The Law of Corporate Finance: General Principles and EU Law: Volume III: Funding, Exit, Takeovers

20.2 Funding Mix 553

Target Share deal: fi-

nancial assis-

tance ex ante.

Asset deal: cash

payment in the

future (loan).

Share deal:

share exchange

(equity invest-

ment).

Share deal: cash

payment in the

future (loan,

contingent

claims).

Other equity or

debt investment.

Share deal: ex-

isting indebted-

ness.

Asset deal: as-

signment of

debts (novation).

New assets,

new subsi-

dies and state

aids.

Legal aspects. From a legal perspective, the financing mix is influenced by the
general legal aspects of different forms of funding (Chapter 2). Shareholders’
capital is generally regarded as the most expensive form of funding, both in direct
issuance-related and adverse-selection costs,^6 and the acquirer will take into ac-
count its desired level of gearing.
In addition to the general legal aspects of different forms of funding, the financ-
ing mix financing mix is also constrained by many particular restrictions such as:

• terms of existing indebtedness (in particular, material adverse change, change
  of control, financial covenants, and other covenants);


• terms of existing asset investment (similar covenants);


• terms of prior state aids and similar subsidies (in particular, terms the breach of
  which can trigger a duty to repay funds received by the target);^7


• terms of existing equity and mezzanine investment;


• restrictions on financial assistance^8 and distributions^9 (in particular, restrictions
  applicable to the target);


• existing shareholders’ pre-emption rights;^10


• restrictions on the issuing of shares for a consideration other than in cash;^11 and


• the regulation of mergers^12 and divisions.^13

In the context of acquisitions, the acquirer should also be aware of the risk that the
acquisition will be regarded as a typical event that can trigger the exit of existing
investors at any relevant level of the investment chain. For example, change of
control may be regarded as an event of default under the target’s existing loan

(^6) See, for example, Schlingemann FP, Financing decisions and bidder gains, J Corp Fin
10 (2004) pp 683–701.
(^7) See Wündisch S, In Subventionsbescheiden lauern oft versteckte Fallen, FAZ, 2 July
2008 p 23.
(^8) Article 24(1) of Directive 77/91/EEC (Second Company Law Directive).
(^9) Article 15 of Directive 77/91/EEC (Second Company Law Directive).
(^10) Article 29(1) of Directive 77/91/EEC (Second Company Law Directive).
(^11) Article 10 of Directive 77/91/EEC (Second Company Law Directive).
(^12) For example, Directive 78/855/EEC (Third Company Law Directive).
(^13) Directive 82/891/EEC (Sixth Company Law Directive).