A Practical Guide to Private Equity Transactions
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397
Index
distribution, interest treated as 167, 271
fees, deductibility of 275
interest deduction 51, 56, 167, 266,
270–5
multiple Newcos 56, 266
NIC 59, 276, 279, 281, 282–3
PAYE 59, 282–3
rolled-up interest 50, 273–4
VAT recovery 275–6
see also acquisition agreement;
articles of association; investment
agreement
nominee companies 62, 116, 119
non-disclosure agreement (NDA) 31–2
non-executive directors and IPO 378,
380–1, 383
Norway 105
notice period: employment 204–5
observers and wrongful trading 344
offences
fraudulent trading 342
insider dealing 294
warranties 84
Ofce of Fair Trading 101–4
operational and IT/systems due diligence 44
options, share 159, 222–4, 227, 364
overseas
Pensions Regulator: enforcement of
notices/directions 246
subsidiaries 200
Targets
competition clearances 78
multiple Newcos 54
partnerships see limited liability partnerships;
limited partnerships
pay in lieu of notice (PILON) 204, 206
PAYE 59, 282–3
penalties
competition matters 108
mezzanine debt: pre-payment 192
pensions 262
accounting basis 230
conicts of interest 338
due diligence 39, 45, 231, 255,
260, 262
funding: dened benet schemes 230–3
Pensions Regulator and ‘moral hazard’
234, 235, 236
associates 239, 240, 245, 250–2
clearance 247–50, 255, 256–7, 260, 263,
264
connected persons 239, 240, 245, 250–1,
252
contribution notices 239–243
nancial support directions 239, 243–7
objectives and powers of Regulator 238,
239, 243–7
Pension Protection Fund (PPF) 239
private equity transactions: key issues
252–3
asset purchase 260–3, 265
during ownership and exit 263–5
Target: own pension scheme 259–60
Target: participating employer 253–9,
263
section 75 debts 233–4, 260, 261, 263, 265
from 6 April 2008 235–8
pre 6 April 2008 234–5
Target ceases to participate 253–5
Target continues to participate 255
tax 254
types of scheme 229–30
phantom share option plan 225–6
PIK (Payment in Kind) notes/interest 50, 166,
193
taxation 274
PILON (pay in lieu of notice) 204, 206
pre-emption rights 149, 152, 154
drag and tag rights 149, 161
mezzanine warrants 195
preference shares 142, 144, 279–80
redeemable 50, 144
ma
nagers 59
price and price adjustment 71–4, 89, 369–71
priority, deed of see intercreditor agreement
private equity 1–2, 21, 176
disclosure and transparency 7
distinguish rms from funds 8, 61
emergence of 5–8
investor, types of 8–10
recent history
credit crunch 7–8, 25, 171,
175–6, 180, 322
growth market 173–5
398
Index
sourcing the deal 10–11
transactions, types of 2–5
private equity rm
distinguish funds from 8, 61
employees of
co-investment scheme 59, 62, 331, 338
proportionate liability clauses and advisers 29
public interest disclosures 218–19
public limited companies 332, 341
nancial assistance 63, 70, 71, 293
special resolution to re-register as private
298
vanity plcs 2, 71
public-to-private transactions 117, 285–6, 308
funding issues
bank funding 306–8
equity funding: investment documents
302–6
issues specic to
board approval to pursue offer 287
conict of interests 286–7, 288, 300
due diligence 289–91
independent advisers 289
independent committee of directors
288–9, 291
management equity participation and
terms 291–3
Takeover Code 286
termination payments 293
other key issues: public takeovers
announcements 296–7
arrangement, schemes of 301–2
concert parties, dealings of Bidco
and 295–6
control, obtaining 297–9
nancial support and exclusivity 293–4
formal public documents 300–1
insider dealing 294–5
irrevocable undertakings 299–300, 308
purchase of own shares 149, 155, 157
warrants and 194
quorum for meetings 162–3, 339
ratchets
equity 21, 59–61, 137, 139, 144, 145–7
purchase of own shares 155
taxation 60, 146, 280, 282, 315
interest rates 201
IPOs: commissions 380
re-registration of public company as private
company 71
readily convertible assets 283
redeemable preference shares 50
managers 59
redundancies 335
references, employee 220–1
regulatory approvals, sector-specic 80–1
related-party transactions 78
remuneration
benets and 210–11, 257–8, 280
committee 133, 134, 211, 326
reputational risk/consequences 121,
287, 346
rescission 83, 118
restrictive covenants
acquisition agreements 70, 94–5, 129
exit: share sale 372–3
investment agreements 94–5, 128–31, 132,
316, 330
secondary buyouts 352
service agreements 94–5, 129, 130–1, 206,
207, 208, 210, 330
restructuring, debt
debt capitalisations: bank’s
inuence 321–4
debt waivers and capitalisations: tax
318–21
underperformance 316–18
retention accounts 73, 76–7, 351, 371
return on investment 17–21
risk
allocation 75–6
, 89, 181
ex
it share sale 367–72
indemnities see separate entry
limitations 90
price adjustment 71–4, 89
warranties 84–5, 120–2, 125
in business between exchange and
completion 82–3
public-to-private transactions 308
reputational 121
see also insurance; limitations; price and
price adjustment; warranties
RJR Nabisco 6
private equity (cont.)
399
Index
sale agreement see acquisition agreement
secondary buyouts 5, 174, 347, 359–60, 376
conicts of interest 349–50, 351
drag rights and right to match 158
earnouts 74
legal documentation
manager, departure of 152, 205, 212,
353–4
negotiation of terms 355–6
structure and classes of instrument(s)
held 64–5, 140, 163, 326, 352–3
tax: rolling managers 64–5, 277, 357–9
warranty cover 352, 356–7
managers, departure of 152, 212, 353–4
feature of secondary buyouts 351–2
initial xed term 205
reasons for 348–9
restrictive covenants 128
selling private equity investor 350–1
structure and classes of instrument(s) 64–5,
140, 352–3
shares: class rights 163, 326
taxation 64–5, 277, 357–9
security
public-to-private transactions 298, 306–8
requirements of funders 198
semi-captive rms 8, 9, 18
senior lender/debt 165, 172–4, 177, 179
adverse change before completion 83
assignment: benet of acquisition
agreement 95
exit: share sale 374
failure of business: prior ranking security
55
high-yield bonds and 200–2
intercreditor agreement 54, 196–8, 202
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 rate 49, 172, 174, 176–7
security requirements 198–200
senior facilities agreement (SFA) 181–3
default, events of 191
nancial covenants 188–91
mandatory prepayments 184–6
positive and negative undertakings
187–8
repayment and interest terms 183–4
representations and warranties 186–7
structural subordination 54–6, 196, 202
structure, simple deal 49
syndicates 62
taxation
debt capitalisations 320
term funding 178
underperformance 318
debt capitalisation 320, 321–4
working capital funding 178
service agreements see employment-related
issues
shadow directors: wrongful trading 344
share premium 64
shareholder approval 78–80, 340–1
shareholders’ agreement see investment
agreement
shares
age: shareholders under 18 148
discount to nominal value prohibited 63
employee incentives: management below
board level
options 159, 222–4, 227, 364
share award plans 224–5
investor, private equity 52
managers see shares in Newco
under managers
preference 142, 144, 279
–80
red
eemable 50, 59, 144
rights attached to see articles of association
warrants to acquire 364
mezzanine debt 56–7, 193–6, 280, 364
senior debt 322
side letters
managers: warranty on due
diligence report 44
secondary buyouts 354
sourcing the deal 10–11
sovereign wealth funds 9
special situation funds 9
sponsors 4
squeeze-out rights 298–9, 304, 307
stamp duty 302, 375
statutory duty, breach of 34
400
Index
structures for transactions 47–8, 68
common issues
investor/management fees 63–4
multiple investors 61–2
pricing the equity: safe harbour 57–9
ratchets 59–61
secondary buyers and other ‘rollover’
sellers 64–5
junior debt: higher leverage 56–7
multiple Newcos 53–6, 266
simple structure 48–9
investor 49–52
managers 52–3
senior lender 49
subscription and shareholders’ agreement
see investment agreement
substantial shareholding exemption 269
summary dismissal 208–9, 214–16
sweet equity, use of term 53
SWOT analysis 16
syndicates
debt funding 175, 180
initial public offerings (IPOs) 379
investors 62
tag and drag
drag rights 157–9, 160, 161–2, 168, 227,
323
tag rights 149, 159–62
Takeover Code
public-to-private transactions 286, 304, 305
announcements 296
arrangement, schemes of 301
buyout team: information to funders 291
concert parties, dealings of Bidco and
295–6
conditionality: cash conrmation 302
conicts of interest 288
formal public documents 300–1
independent advisers 289
information to potential bidders 290–1
insider dealing 295
irrevocable commitments 299
management equity participation 291–3
unsuccessful offer: fee compensation
293–4
vanity plcs 71
tax covenant 110–13
conduct of claims and right to ght 92
given by seller to buyer 111
share sale exit 368
time limit for claims under 92, 112
taxation 266, 283–4
advanced corporation tax (ACT) 51
articles of association 139
investment agreement or 117
clearances 57, 80, 358, 359
debt waivers and capitalisations 318–21
degrouping 321
due diligence 40, 42
existing shareholder
rollover capital gains 64–5, 357–9
group relief 273, 321
investors, private equity 266–70
debt capitalisations 320–1
executives of investor 270
liquidation preference 144
PIK notes 274
tax haven companies 269, 274
withholding tax 267–8, 274, 321
management below board level
cash bonus linked to share value 226
share award plans 224, 225
share incentives 221, 223
managers: 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
managers: 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
PAYE: benet in kind 283
restricted securities 58, 277–81
secondary buyouts: rolling managers
277, 358–9
shares acquired at undervalue 57, 277
Newco(s) 266, 270
cash bonus linked to share value 226
debt waivers and capitalisations 319–20
401
Index
distribution, interest treated as 167, 271
fees, deductibility of 275
interest deduction 51, 56, 167, 266,
270–5
multiple Newcos 56, 266
NIC 59, 276, 279, 281, 282–3
PAYE 59, 282–3
rolled-up interest 50, 273–4
VAT recovery 275–6
pension schemes
section 75 debt 254
ratchets 60, 146, 280, 282, 315
readily convertible assets 283
receipt under tax covenant 111
secondary buyouts 64–5, 277, 357–9
stamp duty 302, 375
transfer pricing 56, 271–2, 284
venture capital trusts (VCTs) 9, 269
withholding tax 267–8, 274, 321
termination of employment 208–9, 217–21,
324, 327, 329–30
date 205, 329
directors 205–6, 325–6
compensation for loss of ofce 341
shareholders 327–9
leaver provisions see leavers
tertiary buyouts 174, 347
thin capitalisation 272, 282
time limits/periods
competition matters
Competition Commission 104
European Commission 108, 109
Ofce of Fair Trading 103, 104
directors
removal of 133
service contracts 340
exit
IPO 381, 382
share sale 375
garden leave 206
high-yield bonds 200
loan notes 166, 167
mezzanine debt 56, 173, 198
notice 205
pension schemes 233
consultation over changes 258
contribution notices 240
nancial support directions 245
public-to-private transactions 295, 298,
299, 303, 307
senior debt 172–3
drawdown periods 182, 183
nancial covenants 190
repayment 183, 184
shares
enhanced voting rights: grace period 141
tax covenant claims 92, 112
taxation
clearances 80
reimbursement of PAYE 283
section 431 election 278
warrants 196
warranty claims
acquisition agreement 92
investment agreement 124, 127
trading and contracts
due diligence 38, 41
trading/trade names 94, 128
transfer pricing 56, 271–2, 284
transfer of undertakings (TUPE) 261–3
underperformance and debt restructuring
316–18
debt capitalisations: bank’s inuence 321–4
debt waivers and capitalisations: tax
318–21
unfair dismissal 213–14, 219, 327
upper-market buyout sector 8, 9, 55
US investors 61
valuation of businesses 19–20
vanity plcs 2
re-register as private company 71
VAT recovery 275–6
venture capital 4–5, 9, 62, 313
venture capital trusts (VCTs) 9, 269
voting rights 14
0–2
wai
vers
banks 312
employee references 220
pre-conditions to completion 81
re-registration of public company as private
company 71
taxation of debt 318–19
Walker Report 7
402
Index
warehousing 149, 155–7
warranties
acquisition agreement 84–5
interaction between warranties in
investment agreement and 122–4
knowledge/awareness 85–9, 113
limitations 89–93, 98, 356–7
action for breach of 34–5
between exchange and completion: breach
of 83
business plan 12
conduct of claims and right to ght 92–3
debt providers: representations and 186–7
exit
IPO 380–1
share sale 148–9, 323, 367–9
functions of 84–5, 120
further funding round 316
insurance 125, 351, 369, 381
investment agreement 44, 88, 120–2, 168,
369
chairman 132
interaction between warranties in acqui-
sition agreement and 122–4
limitations and defences 124–8, 356–7
monetary limits 90–1, 124–5, 126, 127,
356–7, 380
notication of claims 92
pension schemes 256, 265
proceeds from claims
bank funding: mandatory prepayments
185–6
public-to-private transactions 285, 289,
304, 305–6
repetition at completion 83
reverse 89
secondary buyouts 350–1, 352, 356–7, 359
time limit for claims 92, 124, 127
warrants 364
mezzanine debt 56–7, 193–6, 280, 364
senior debt 322
whistleblowing 218–19
withholding tax 267–8, 274, 321
working capital facilities 49, 178, 182, 183,
191
guarantees 199
wrongful dismissal 214
wrongful trading 343–4