against this backdrop, as far as Spain is concerned, reference must unavoidably be made to the new Law on Structural Modifications to Commercial Companies (the LME). Standardizing and revising the rules on structural modifications at commercial companies, this piece of legislation is all set to have a significant impact on the country's M&A market.

The Law on Structural Modifications to Commercial Companies

The LME sets out the regulations governing structural modifications at commercial companies, consisting of alterations of legal form, mergers, spin-offs, transfers en bloc of assets and liabilities and including international relocations of registered offices.

This short article does not seek to provide an all-encompassing review of this Law, but rather simply to take a brief look at some of the new developments that will foreseeably have a greater impact on deals struck in the biotech industry.

Changes to the merger regime

Mergers and acquisitions are without doubt the method most frequently used by companies seeking to grow in size and boost their productivity. In the case of the biotech industry, such deals are essential in order to reach the size required to attract the attention of investors and make their way in a globalized market. This is why they have played such a pivotal role in the development of the sector in the US.

In this article, we will focus on the general merger regime. Nevertheless, it is worth pointing out that the LME transposes the Directive on Cross-Border Mergers into Spanish law, bringing with it an express set of rules on mergers between companies from different EEA States. Although such transactions already took place in practice, the new procedure will help overcome the numerous hurdles facing intra-EU mergers, and is also expected to facilitate mergers with non-EU companies.

Generally speaking, the new regulations introduce an array of provisions in a bid to simplify and expedite mergers. First of all, the cases in which a report by an independent expert on the merger plan is not required have been widened (with the resulting savings in costs and time that this will bring about).

The LME also attempts to simplify intra-group mergers, extending the scope of the simplified procedure, already provided for under the Spanish Corporations Law, to cover cases in which the absorbing company directly holds a stake of at least ninety percent in the absorbed company.

In the same vein, the simplified procedure may also now be used to expedite deals in which corporations or partnerships limited by shares play no part and where a resolution has been unanimously adopted by a shareholders' meeting held without prior call and with the attendance and unanimous consent of all the shareholders.

In the interest of certainty in legal transactions, the LME excludes the possibility of challenging a merger once it has been registered, unless it is carried out in breach of its provisions, and establishes, in any event, a three-month time period in which to allege the nullity of the merger. Nonetheless, with a view to safeguarding minority shareholders' rights, an out-of-court procedure for challenging the exchange ratio has been put in place.

The LME introduces a special set of rules governing deals that have been particularly prevalent in recent years, above all in the private equity industry: LBOs followed by a merger between the buyer and the target. While this type of transaction is less commonplace in the biotech industry, it is worth noting that the LME lays down special requirements for mergers between two or more companies where one of them has incurred debt in the three years immediately before acquiring control (or essential assets) from another company in the merger.

Changes to spin-off rules

As we see it, the concept of spin-offs looks all set to play a particularly key role at biotech firms, not simply as a mechanism with which to split up the various lines of business and thus isolate the risks associated with each, but also as a means to enable financing rounds and the entry of investors solely into those business areas of interest to them.

According to the LME, a spin-off may take the form of a total spin-off, a partial spin-off, or a segregation. As far as the first two methods are concerned, suffice it to say that the legislation does not introduce too many new developments with respect to the regime previously in force.

It is, however, worth noting the express regulation under the LME of segregations and "hive downs," placing them on a par with spin-offs. "Segregation" is understood to mean the transfer en bloc by universal succession of one or more parts of a company's assets and liabilities, each constituting an economic unit, to one or more companies, where the segregated company (but not its shareholders) receives shares in the beneficiary companies.

"Hive downs" have been defined by some as what the new Law classifies as the "formation of a wholly-owned investee by means of the transfer of its assets and liabilities." In other words, a transaction whereby a company transfers en bloc its assets and liabilities to a newly-formed company, receiving all of the shares in the beneficiary company in return.

Thus, Spanish law now allows for the possibility of performing these two transactions under the aegis of the principle of universal succession, an essential prerequisite for the viability of many transactions of this type.

Conclusions

It would be remiss to deny that certain aspects of the LME are difficult to interpret. Given the limitations of this piece, we have made no reference to such aspects. Despite this, the new legislation should not be viewed overall in a wholly negative light. It represents a further step (albeit transitional, as acknowledged in the LME itself) towards perfecting Spanish corporate law. In general terms, it offers a more comprehensive and, in many cases, simpler framework under which to reorganize Spanish biotech firms.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.