A Practical Guide to Private Equity Transactions
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387
Index
summary dismissal 209
class rights
investors 136–7, 149, 163–4
managers 163, 326
directors 162, 206
conicts of interest 162, 338, 340
investor 336, 338–9
resign on termination of
employment 326
dividends 142–4, 157
drag and tag
drag rights 157–9, 160, 161–2,
168, 227, 323
tag rights 149, 159–62
employee shareholders 116
employment termination
date 205, 329
removal of rights attached to shares 329
fair value 150, 152, 153
investment agreement or 117
public document 117
public-to-private transactions 287, 288
quorum 162–3, 339
ratchets 145–7
return of capital and allocation of sale
proceeds 53, 144–5
share award plans 224, 225
share structure and core
share rights 139
transfers of shares 147
compulsory 151–5, 168, 212–17
permitted 147–9
voluntary 149–51
voting rights 140–2
warehousing 149, 155–7
asset purchase, Target acquired as 69,
260–3, 265
assets
due diligence 38, 39–40, 41
intra-group transfers: degrouping
charges 321
sales of
bank funding: mandatory
prepayments 185
substantial property transactions with
directors 341
associates
pension schemes 239, 240, 245, 250–2
related-party transactions 78–9
attorney, power of 151, 157, 206, 299, 325
exit share sale 367, 375
auction process 10–11, 22, 23–6, 27–8, 364
debt funding 179
locked box mechanism 73
vendor due diligence 35–6, 41, 366
audit committee 134, 337
auditors
duty of care 42
‘hold harmless’ letter 43–2
awareness see knowledge
Bad Leaver/Good Leaver provisions
second-tier management 226
deferred share plan 224
share options 224
senior management equity 152–5, 208, 209,
328, 329
interaction with service agreements 153,
212–17
public-to-private transactions 292
Beckmann rights 262–3, 265
bonus schemes 211
brands 94, 106
bridge funding 201
budgeting process, annual 311
business angels 9
business plan 12–13, 311, 313, 316, 362
contents 13–16
nancial model 17
buy-and-build investments 5, 15,
19, 176, 17
8
buyin management buyouts (BIMBOs) 3
capital expenditure: bank limits 190
captive rms 8, 9, 61, 369
competition matters 107
taxation 269
cash ow
cover: nancial covenant 189–90
prepayment of debt from excess 186
caveat emptor 34
chairman 132–3, 331, 339, 378
Channel Islands 268
City Code on Takeovers and Mergers
see Takeover Code
Class 1 transactions
shareholder approval 79
388
Index
clearances
competition see competition matters
pension schemes 247–50, 255, 256–7, 260
during ownership 263
exit 264
tax 57, 80, 358, 359
co-investment schemes 59, 62, 270, 331, 338
two or more private equity investors:
competition matters 107–8
Combined Code 2008 208
commercial due diligence 44
Company Share Option Plans (CSOPs) 223
compensation see damages
Competition Appeal Tribunal (CAT) 104
competition matters 77–8, 99–100
EC merger control rules 104–10
national or EEA rules 101, 110
typical issues 100–1
UK merger control rules 101–4
completion
accounts 71, 369–71
conduct of Target between exchange and 82
dummy run 26
investment agreement 119–20
repetition of warranties at 83
share sale exit 367
compromise agreements
pensions 234, 239
termination of employment 219–21, 330
conditionality
acquisition agreement 77–83, 118, 257
investment agreement 117–19
public-to-private transactions 302–3
share sale exit 367
condentiality 31–2
acquisition agreement: sellers 94
exit: share sale 373
funders: information on proposed
transaction 179
‘hold harmless’ letter 43
investment agreement 117, 131, 329
pension trustees 250
regulatory approvals, sector-specic 81
shareholder approval 80
conicts of interest
directors 134, 138, 162, 345
declaration of interests in existing
transactions 340
duty to avoid situational conicts 337–9
public-to-private transactions 286–7,
288, 300
transactional conicts 339–40
transactions between companies and
340–1
secondary buyouts 349–50, 351
connected persons
debt waivers and capitalisations 319, 320–1
pension schemes 239, 240, 245, 250–1, 252
shareholder approval 79
transfer pricing 271–2
consents
bank 187–8, 312, 354
debt capitalisation 323
due diligence: licences and 38
investor 135–7, 163, 311, 316, 323, 353
loan note instrument, changes to 167–8
pension changes and individual 258, 259
warrant holders 195
constitutional matters
due diligence 38
constructive dismissal 216–17
consultation
pension changes and employee 258
contingent fee arrangements 27–8
contracts and trading
due diligence 38, 41
convertible securities 281
copyright 39
costs
advisers 27–8, 372
due diligence, vendor 36
investigating accountants 313
investment agreement: deal does not com-
plete 119
pre-condition(s) to completion not met 81
underwrites 33–4, 81
wrongful trading action: legal 343
cramdown 201
credit crunch 7–8, 25, 171, 175–6, 180, 322
criminal offences
fraudulent trading 342
insider dealing 294
warranties 84
CSOPs (Company Share Option Plans)
223
cur
e rights: debt funding 191
equity 190–1
389
Index
damages/compensation
breach of investment agreement or articles
209
discrimination 218
employee references 220
failure to give due notice 207, 208, 214
loss of ofce, compensation for 341
whistleblowing 219
wrongful trading 343
data rooms 35–6, 41
disclosure 98
de minimis limits
completion accounts: price adjustment 72
directors’ duties
benets from third parties 339
loans to directors 341
substantial property transactions 341
tax covenant claims 112
warranty claims 90
deal documents
overview 65–8
see also acquisition documents; debt
documents; equity documents
deal process 22, 45–6
due diligence 46
data rooms 35–6, 41
disclosure and 37
nancial 17, 40–4
heads of agreement and 31
legal 36–40
materiality 37
other 14, 44–5
overview 34–5
vendor 35–6, 41
overview 22–6
preliminary matters
engagement letters 28–30
engaging advisers 26–8
exclusivity 25–6, 27–8, 31, 32
heads of agreement 22, 30–4
debt documents 181
mezzanine facility agreement (MFA) 191–6
overview 67–8
senior facilities agreement (SFA) 181–91
debt funding 170–1, 202
adverse change before completion 77–83
availability of 176–7
bridge debt 201
documentation 67–8, 181
mezzanine facility agreement (MFA)
191–6
senior facilities agreement (SFA) 181–91
due diligence 180–1, 198
further funding round 313–15
checklist 315–16
higher leverage: junior debt 53, 56–7
intercreditor agreement see separate entry
larger transactions: alternative nancing
structures 200–2
monitoring 312
need for 171–2
overview 177–81
recent history 171–7
simple deal structure 49
public-to-private transactions 306
security 298, 306–8
scoping 177–8
secondary buyouts 354
security requirements of funders 198
stapled debt package 24, 25–6
see also mezzanine debt; senior lender/debt
debt restructuring
debt capitalisations: bank’s
inuence 321–4
debt waivers and capitalisations: tax
318–21
underperformance 316–18
deceit 34
deep discount bonds 50, 268, 275
deferred share plan 224
degrouping charges 321
development capital 5, 64, 143, 313
directors
articles of association 162, 206
conicts of interest 162, 338, 340
investor directors 336, 338–9
resign on termination of
employment 326
bank appointment 323
conicts of interest 134, 138, 162, 345
declaration of interests in existing
transactions 340
duty to avoid situational 337–9
public-to-private transactions 286–7,
288, 300
transactional 339–40
390
Index
transactions between companies and
d i r e c t o r s 340–1
duties 156, 330–2
act within company’s powers 334
avoid conicts of interest 337–9
care, skill and diligence, reasonable
336–7
declaration of interests in existing
transactions 340
declare interests in proposed
transactions/arrangements 339–40
derivative claims procedure: 2006 Act
332–3
independent judgment 335–6
insolvency 342–4
owed to 332–3
practical guidance 344–5
promote success of company 334–5
security, giving of 200
third parties, not to accept benets
from 339
transactions between companies and
directors 340–1
investment agreement
board committees 134–5
board composition 132–4
investor 331, 336, 338, 340
fees 137
IPO and non-executive 378, 380–1, 383
loans to 341
pension schemes 245
contribution notices 240
public-to-private transactions
board approval to pursue offer 287
conicts of interest 286–7, 288, 300
independent committee of directors
288–9, 291
removal of 133–4, 162, 206
compensation for loss of ofce 341
termination of employment 205–6,
325–6
warrant holders 195
see also employment-related issues
disclosure 87, 370
acquisition disclosure letter 97–9, 165
due diligence and 37, 87–8
indemnities and 90, 112
investment disclosure letter 164–5
IPOs 383
limitations and 98
principles 95–6
public interest 218–19
supplemental letter on completion 83
tax covenant and 112
warranties, function of 84–5
discount bonds, deep 50, 268, 275
discount to share nominal value prohibited 63
discrimination 218, 260
dismissal
claims on 217–21
constructive 216–17
summary 208–9, 214–16
unfair 213–14, 219, 327
wrongful 214
disputes, investigations and litigation
due diligence 39
distressed and special situation funds 9
distributions
interest
excess over reasonable commercial
return 271
stapled loan notes 167
unlawful 200
dividends 52, 142–4, 157
distributable reserves 51
pension scheme 257, 263
section 75 debt 255
redeemable preference shares 51
taxation 268
warrant holders 195
documentation
overview 65–8
see also acquisition documents;
debt documents;
equity documents
double counting: price reduction 76
double taxation agreements 268, 274
drag and tag
drag rights 157–9, 160, 161–2,
168, 227, 323
tag rights 149, 159–62
due diligence 46
data rooms 35–6, 41
debt funding 180–1, 198
disclosure and 37
directors (cont.)
391
Index
exit planning and 362–3
exit process
initial public offerings (IPOs) 378, 382
share sale 366
heads of agreement and 31
materiality 37
overview 34–5
pensions 39, 45, 231, 255, 260, 262
public-to-private transactions 289–91
secondary buyouts 351
types of
nancial 17, 40–4
legal 36–40, 198
other 14, 44–5
vendor 35–6, 41, 366
warranties
knowledge/awareness of buyer 87–8
duty of care
auditors 42
earnings, high visibility of 16
earnouts 73–4
election: section 431 59, 225, 278
employee benet trusts (EBTs) 149,
156, 224, 364
employee incentives: management below
board level 221–2, 228
cash-based arrangements 225–6
issues on exit 227
key issues 226–7
share award plans 224–5
share options 159, 222–4, 227, 364
employer: duty of trust and condence 258
employment-related issues 203–4, 227–8
due diligence 38–9, 41–2, 45
employment terms 204, 211–12, 310
garden leave 131, 204, 205–6,
208, 210, 325
notice 204–5
pay in lieu of notice 204, 206
remuneration and benets 210–11,
257–8, 280
restrictive covenants 94–5, 129, 130–1,
206, 207, 208, 210, 330
summary dismissal, grounds for 208–9
garden leave 131, 204, 205–6, 208, 210
leaver provisions, interaction of service
agreements and 153, 212–17
references 220–1
remuneration committee 133, 134, 211, 326
repudiatory breach of contract 130, 206,
325–6, 330
shareholder approval
compensation for loss of ofce 341
directors’ long-term service contracts
340
termination, issues on 217–21, 327, 329–30
transfer of undertakings (TUPE) 261–3
warrant holders: excessive remuneration to
management 195
engagement letters: advisers 28–30
Enterprise Management Incentives (EMI) 223
environmental issues
due diligence 40, 45
equity cure provisions 190–1
equity documents 114
equity offer letter/termsheet 114–16, 355–6
investment disclosure letter 164–5
overview 67
see also articles of association; investment
agreement
equity gap 9
equity kicker
warrants 364
me
zzanine debt 56–7, 193–6, 280, 364
senior debt 322
equity shares see shares
escrow/retention accounts 73, 76–7, 351, 371
Eurobonds 50, 267
European Economic Area (EEA) 101, 105
European Union (EU)
merger control rules 101, 104–10
Parliament 7
exclusivity
advisers: fees for work before 27–8
auction process 25–6
costs underwrites and breach of 33
managers: equity offer letters 115–16
public-to-private transactions 294
secondary buyouts 355, 356
sellers 31, 32–3
exits 174, 361, 384–5
bank funding: mandatory prepayments
184–5
focus on 362–4
growing prots 19
392
Index
initial public offerings (IPOs) 361, 376,
384–5
drag rights 168
preparation and process 378–9, 382–3
relationship agreement 381–2
structure, typical transaction 377
underwriting agreement, key terms of
379–81
internal rate of return 19–20
multiple arbitrage 19–20
share sale 361, 373–5, 376, 384–5
‘behind the scenes’ mechanisms: seller
risk 372
completion accounts 369–71
condentiality 373
locked box mechanism 371
parties 364–5
restrictive covenants 372–3
typical features of 365–7
warranties: managers 148–9, 369
warranties and covenants 148–9, 323,
367–9
warrant holders, notice to 196
fees and expenses, investor 63–4, 137
nancial assistance: acquisition of shares 63,
70–1, 199–200, 293, 307
nancial covenants: bank funding 188–91,
192, 197
nes
competition matters 108
fraudulent trading 342
pension schemes: consultation over changes
258
ip ups 64–5, 358
fraud 84, 90, 121
summary dismissal 209
fraudulent trading 342–3
garden leave 131, 204, 205–6, 208, 210, 325
general partners (GPs) 8, 61, 62
competition matters 107
pension schemes 252
Good Leaver/Bad Leaver provisions
second-tier management 226
deferred share plan 224
share options 224
senior management equity 152–5, 208, 209,
328, 329
interaction with service agreements 153,
212–17
public-to-private transactions 292
group relief 273, 321
growth capital 5
growth share schemes 224, 225
guarantees
directors, loans to 341
pension schemes 257
section 75 debts 235, 236, 238, 254
public-to-private transactions 307
seller’s obligations: ultimate parent
company/beneciaries of trust 70
senior and mezzanine debt 199
heads of agreement 22, 30–4
high-yield bonds 200–2
‘hold harmless’ provisions 125
audit papers, release of 43–2
engagement letters 30
Iceland 105, 175
indemnities 76, 85, 89
conduct of claims and right to ght 92
costs 33–4
exit
IPO 380
share sale 368, 369
‘hold harmless’ provisions 125
audit papers, release of 43–2
engagement letters 30
limitations 90
manager: claim against other managers
126–7
pension schemes 256, 262, 265
section 75 debt 255
proceeds from claims
bank funding: mandatory prepayments
185–6
secondary buyouts 351
tax see tax covenant
independent rms 8–9, 18
initial public offerings (IPOs) 361, 376, 384–5
drag rights 168
process 382–3
preparation and start of 378–
9
exi
ts (cont.)
393
Index
relationship agreement 381–2
structure, typical transaction 377
underwriting agreement, key terms of
379–81
insider dealing 294–5, 384
insolvency 322
debt waivers 319
responsibilities of directors 342–4
institutional buyouts (IBOs) 3–4, 52
institutional strip, use of term 53
insurance
advisers: compromise agreements 219
companies 80
director and ofcer liability 345
due diligence 39, 44–5
keyman 199
pension schemes: scheme liabilities 264
proceeds
bank funding: mandatory prepayments
185
warranty 125, 351, 369, 381
intellectual property
due diligence 39
intercompany loan arrangements 55
intercreditor agreement 54, 56, 196–8
debt-free Target 178, 199
dividends 51, 144
investor fees 137
loan notes 50, 165, 166, 167, 197, 198
Newco warranties and 122
return of capital 145
security trustee 199
interest
bridge debt 201
cover: nancial covenant 189–90
high-yield bonds 200
loan notes 50, 166
corporation tax deduction 51, 56, 167,
266, 270–5
rate 52, 59, 166
payment in kind (PIK) 50, 166, 193, 274
ratchet 201
rate
loan notes 52, 59, 166
mezzanine debt 56, 173, 174, 176–7, 193
public-to-private transactions 308
senior debt 49, 172, 174, 176–7, 184
internal rate of return (IRR) 17–21, 52
debt funding 172, 174
mezzanine debt 56
ratchets 21, 59–61, 60, 145, 147
investigations, disputes and litigation
due diligence 39
investment agreement 228
articles of association or 117
background 116–17
bank: debt capitalisation 323
board
committees 134–5
composition 132–4
breach of
summary dismissal 209
cancellation: share sale exit 374
completion 119–20
conditionality 117–19, 302–3
condentiality 117, 131, 329
consents, investor 135–7, 163, 311
directors: resign on termination of employ-
ment 326
fees and expenses, investor 137
information required by investors 135
loan notes, transfer of 167
monitoring performance, tools for 310–13
parties 116–17
public-to-private transactions 302–6
purchase of own shares 149
restrictive covenants 94–5, 128–31, 132,
316, 330
venture capital 4
warranties 44, 88, 120–2, 132, 168
on exit 369
interaction with warranties in acquisition
agreement 122–124
limitations and defences 124–8, 356–7
secondary buyouts
356–7
warranty insurance 369
investment bank, appointment of 28, 379
investment companies
competition matters 107
investment trusts 269
investor, private equity
consents 135–7, 163, 311, 316, 323, 353
fees and expenses 63–4, 137
investor directors 331, 336, 338, 340
fees 137
multiple investors 61–2
394
Index
reputational risk/consequences 121, 287,
346
structure, instruments(s) and core share
rights 49–52, 139
class rights 136–7, 149, 163–4
voting rights 140–2
taxation 144, 266–70, 274, 320–1
executives of investor 270
tax haven companies 269, 274
withholding tax 267–8, 274, 321
see also articles of association;
investment agreement; limited
partnerships
IPOs see initial public offerings
IRR see internal rate of return
IT/systems due diligence 44
joint and several liability 91, 126, 246
junior debt: higher leverage 53, 56–7
see also mezzanine debt
kicker, equity
warrants 364
mezzanine debt 56–7, 193–6, 280, 364
senior debt 322
knowledge/awareness
tax covenant 112
warranties 85, 113
buyer, awareness of 87–9
interaction of investment and acquisition
agreements 122–4
investors: investment agreement 127–8
seller, awareness of 86–7
Kohlberg Kravis & Roberts (KKR) 6
land and buildings
due diligence 39–40
lead investor 62
leavers: shares
removal of rights attached to shares 329
second-tier management 226
deferred share plan 224
share options 224
senior management equity 152–5, 208, 209,
328, 329
public-to-private transactions 292
service agreements 153, 212–17
leverage: nancial covenant 189–90
leveraged buyouts (LBOs) 3–4, 7
licences
competition matters 106
consents and
due diligence 38
Liechtenstein 105
limitations 89–90
accountancy rms 28–30
completion accounts: price adjustment 72,
369–71
tax covenant 111–12
warranties
acquisition agreement 89–93,
98, 356–7
investment agreement 124–8, 356–7
IPOs 380
secondary buyouts 356–7
limited liability partnerships (LLPs) 61
limited partnerships (LPs) 8, 48, 61–2
competition matters 107
pension schemes 252
taxation 269, 272, 274
US investors 61
liquidation preference 53, 144
listed companies 230, 365
AIM listing 79, 377, 382, 383
Combined Code 2008 208
shareholder approval 78–9
see also initial public offerings; public-to-
private transactions
litigation, disputes and investigations
due diligence 39
living with the investment 309, 345–6
action plan (post completion 90 or 100 day
plan) 16, 312, 363
conicts of interest see under directors
directors’ duties see under directors
exit focus 363–4
further funding round 313–16
manager, parting company with 324,
329–30
directorship 325–6
employment rights/claims 217–21, 327
shareholder, rights as 327–9
monitoring investment 309–13
underperformance and debt
restructuring 316–18
investor, private equity (cont.)
395
Index
debt capitalisations: bank’s inuence
321–4
debt waivers and capitalisations: tax
318–21
loan notes 50–2, 58, 165–8, 279–80
exit: share sale 374
further funding round 313–15
checklist 315–16
intercreditor agreement 50, 165, 166, 167,
197, 198
interest 50, 166
corporation tax deduction 51, 56, 167,
266, 270–5
rate 52, 59, 166
managers 59, 277
seller(s), issued to 71
loans to directors 341
locked box mechanism 73, 371
lower-market buyout sector 8
Luxembourg 268, 269
management buyouts/buyins
(MBOs/MBIs) 2–3
managers
board membership of Newco 133
completion accounts 72
condentiality 131
exit: IPO 378, 380–1
exit: share sale 372, 374
completion accounts 371
locked box mechanism 371
restrictive covenants 373
warranties 148–9, 369
investment disclosure letter 164–5
knowledge/awareness
tax covenant 112
warranties 86, 89–8, 113
parting company with 324, 329–30
directorship 205–6, 325–6, 341
employment rights/claims 327
shareholder, rights as 327–9
public-to-private transactions
board approval to pursue offer 287
conicts of interest 286–7, 288, 300
equity participation and terms 291–3
independent committee of directors
288–9, 291
information: due diligence 289–91
negotiations on continuing operations
301
undertakings 304
warranties 304, 305–6
ratchets 21, 59–61, 137, 139, 144, 145–7,
155
taxation 60, 146, 280, 282, 315
restrictive covenants see separate entry
secondary buyouts 347
conicts of interest 349–50
departure of manager 152, 205, 212,
351–2, 353–4
negotiation of terms 355–6
reasons for 348–9
structure and classes of instrument(s)
held 64–5, 140, 163, 326, 352–3
warranties 351, 352, 356–7
shares in Newco 52–3
class rights 163, 326
dilution: further funding round 314–15
drag and tag rights 157–62, 168
family member/trust: compulsory
transfer 151
leaver provisions and service agreements
153, 212–17
leavers: compulsory transfer 142, 152–6,
157,
168, 205, 20
7
permitted transfers 148
pricing the equity: safe harbour 57–9, 60
quorum 163
return of capital 53, 144
separate class 139
voluntary transfers 149–51
voting rights 140–2
taxation: capital gains 143, 276–7
loan notes 277
management below board level 221, 223,
225
pricing the equity: safe harbour 57–9,
60, 279–81
secondary buyouts: rolling managers
64–5, 357–9
section 431 election 225, 278
taxation: income tax 276–7
cash bonus linked to share value 226
loan notes 277
loans, benecial 224, 281
other potential charges on exit 281–2
396
Index
PAYE: benet in kind 283
restricted securities 58, 277–81
secondary buyouts: rolling managers
277, 358–9
shares acquired at undervalue 57, 277
warranties
acquisition agreement 86, 88–9, 113
exit: IPO 380–1
exit: share sale 148–9, 369
further funding round 316
interaction between agreements 122–4
investment agreement 44, 120, 124–7,
127–8, 168
public-to-private transactions 304,
305–6
secondary buyouts 351, 352, 356–7
material adverse change (MAC) provisions
83, 118–19
materiality 37, 83
bank funding
default, events of 191
mandatory prepayments 186
completion accounts: price adjustment 72
managers: breach of investment agreement
or articles 209
Pensions Regulator and ‘moral hazard’
248, 249–50
summary dismissal 215
tax covenant claims 112
warranty claims 90–1
maximum liability cap
accountancy rms 28–9
completion accounts: price adjustment 72,
369–71
tax covenant 111
warranties
acquisition agreement 91, 356–7
investment agreement 124–5, 126, 127,
356–7
IPO 380
secondary buyouts 356–7
merger control see competition matters
mezzanine debt 56–7, 59, 165, 173, 174–176
exit: share sale 374
nancial covenants 192
intercreditor agreement 56, 196–8, 202
debt-free Target 178, 199
dividends 144
loan notes 165, 166, 167, 197, 198
Newco warranties and 122
return of capital 145
security trustee 199
junior debt 192
mezzanine facility agreement (MFA) 191–3
warrants 193–6
security requirements 198–200
term funding 178
warrants 56–7, 193–6, 280, 364
mid-market buyout sector 8, 55, 161
debt funding 172–3, 179–80, 181, 202
investment by managers 52
milestones 16, 313
exclusivity and 32–3
minority shareholders 116, 310, 323, 332
compulsory acquisition procedure 298–9,
304, 307
protection of 298, 328, 333, 334
re-registration as private company 298, 307
misrepresentation 34
monetary limits
accountancy rms 28–9
completion accounts: price adjustment 72,
369–71
directors’ duties
benets from third parties 339
loans to directors 341
substantial property transactions 341
tax covenant 111–12
warranties 90–1, 124–5, 126, 127,
356–7
IPO
380
secondary buyouts 356–7
money laundering 316
monitoring investment 309–13
multiple arbitrage 19–20
multiple Targets 54
National Insurance Contributions (NIC) 59,
276, 279, 281, 282–3
negligent misstatement 84
Newco(s)
deal structure 48–53
multiple Newcos 53–6, 266
tax 266, 270
cash bonus linked to share value 226
debt waivers and capitalisations 319–20
managers (cont.)