A Practical Guide to Private Equity Transactions (Law Practitioner Series)

Half-title......Page 3
Title......Page 5
Copyright......Page 6
Contents......Page 7
Figures......Page 8
Foreword......Page 9
Preface and acknowledgments......Page 11
Table of cases......Page 13
1 Introduction......Page 15
(a) Management buyouts (MBOs, or buyouts)......Page 16
(c) Leveraged buyouts and institutional buyouts (LBOs/IBOs)......Page 17
(d) Venture capital......Page 18
2.2 The emergence of private equity......Page 19
2.3 Types of private equity investor......Page 22
2.4 Sourcing the deal......Page 24
3.1 General......Page 26
3.2 Business Plan contents......Page 27
3.4 Investor returns......Page 31
4 Conclusion......Page 35
2 The deal process: an overview......Page 36
3.1 Engaging advisers......Page 40
(a) Limitations on liability......Page 42
(b) Proportionality......Page 43
3.3 Heads of agreement and exclusivity......Page 44
(a) Confidentiality......Page 45
(b) Exclusivity......Page 46
(c) Costs underwrites and indemnities......Page 47
4.1 Overview of due diligence......Page 48
4.2 Vendor due diligence and data rooms......Page 49
4.3 Legal due diligence......Page 50
(e) Employees and pensions......Page 52
(h) Property and environmental......Page 53
4.4 Financial due diligence......Page 54
(d) Management/staff review......Page 55
(e) Tax due diligence......Page 56
4.5 Other due diligence......Page 58
5 Conclusion......Page 59
1 Introduction......Page 61
2.1 A simple structure......Page 62
(b) The investor......Page 63
(c) The managers......Page 66
2.3 Multiple Newcos......Page 67
(b) Structural subordination......Page 68
2.4 Higher leverage: junior debt......Page 70
3.1 Pricing the equity: the safe harbour......Page 71
3.2 Ratchets......Page 73
3.3 Multiple investors: understanding the parties......Page 75
3.4 Investor/management fees......Page 77
3.5 Secondary buyouts and other ‘rollover’ sellers......Page 78
4 The deal documents......Page 79
4.1 The acquisition documents......Page 80
4.3 The debt documents......Page 81
5 Conclusion......Page 82
1 Introduction......Page 83
2.1 Parties......Page 84
(a) Completion accounts......Page 85
(c) Earnouts and similar arrangements......Page 87
2.3 Other risk allocation during negotiation......Page 89
2.4 Retention accounts......Page 90
(a) Competition clearances......Page 91
(b) Shareholder approval......Page 92
(d) Other regulatory approvals......Page 94
2.6 Consequences of conditionality......Page 95
(b) Risk in the business during the delay......Page 96
2.7 Warranties, indemnities and risk allocation......Page 98
2.8 Warranties and knowledge/awareness......Page 99
(a) Awareness of the seller......Page 100
(b) Awareness of the buyer......Page 101
2.9 Limitations......Page 103
(a) Monetary limits......Page 104
(c) Conduct and the right to fight......Page 106
(d) Other typical limitations......Page 107
2.10 Restrictive covenants and confidentiality......Page 108
3.1 Disclosure: principles......Page 109
(b) General disclosures......Page 111
(c) Specific disclosures......Page 112
4.1 Introduction......Page 113
4.2 Typical issues for private equity transactions......Page 114
(a) Ceasing to be distinct (control)......Page 115
4.5 Notification: voluntary system......Page 116
4.6 EC merger control legislation......Page 118
(a) What is a concentration?......Page 119
(b) A Community dimension: the turnover threshold......Page 120
4.7 Relevant turnover......Page 121
4.8 Notification: mandatory system......Page 122
4.9 Appeals and jurisdiction......Page 123
5.1 Background......Page 124
5.3 Limitations in the tax covenant......Page 125
5.4 Tax covenant on a private equity acquisition......Page 126
6 Conclusion......Page 127
2 Equity offer letter......Page 128
3.1 Background and parties......Page 130
3.2 Conditionality......Page 131
3.3 Completion......Page 133
3.4 Investment agreement warranties......Page 134
3.5 Interaction between investment agreement warranties and acquisition agreement warranties......Page 136
3.6 Warranty limitations and defences......Page 138
3.7 Restrictive covenants......Page 142
3.8 Confidentiality obligations......Page 145
3.9 Board composition......Page 146
3.10 Board committees......Page 148
3.12 Investor consents......Page 149
3.13 Investor fees and expenses......Page 151
4.1 Background......Page 152
4.2 Share structure and core share rights......Page 153
4.3 Voting......Page 154
4.4 Dividends......Page 156
4.5 Return of capital and allocation of sale proceeds......Page 158
4.6 Ratchet......Page 159
4.8 Permitted transfers......Page 161
4.9 Voluntary transfers......Page 163
4.10 Compulsory transfer......Page 165
4.11 Compulsory transfer on cessation of employment (‘leavers’)......Page 166
(b) Vesting......Page 167
4.12 Warehousing......Page 169
(a) Drag rights......Page 171
(b) Tag rights......Page 173
(c) Threshold......Page 174
(e) Treatment of non-cash consideration......Page 175
4.15 Quorum......Page 176
4.16 Class rights for investors......Page 177
5 Investment disclosure letter......Page 178
6 Loan note instrument......Page 179
6.3 Events of default......Page 180
6.5 Changes to the loan note instrument and consents......Page 181
7 Conclusion......Page 182
1 Introduction......Page 184
2.1 Why seek debt finance?......Page 185
2.2 What was the benchmark funding package in the early part of the new millennium?......Page 186
2.3 Growth market, increased liquidity and rising borrower power?......Page 187
2.4 The crunch point......Page 189
2.5 So, what now?......Page 190
3.2 Scoping the debt funding requirement......Page 191
3.4 Finance: bilateral, arrange-and-underwrite, or club?......Page 193
3.5 Due diligence on the Target......Page 194
(a) Facilities available......Page 195
(b) Drawdown period(s)......Page 196
(c) Repayment and interest terms......Page 197
(d) Mandatory prepayments......Page 198
(e) Representations and warranties......Page 200
(f) Positive and negative undertakings......Page 201
(g) Financial covenants......Page 202
(a) Mezzanine Facility Agreement......Page 205
(b) Mezzanine warrants......Page 207
4.3 Intercreditor Agreement......Page 210
5 Security requirements of funders......Page 212
6.1 Background......Page 214
6.2 Bridge debt......Page 215
7 Conclusion......Page 216
1 Introduction......Page 217
2.2 Notice......Page 218
2.3 Garden leave......Page 219
2.4 Payment in lieu of notice......Page 220
2.5 Grounds for summary dismissal......Page 222
2.7 Remuneration and benefits......Page 224
2.8 Other terms......Page 225
3.1 General......Page 226
3.2 Unfair dismissal......Page 227
3.4 Summary dismissal......Page 228
3.5 Constructive dismissal......Page 230
4.1 Types of claim......Page 231
4.3 Whistleblowing......Page 232
4.4 Compromise agreements......Page 233
5.1 Introduction and purpose......Page 235
(a) Share option arrangements......Page 236
(b) Share award plans......Page 238
(c) Cash-based arrangements......Page 239
5.3 Key issues to consider with all incentive arrangements......Page 240
6 Conclusion......Page 241
2.1 Types of pension scheme......Page 243
2.2 Pension scheme funding......Page 244
2.3 Section 75 debts......Page 247
(a) Pre 6 April 2008......Page 248
(i) Scheme apportionment arrangements......Page 249
(iii) Withdrawal arrangements......Page 250
(iv) Approved withdrawal arrangements......Page 251
3.1 The Pensions Regulator and the Pension Protection Fund......Page 252
3.2 Contribution notices......Page 253
(b) Post 14 April 2008......Page 254
3.3 Financial support directions......Page 257
3.4 Clearance......Page 261
3.5 Associates and connected persons......Page 264
4.1 Introduction......Page 266
(i) Target pays the section 75 debt in full......Page 267
(iii) Target pays the section 75 debt in part......Page 268
(b) Other provisions imposing liability......Page 269
(c) Moral hazard issues......Page 270
(d) What future service benefits will be provided?......Page 271
(e) Past service transfers......Page 272
(b) Funding obligations of Target going forward......Page 273
4.4 Target is acquired as an asset purchase......Page 274
4.5 Issues during ownership and on exit......Page 277
5 Conclusion......Page 279
2.1 Structure of the investor......Page 280
2.2 Returns from debt: withholding tax......Page 281
2.4 Gains on realising investments......Page 282
3.1 Tax deductions for interest......Page 284
3.3 Transfer pricing......Page 285
3.4 Timing of any interest deduction......Page 286
3.6 VAT recovery......Page 289
4 Tax issues for managers......Page 290
4.2 Restricted securities......Page 291
4.3 Elections......Page 292
4.4 HMRC/BVCA Memorandum of Understanding......Page 293
4.5 Potential income tax charges on exit......Page 295
4.6 PAYE/NIC......Page 296
5 Conclusion......Page 297
1 Introduction......Page 299
2.2 Conflicts of interest......Page 300
2.3 Board approval to pursue offer......Page 301
2.4 Appointment of independent committee of directors......Page 302
2.6 Due diligence......Page 303
2.8 Management equity participation and terms......Page 305
3.1 Financial support and exclusivity (inducement and break fees)......Page 307
3.2 Insider dealing......Page 308
(b) Rules concerning offer terms......Page 309
3.4 Announcements......Page 310
(a) 50 per cent shareholding......Page 311
(c) 90 per cent shareholding and the compulsory acquisition procedure......Page 312
3.6 Irrevocable undertakings......Page 313
3.7 The formal public documents......Page 314
3.8 Schemes of arrangement......Page 315
(a) Conditionality: cash confirmation......Page 316
(c) Obligations on the management team and Bidco......Page 317
(d) Warranties......Page 319
4.2 Bank funding......Page 320
5 Conclusion......Page 322
2.1 Approach to monitoring......Page 323
2.2 Tools for monitoring......Page 324
(c) Investor consents......Page 325
2.3 Remedies to facilitate monitoring......Page 326
3.1 Reasons for seeking funding......Page 327
3.2 Dilution and the structuring of further funding......Page 328
3.3 Further funding checklist......Page 329
4.1 Background and reasons for underperformance......Page 330
4.3 Debt waivers and capitalisations: tax consequences......Page 332
(a) Tax arising in Newco......Page 333
(b) Tax relief for the creditors......Page 334
4.4 Debt capitalisations and restructurings: the bank’s influence......Page 335
5.2 Claims and rights to be considered......Page 338
5.3 Directorship......Page 339
5.5 Rights as a shareholder......Page 341
5.6 Non-compete, confidentiality and related matters......Page 343
6.1 Background to directors’ duties......Page 344
6.2 To whom are the duties owed?......Page 346
6.4 Duty to promote the success of the company (section 172)......Page 348
6.5 Duty to exercise independent judgment (section 173)......Page 349
6.6 Duty to exercise reasonable care, skill and diligence (section 174)......Page 350
6.7 Duty to avoid conflicts of interest (section 175)......Page 351
6.9 Duty to declare interests in proposed transactions or arrangements (section 177)......Page 353
(a) Directors’ long-term service contracts (sections 188 and 189)......Page 354
(d) Loans to directors (sections 197–214)......Page 355
(a) Fraudulent trading......Page 356
(b) Wrongful trading......Page 357
6.13 Practical guidance on directors’ duties......Page 358
7 Conclusion......Page 359
1 Introduction......Page 361
2.1 Reasons for a secondary buyout......Page 362
2.2 Seller conflicts of interest......Page 363
2.3 The selling private equity investors......Page 364
2.4 Exiting managers......Page 365
3.1 Structure and classes of instrument(s) held......Page 366
3.2 Implications of departure of manager......Page 367
3.3 Negotiation of terms: use of equity termsheet or questionnaire......Page 369
3.4 Warranty cover......Page 370
3.5 Tax considerations for the rolling managers......Page 371
4 Conclusion......Page 373
1 Introduction......Page 375
2.2 The role of due diligence......Page 376
2.3 Exit focus during the life of the investment......Page 377
3.1 Parties......Page 378
(a) Selection of advisers......Page 379
(d) The share sale agreement......Page 380
3.3 Warranties and covenants: the institutional position......Page 381
3.4 Completion accounts and locked box mechanisms......Page 383
3.6 Restrictive covenants......Page 386
3.8 Other matters......Page 387
(c) Allocation of seller completion obligations......Page 388
(e) Further assurance......Page 389
4.2 Identifying a viable IPO candidate......Page 390
4.3 Typical transaction structure......Page 391
4.4 Grooming a company for IPO......Page 392
(a) Fees and commissions......Page 393
(b) Warranties and indemnities......Page 394
4.7 Relationship agreement......Page 395
4.8 IPO process......Page 396
5 Conclusion......Page 398
Index......Page 400