The International Comparative Legal Guide to: Private Equity 2019 5th Edition A practical cross-border insight into private equity

Published by Global Legal Group, with contributions from:

Aabø-Evensen & Co Dentons Proskauer Rose LLP Advokatfirman Törngren Magnell DS Avocats Samvād: Partners Ali Budiardjo, Nugroho, Reksodiputro Eversheds Sutherland Schindler Attorneys Allen & Gledhill LLP (Luxembourg) LLP Solórzano, Carvajal, González, Pérez-Correa, S.C. (SOLCARGO) Ashurst Hong Kong Faveret Lampert Advogados Udo Udoma & Belo-Osagie Avance Attorneys Ltd Garrigues Van Olmen & Wynant Bär & Karrer Ltd. HBK Partners Attorneys at Law Webber Wentzel British Private Equity & Venture Capital Houthoff Association (BVCA) Johnson Winter & Slattery Zhong Lun Law Firm Bub Memminger & Partner Maples Group Consortium Legal Matheson Davis Polk & Wardwell LLP McMillan LLP Debarliev, Dameski & Kelesoska Morais Leitão, Galvão Teles, Attorneys at Law Soares da Silva & Associados Dechert LLP Pirola Pennuto Zei & Associati The International Comparative Legal Guide to: Private Equity 2019

General Chapters:

1 2019 and Beyond: Private Equity Outlook for 2020 – Ross Allardice & Dr. Markus P. Bolsinger, Dechert LLP 1

2 Private Equity Transactions in the UK: the Essential Differences from the U.S. Market – Nicholas Plant, Dentons 4 Contributing Editors Christopher Field & 3 Management Incentive Plans – The Power of Incentives – Eleanor Shanks & Rob Day, Dr. Markus P. Bolsinger, Proskauer Rose LLP 7 Dechert LLP 4 Alternative Exits: Legal and Structuring Issues in GP-Led Secondaries – Leor Landa & Publisher Oren Gertner, Davis Polk & Wardwell LLP 14 Rory Smith Sales Director 5 EU Sustainable Finance Rules Start to Affect Private Equity – Tom Taylor, Florjan Osmani British Private Equity & Venture Capital Association (BVCA) 20 Account Director Oliver Smith Country Question and Answer Chapters: Senior Editors Caroline Collingwood 6 Australia Johnson Winter & Slattery: Divesh Patel & Andy Milidoni 24 Rachel Williams 7 Austria Schindler Attorneys: Florian Philipp Cvak & Clemens Philipp Schindler 33 Sub Editor Jenna Feasey 8 Belgium Van Olmen & Wynant: Luc Wynant & Jeroen Mues 43

Group Consulting Editor 9 Brazil Faveret Lampert Advogados: Claudio Lampert & João F. B. Sartini 50 Alan Falach Published by 10 Canada McMillan LLP: Michael P. Whitcombe & Brett Stewart 58 Global Legal Group Ltd. 11 Cayman Islands Maples Group: Julian Ashworth & Patrick Rosenfeld 66 59 Tanner Street London SE1 3PL, UK 12 China Zhong Lun Law Firm: Lefan Gong & David Xu (Xu Shiduo) 74 Tel: +44 20 7367 0720 Fax: +44 20 7407 5255 13 Finland Avance Attorneys Ltd: Ilkka Perheentupa & Erkki-Antti Sadinmaa 84 Email: [email protected] URL: www.glgroup.co.uk 14 France DS Avocats: Arnaud Langlais & Gacia Kazandjian 93 GLG Cover Design F&F Studio Design 15 Germany Bub Memminger & Partner: Dr. Peter Memminger 101 GLG Cover Image Source 16 Hong Kong Ashurst Hong Kong: Chin Yeoh & Joshua Cole 108 iStockphoto 17 Hungary HBK Partners Attorneys at Law: Dr. Márton Kovács & Dr. Gábor Puskás 114 Printed by Ashford Colour Press Ltd 18 India Samvād: Partners: Vineetha M.G. & Ashwini Vittalachar 122 July 2019 19 Indonesia Ali Budiardjo, Nugroho, Reksodiputro: Freddy Karyadi & Anastasia Irawati 132 Copyright © 2019 Global Legal Group Ltd. 20 Ireland Matheson: Brian McCloskey & Aidan Fahy 140 All rights reserved No photocopying 21 Italy Pirola Pennuto Zei & Associati: Nathalie Brazzelli & Massimo Di Terlizzi 149

ISBN 978-1-912509-82-9 22 Luxembourg Eversheds Sutherland (Luxembourg) LLP: Holger Holle & José Pascual 155 ISSN 2058-1823 23 Macedonia Debarliev, Dameski & Kelesoska, Attorneys at Law: Dragan Dameski & Vladimir Boshnjakovski 162 Strategic Partners 24 Mexico Solórzano, Carvajal, González, Pérez-Correa, S.C. (SOLCARGO): Fernando Eraña & Carlos Eduardo Ugalde 169

25 Netherlands Houthoff: Alexander J. Kaarls & Vivian A.L. van de Haterd 176

26 Nicaragua Consortium Legal: Rodrigo Taboada & Andres Caldera 186

27 Nigeria Udo Udoma & Belo-Osagie: Folake Elias-Adebowale & Christine Sijuwade 192

28 Norway Aabø-Evensen & Co: Ole Kristian Aabø-Evensen 199

29 Portugal Morais Leitão, Galvão Teles, Soares da Silva & Associados: Ricardo Andrade Amaro & Pedro Capitão Barbosa 220

30 Singapore Allen & Gledhill LLP: Christian Chin & Lee Kee Yeng 228

Continued Overleaf

Further copies of this book and others in the series can be ordered from the publisher. Please call +44 20 7367 0720

Disclaimer This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication. This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations

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Country Question and Answer Chapters:

31 South Africa Webber Wentzel: Michael Denenga & Andrew Westwood 236

32 Spain Garrigues: Ferran Escayola & María Fernández-Picazo 246

33 Sweden Advokatfirman Törngren Magnell: Sten Hedbäck & Vaiva Burgyté Eriksson 255

34 Switzerland Bär & Karrer Ltd.: Dr. Christoph Neeracher & Dr. Luca Jagmetti 263

35 United Kingdom Dechert LLP: Ross Allardice & Robert Darwin 271

36 USA Dechert LLP: John LaRocca & Dr. Markus P. Bolsinger 281

PREFACE

We are privileged to have been invited to preface the 2019 edition of The International Comparative Legal Guide to: Private Equity, one of the most comprehensive comparative guides to the practice of private equity available today. The Guide is in its fifth edition, which is itself a testament to its value to practitioners and clients alike. Dechert LLP is delighted to serve as the Guide’s Editor. With developments in private equity law, it is critical to maintain an accurate and up- to-date guide regarding relevant practices and legislation in a variety of jurisdictions. The 2019 edition of this Guide accomplishes that objective by providing global businesses leaders, in-house counsel, and international legal practitioners with ready access to important information regarding the legislative frameworks for private equity in 31 different jurisdictions. This edition also includes five general chapters, which discuss pertinent issues affecting private equity transactions and legislation. The fifth edition of the Guide serves as a valuable, authoritative source of reference material for lawyers in industry and private practice seeking information regarding the procedural laws and practice of private equity, provided by experienced practitioners from around the world. Christopher Field & Dr. Markus P. Bolsinger Dechert LLP chapter 1

2019 and Beyond: private equity outlook for 2020 ross allardice

Dechert llp Dr. markus p. Bolsinger

I. Introduction traditional investment approaches, as well as familiarising investors with longer-term hold strategies. In 2018, the global private equity (PE) industry continued to make deals, pursue exits and raise capital. Limited partners remain Portfolio equity minority stakes committed to investment in funds and portfolio companies alike and continue to provide fresh capital as part of new fundraisings. Consistent with the need for PE sponsors to seek alternative Heavy competition across all asset classes has seen seller valuation opportunities for capital deployment and value, there has been a expectations pushing deal multiples to historic highs. For general significant increase in the volume of minority investments and partners, putting record amounts of capital to work has led to partnership structures by PE sponsors over the course of 2018 and exploration of non-traditional asset classes and a requirement to be this is expected to continue. Throughout this period, we have creative across capital structures whilst identifying targets and continued to see the invocation of alternative capital structures planning for the worst against the backdrop of Brexit and the tariff (from pure common equity investments with certain control/veto wars between the US and China. rights as well as preferred equity or debt-like structures with limited governance rights but with the ability to participate in equity returns Funds are therefore continuing to further diversify into credit, real (i.e. through warrants)). estate, infrastructure and growth investments. Larger funds are creating more strategic funds with lower return expectations and A seller in a minority deal may be looking for more than a financial longer hold periods, as well as smaller funds addressing smaller cap return and may be more interested in investment by firms that also transactions. PE dry powder has been on the rise since 2012 and hit have a deep knowledge and network to expand its business a record high of $2 trillion at year end 2018. internationally and be willing to cede certain control and veto rights in order to obtain the investment (particularly, where there is the More liquidity in the market coupled with a limited number of opportunity to potentially obtain step-up economic and control attractive assets means competition for those assets is fierce. This rights over a longer-term horizon). impacts the acquisition process on any auction or bilateral deal. In order to successfully acquire attractive assets, PE buyers must In addition, the hunt for valuable assets has led to a renewed interest transact within a tight timeframe and on seller-friendly terms (with in founder-led and family businesses which often lend themselves to limited seller recourse and more aggressive pricing structures). partnership capital structures. This trend has been particularly visible in central and eastern Europe and the Middle East where we Consequently, PE funds have to be creative to ensure capital is have continued to see a growth in transactions of this type. The deployed timely and effectively. desire of founders to retain an ongoing interest in trophy assets over the long-term has also complemented the growth of funds focused II. Trends in the PE Market on long-term holds and the continued increase in activity of historically passive investors, including pension funds and family offices. Buy and Build Strategy The growth of strategic partnership investments is another example of PE using the capital structure and opportunities to take advantage Larger funds are beating strategic buyers at their own game by of trophy assets and set themselves apart through expertise rather executing large-scale strategic mergers that create value out of than just buying power. synergies and combined operational strength and by implementing more ambitious buy-and-build strategies. Such structures allow general partners to justify the initial acquisition of a relatively GP equity minority stakes and LP transfers expensive platform which can then act as a foundation for further strategic add-on acquisitions that can be acquired for lower We have seen in the past few years, general partners and limited multiples as part of a longer-term focused strategy. Further strategic partners taking direct minority stakes in portfolio companies with acquisitions have the effect of reducing the overall acquisition cost increased frequency. In addition, traditional PE firms like of such platforms. However, optimising the implementation of a Bridgepoint are selling minority stakes in themselves. Firms like buy-and-build strategy requires GPs to adapt and diversify Dyal Capital and Blackstone are raising billions of capital for “fund

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of firms” vehicles dedicated to buying portfolios of GP minority Whilst the requirement for the ability to control their investments stakes. This market for GP minority stakes is a natural extension of a will continue to represent a roadblock for traditional PE sponsors, mature PE market. Selling GP stakes this way means firms can deploy the amount of capital available for deployment, together with the further capital to fund growth initiatives. For the investor, striking a rise of non-traditional equity investors, provide positive indications close relationship with a GP can result in better terms for the firm’s of the potential for the return of strategic minority investments into primary fund as well as direct co-investment opportunities. public companies (so-called “PIPE” investments). In addition to the growth in transfers of GP stakes, we have witnessed an increased frequency of transfers of LP interests by PE sponsors. Subscription lines These transaction structures are being used creatively in order to allow sponsors to retain trophy and high-growth assets (avoiding potential Whilst subscription lines offer general partners the opportunity to negative investor sentiment regarding so-called “pass the parcel” act quickly in an auction (by avoiding the need to wait for investor transactions) and to hold portfolio assets for longer periods and in commitments through a capital call process before a transaction can order to ensure strategic alignment between sponsors and investors. be completed), the use of subscription lines (and the increase of the use of subscription lines for longer-term bridge financing purposes) Co-investment Opportunities continues to be a contentious issue from an investor perspective. This is where loans to general partners are secured against investor In recent years, PE funds have had to change tack in order to meet commitments and have the potential of improving returns through the demands of investors and give themselves a competitive edge. financial engineering rather than the quality of investments by the In the industry’s early years, it used to be that funds could rely on general partner. The internal rate of return on which PE fund financial engineering to achieve returns. One of the most striking managers are commonly judged is sensitive to when PE investors’ developments in recent times has been the collaboration of sponsors cash is put to work. Subscription lines allow fund managers to draw with strategic investors. This has come in two forms: down from their investors at a later date improving the fund’s IRR in the process. Accordingly, it is expected that investor pressure for ■ giving LPs direct access to deals as co-investors thereby increasing a PE fund’s firepower and ability to complete more rigorous control on the use of subscription lines in fund larger deals; and documents will increase and, with funds focused on long-term holding periods, for the use of multiple-of-money investor return ■ bringing in corporate co-investors on buyouts, again increasing financial firepower and bringing valuable industry metrics (alongside or in lieu of IRR metrics) to continue to grow. knowledge to the portfolio company and a potential suitor to exit to in the future. Growth Equity In addition, LPs have come to seek greater levels of co-investment as a means to improve investment performance by reducing The rise of growth equity in the past five years is striking. Since management fees. 2014, some $367 billion has been raised globally for growth equity and for many larger PE funds this pool of capital offers a way to Direct lending and alternative capital growth focus on fast growing companies and achieve a return without the need for high leverage multiples. Growth equity occupies the space between buyout which focuses on companies with years of proven 2018 has been notable for the continued growth of transactions cash flow and profitability and venture capital which invests in start- funded through leverage provided by debt-funds rather than from ups that are generally yet to generate EBITDA and are still in traditional sources of loan finance. The ability of debt funds to offer development mode. Growth equity is closer to traditional leveraged more creative structures and leverage multiples in excess of those buyout funds and this is why we are starting to see larger established provided by banks, coupled with the increasing amounts of investor funds set aside pools of capital for growth equity deals. capital being deployed within debt funds means that this trend is expected to continue. Given potential economic headwinds, the rise of the direct lenders is expected to enhance momentum in deal flow III. Outlook even if traditional financing sources become unavailable, or where the leverage available from such sources decreases. While fundraising trended down in 2018 in line with a weaker exit However, the ability to obtain enhanced leverage, along with the market and lower distributions to investors, the amount of dry ability of sponsors to cherry-pick advantageous debt terms in a powder available is at a historic high and must be put to work. As a competitive market could, in the context of significant economic consequence, this dynamic means that deal-making activity is likely upheaval, feasibly lead to an increase in defaults and associated to remain robust and competitive through to the end of 2019 and into work-out scenarios, particularly as regards assets which have 2020, as managers continue to try and navigate a highly competitive significant exposure to macro-economic trends. and well capitalised PE market by using some of the methods outlined above.

Take private transactions We should therefore expect the trend of increased asset prices and seller-friendly terms to continue along with further diversification In the last two years there has been a considerable increase in interest by general partners looking for new avenues (in line with the themes in take-private transactions across Europe. We expect this to above) in which to make returns from their increasing amounts of continue. More than half of the successful take-private transactions committed capital, even in the face of economic headwinds. That in the UK in the past two years have been sold to PE sponsors. said, global events may also provide significant opportunities for investors to acquire distressed assets at advantageous valuations as In the first quarter of 2019, key stock indices lost gains made well as rewarding those sponsors who are implementing creative throughout 2018 which will provide PE funds with an opportunity and innovative investment strategies. and focus on certain undervalued assets (especially publicly listed companies experiencing stock price decline).

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Acknowledgment Mark Evans, a corporate and securities associate at Dechert LLP, also contributed to this chapter.

Ross Allardice Dr. Markus P. Bolsinger Dechert LLP Dechert LLP 160 Queen Victoria St Three Bryant Park London 1095 Avenue of the Americas, New York EC4V 4QQ NY 10036-6797, USA /Skygarden, Erika- Mann-Straße 5,Munich 80636, Germany Tel: +44 20 7184 7362 Email: [email protected] Tel: +1 212 698 3628 / +49 89 2121 6309 URL: www.dechert.com Email: [email protected] URL: www.dechert.com

Ross Allardice’s focus solely on financial sponsor matters means he Dr. Markus P. Bolsinger, co-head of Dechert’s PE practice, structures sees a large number of transactions across the European private and negotiates complex transactions – domestic and transatlantic M&A, equity, portfolio and restructuring space. He is heavily involved with leveraged buyouts, recapitalisations and going-private transactions – every phase of a transaction and has an excellent understanding of and advises on general corporate and corporate governance matters. current market terms in the financial sponsor market. He represents Dr. Bolsinger’s experience extends across industries, including parties across multiple industry sectors. healthcare, industrial, packaging, agribusiness, consumer, food and beverage, and restaurant sectors. His clients have included leading PE firms, such as First Atlantic Capital, ICV Partners, J.H. Whitney & Co., Morgan Stanley Capital Partners and New Mountain Capital. In addition to his core M&A and PE experience, Dr. Bolsinger has extensive expertise in transactional risk insurance, and frequently speaks and writes on the topic in major media outlets. He has been listed as a recommended lawyer by the U.S., EMEA and Germany editions of The Legal 500, a legal directory based on the opinions of clients and peers. Recognised for M&A and PE buyouts in 2018, Dr. Bolsinger has been cited as “a trusted adviser” who “takes the time to understand a client’s business and motivations before undertaking any way”. Since 2010, every year Dr. Bolsinger has been recognised and received a pro bono service award.

Dechert is a global law firm focused on sectors with the greatest complexities and highest regulatory demands. We deliver practical commercial insight and judgment to our clients’ most important matters. Nothing stands in the way of giving clients the best of the firm’s entrepreneurial energy and seamless collaboration in a way that is distinctively Dechert. Dechert has been an active advisor to the private equity industry for more than 30 years – long before it was called “private equity”. As a result of our longstanding roots and diverse client base, we have a deep understanding of the latest market terms and trends and provide creative solutions to the most complex issues in evaluating, structuring and negotiating PE transactions. Ranked among the top law firms for PE by prominent league tables and legal directories, Dechert’s global team has been recognised for its commercial judgment and client focus.

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private equity transactions in the uK: the essential Differences from the u.S. market

Dentons Nicholas plant

Introduction 3. Financing: UK deals are usually done on a “certain funds” basis with no financing condition or financing out. But some private equity and strategic deals in the U.S. contain A U.S. private equity fund seeking to acquire a business in the UK financing conditions. In the UK, we would argue that makes will soon notice a number of differences from the U.S. market. It is the acquisition agreement little more than a call option. important to be aware of these differences if you are competing If in the U.S. there is no financing condition, as is the case in against UK private equity houses. virtually all U.S. large cap private equity deals, there will The key features are that in the UK we have a far more seller- typically be a reverse termination fee which requires the friendly approach and management incentives are structured buyer to pay a fixed amount if the financing is not available differently (however, they achieve much the same economic result). and the other closing conditions are met. This reverse termination fee is usually the seller’s exclusive monetary remedy against the buyer. Although reverse termination fees Seller-friendly are seen in the UK, they are relatively rare, certainly by comparison with U.S. practice. Below are 11 ways in which the UK approach (and English law) is more seller-friendly. Transfer of Risk

Deal Certainty The common theme among the next three distinctions is the timing of when the risk (and benefit) of ownership transfers. The common theme among the first three distinctions is deal 4. Price certainty: It has been common for a number of years in certainty. A typical UK agreement assumes that, even where there is English law acquisition agreements, particularly in auctions, a gap between signing and closing, deal certainty is required from for the acquisition price to be structured on a “locked box” basis. That is, the price payable for the target company is signing. agreed upon in advance of signing based on a balance sheet 1. Conditions: Typically, UK agreements contain only those drawn up to an agreed date (the “locked box date”). The closing conditions required by law or regulation, i.e. buyer then bears the risk and reward of the target’s “mandatory” conditions (e.g. anti-trust clearances or other performance from the locked box date through signing to regulatory approvals). These are generally specified together closing. In return, the seller undertakes that there will be no with detailed provisions on timings for filings and “leakage” of value from the target company to the sellers in consequences based upon the response from the relevant that period in the form of dividends or otherwise, i.e. the box regulatory body. By contrast, U.S. deals are more likely to is “locked” from the locked box date. This is entirely in have greater conditionality and sometimes to provide for a keeping with the philosophy that risk passes to the buyer substantial period of time before closing, known in the U.S. from signing. The advantages for the seller in using a as the “marketing period”, for the buyer to have a fair shot at “locked box” include the ease with which bids can be securing acquisition financing. compared and price certainty (as there is no post-closing 2. Material Adverse Change: It is unusual for UK deals to be adjustment). subject to a MAC condition. Even if a MAC condition is Although the use of the locked box mechanism is increasing included, it is likely to be relevant only if an “armageddon” in the U.S., it is still common to have a purchase price event occurs in respect of the target business itself which is adjustment based on the working capital or net worth of the not the result of macro-economic factors. It is also frequently company as of the closing date (which is typically estimated constructed so that it is only triggered by a change that has a at closing and trued up post-closing), and the seller is free to specified financial consequence on the target group. The aim make ordinary course distributions out of the company of this approach is to bring certainty by clearly defining the during the interim period. Unlike the locked box mechanism, trigger for the MAC (rather than leaving it to a court or and depending on the precise formula used in any particular arbitrator to decide whether the impact of a future event is adjustment, the seller retains the commercial risk and reward “material”). By contrast, MAC clauses are far more common until closing. Furthermore, the seller has less control over the in the U.S., although they are also interpreted very narrowly. final amount of the purchase price, and the price is likely to Conceptually, that makes sense because in the U.S. risk is not be subject to a post-closing adjustment and potential dispute considered to pass to the buyer until closing (see Transfer of based on the closing accounts. Risk section below).

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5. Control between signing and closing: The covenants to Also, in the UK, express contractual indemnification is far which the target business and seller are subject in the period less common than in the U.S. except in relation to tax or other between signing and closing are likely to be significantly specifically identified risks (e.g. environmental exposure). more prescriptive and extensive in the UK than in the U.S. The buyer’s remedy for breach of a warranty in a UK 6. Repetition or “bring down” of warranties and acquisition agreement will instead usually be a contractual representations: In the UK, it is unusual for warranties to be claim for damages, with a duty to mitigate losses and a repeated (or “brought down”) at closing, although, as a requirement for any damage to be reasonably foreseeable. compromise, sellers may agree that a small number of Some U.S. deals actually end up with a similar result, fundamental warranties, such as those regarding title, notwithstanding the express contractual indemnification due insolvency and material litigation, are repeated at closing. In to waivers by buyers of consequential damages and a the U.S., the practice is generally to require representations contractually imposed duty to mitigate. and warranties to be repeated on closing or, at the very least, 8. Disclosure: The style and substance of the disclosure process include a closing condition that gives the buyer the ability to differs between UK and U.S. documents. Under a UK terminate the transaction for a material breach of warranty acquisition agreement, the seller’s disclosures are typically and representation prior to closing. contained in a separate disclosure letter, rather than the schedules to the sale agreement itself, which is often the case in the U.S. A UK disclosure letter will contain a mix of Seller’s Liability general and specific disclosures against the warranties. Even the specific disclosures are normally deemed to qualify all The position on seller’s liability when comparing the UK and U.S. warranties and not just the specific warranties to which they is more balanced. On the one hand, a UK private equity seller will relate. More significantly, in auctions it would be usual for not give any warranties (other than title and capacity) and other the entire contents of the data room and of any vendor due warrantors are unlikely to repeat them on closing. Also, disclosure diligence reports to be deemed to be generally disclosed against the warranties. In the U.S., the buyer will usually will be more comprehensive. On the other hand, the scope of allow specific disclosures against specific warranties, and warranties and caps and time limits on liability are likely to be any other warranties as to which it is readily apparent that broader, higher and longer in the UK than the U.S. such disclosures might relate. General disclosures, or 7. Limits on Liability: Private equity sellers in the UK never imputations to buyers of the entire contents of the data room, give business warranties in an acquisition agreement (except are far less common in the U.S. and not typically accepted by for title and capacity). Instead, a buyer relies on warranties U.S. buyers. received from the management team. That, combined with a 9. Specific Performance and Liquidated Damages: While the management team rolling over 50% or more of its post-tax test for granting specific performance is the same between sale proceeds, gives the buyer some comfort in what it is the U.S. and the UK (i.e. monetary damages would not be an acquiring. If a buyer requires a higher level of recovery adequate remedy), an order for specific performance is against the purchase price in the event of a breach of generally easier to obtain in the U.S. than the UK. Liquidated warranty, then it can also acquire warranty and indemnity damages are also easier to obtain in the U.S., because in the insurance. Warranty and indemnity insurance is now very UK the onus is on the enforcer to prove that the amount common in the UK private equity market. The premium claimed is a reasonable estimate of its loss, i.e. UK courts do costs around 1% of the amount of insurance cover provided not award penalties. and the deductible (also known as the “attachment point”, “retention” or “excess”) is usually set at 0.5% of the 10. Buying from an Administrator: In the UK, our equivalent of enterprise value of the target company – but is sometimes as buying a business out of Chapter 11 is acquiring it from an low as £1. Most unknown liabilities will be covered by the “Administrator”. Buyers of businesses from an Administrator insurance. Common exceptions are: transfer pricing; will, typically, receive no warranties or representations on the secondary tax liabilities; any pension funding shortfall; target business from the sellers, and have no post-closing holiday pay; environmental warranties; and product liability. recourse against the sellers. At best, they will receive a Typically, the buyer will still seek these warranties and rely warranty from the Administrator confirming the validity of his on the fact that, under English law, the limitations on liability appointment. It is possible for the buyer to have an escrow (including the warrantors’ cap on liability) will cease to apply arrangement or deferred consideration, but if there are in the event of fraud. competing bids the Administrator will favour the bid that provides the maximum cash payment on closing. The solution In the U.S., the construct is different. A selling private equity is for the buyer to price in the risks. fund is unlikely to give business warranties and any management liability of the kind seen in the UK is extremely rare (perhaps reflecting the reality that a lawsuit against one’s Finally new management team is an unattractive proposition). However, both the selling private equity fund and 11. Process: Vendor legal due diligence (where key legal due management team may fund, proportionate to their diligence materials are prepared in advance of the sale shareholdings, an escrow in an amount equal to 5–10% of the process and designed to be relied on by the successful bidder) equity value. The escrow is typically paid over to the seller is common in the UK. It may be particularly helpful if the once the representations and warranties expire, subject to target company has “issues” which require explanation reserved amounts for any pending claims. The corollary of and/or if the target business is international and therefore this is that in the U.S. the seller’s representations and expensive to diligence and/or if the timetable is aggressive. warranties can survive for as little as the first anniversary of the closing or, alternatively, the completion of the first audit By contrast, in the U.S. it is rarely used, largely because of cycle under the buyer’s ownership. By contrast, in the UK, litigation risk and scepticism on the part of U.S. buyers as to time limits tend to be longer – typically two years for non-tax the level of comfort offered. warranties and seven years for tax warranties. However, the warranty and indemnity insurance is invariably structured so that the warrantors themselves cease to be liable for the deductible after the first anniversary of closing. iclg to: private equity 2019 www.iclg.com 5 © Published and reproduced with kind permission by Global Legal Group Ltd, London Dentons private equity transactions: uK vs. u.S.

the subscription price for a portion of his shares and market value Conclusion for the balance. The portion that must be offered for market value will increase in line with how long the relevant manager has been in These differences demonstrate why U.S. sellers might prefer that the business. This is what we call “value vesting”. Four years is a their international deals are done under UK law. However, in typical period for the manager’s entire holding to “value vest”, i.e. making tactical decisions about the choice of law, sellers should be be forfeitable entirely for market value. This last category achieves mindful of the geographic location of the likely pool of buyers. It the same economic outcome as the “actual vesting” that one sees in would make no sense to have English law if both the pool of bidders the U.S. and target itself are based outside of the UK. Two countries divided by a common language – indeed!

Management Incentives

In the UK we structure management incentives a little differently from the U.S., but with much the same economic result. Nicholas Plant In the UK, all share incentives are awarded to the management team Dentons on closing, but all are subject to forfeiture if the manager leaves One Fleet Place before the exit. The reason is entirely tax-driven, i.e. if shares are London, EC4M 7WS awarded at less than their market value at the time of award, then the United Kingdom

recipient will suffer income tax on the difference between the price Tel: +44 20 7246 7081 he pays (if lower) and the market value. The employer will also Email: [email protected] suffer a tax bill on the difference (employer national insurance URL: www.dentons.com which is currently charged at 13.8% on the difference). Because it is assumed the market value of the shares will increase during the Nicholas is global co-head of private equity at Dentons. He has over lifespan of the investment, it therefore makes sense to award all the 20 years of experience working on both domestic and cross-border incentives at the outset of the investment period. That is why the leveraged buyouts and has led over £7 billion of LBOs in the last five issue of shares during the investment period pursuant to staggered years. vesting under an option plan makes no sense in the UK. Nicholas has worked extensively for some of the leading private equity If a manager leaves before the exit, then all his shares will be houses, including: Apax; Blackstone; Centerbridge; CVC Capital forfeitable. The legal construct is the leaver must offer the shares Partners; Duke Street Capital; European Capital; Graphite Capital; Investcorp; and Stonepeak Infrastructure Partners. for sale (so the eligible shareholders will have a call option over the leaver’s shares – in no circumstances will the leaver have a put Nicholas receives exceptional praise from market sources. He is named as a “leading individual” by Chambers & Partners. It quotes option). The question is at what price. A bad leaver will be required clients who describe him as “technical” and “very client-focused” – to offer his shares for sale at the lower of market value and the Chambers UK 2016 (Private Equity). It also says Nicholas “is a well- subscription price (because if the subscription price is set as the known private equity lawyer whose clients include leading players” – floor and the shares subsequently become worthless, it would have Chambers UK 2017 (Private Equity). the perverse result of incentivising the management team to Nicholas also has a specialism in African private equity. He advised on voluntarily resign). The price paid to a good leaver will be market the largest private equity transactions in Africa in 2013 and 2014 (the Petrobras JV and IHS Holdings). He is listed in The Lawyer: Africa value. A third category has developed in the UK market – the Elite 2015 as one of the 10 leading international lawyers advising on intermediate leaver, who is essentially someone dismissed without African private equity. cause on full notice. He will receive the lower of market value and

Dentons is the world’s first polycentric global law firm. A top-10 firm on the Acritas 2018 Global Elite Brand Index, the firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. We are driven to provide our clients with a competitive edge and are connected to the communities where our clients want to do business. Now the world’s largest law firm, Dentons’ global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in 170 locations, in 78 countries. Dentons is at the core of international private equity. We have one of the largest integrated global teams, with over 200 specialist lawyers advising on private equity transactions. We offer the full range of private equity services including Buyouts, Secondaries, Spin-outs, Venture Capital and Fund Formation, together with specialist advisers in our Leveraged and Acquisition Finance, Competition, Tax and Regulatory practices.

6 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 3 management incentive plans – the power of incentives eleanor Shanks

proskauer rose llp rob Day

“People Respond to Incentives” performance, whether in terms of IRR or money multiples delivered, invariably for private equity the measure is tested on cash invested compared to cash returned and the time Much has been written about the power of incentives, the risk of period in between. At the heart of most MIPs is the principle distortion of behaviour and the unalterable fact that all incentive that managers will not see their benefits crystallise until they systems tend to promote “gamification” or, in other words, achieve a suitable cash return for the investor. behaviour that is designed to maximise the incentive reward, ■ When value starts to flow (the hurdle): The senior regardless of whether or not that actually meets the objectives of the managers at a private equity house will generally only benefit business or investor providing the incentive. from performance fees or carried interest payments where the Whilst the psychology of incentives is beyond the scope of this fund is delivering to their own investors a level of return which exceeds the fund’s pre-set hurdle. As such, it is article, the one statement that all commentators agree on is “people common to import that same hurdle (or, if the competitive respond to incentives”, and the incentives provided by private equity landscape permits, a higher hurdle) directly into the portfolio houses to their management teams (invariably in the form of equity company incentive plan so that managers of the portfolio incentive plans in one guise or another) are amongst some of the companies themselves start to participate in an increase in the most powerful incentive structures in the corporate world. capital value of those portfolio companies only when a cash With desirable assets in hot demand and with many private equity return to the fund is being delivered which satisfies the houses competing to win assets through auction processes, “upstream” hurdle requirement; or, more simply, the MIP is designed to ensure that the management team is not being competition is no longer simply a matter of price: bidders must also rewarded unless it is contributing to fund performance at a battle for the hearts and minds of the senior management team and level that should reward the private equity managers often win a competition of generosity when it comes to incentives themselves. and benefits. Against this backdrop, there are an increasing number The premise, therefore, is a simple one: the management team of sophisticated management teams who have experienced private makes money when the house makes money, the better the house equity ownership before and, assisting them, a growing phalanx of does, the better the management does and, in all cases, what is tested dedicated advisory teams who solely represent management in is cash invested versus cash realised and the period of time in agreeing incentive arrangements with private equity houses. As a between. As with all simple premises, however, complexity, detail direct result of these dynamics, management incentive packages and nuance inevitably apply and can lead to some material issues of have become increasingly complex and diverse. This article seeks non-alignment, and can equally lead to materially different value to explore some of the key areas for consideration when establishing outcomes. and administering a management incentive plan (“MIP”). Perhaps predictably given the variety in this area, MIPs are known under a number of different monikers (many use the term “MEP” Capital structure (management equity plan) instead, for example). For the sake of brevity, this article will use the term MIP throughout. Understandably, MIPs require an overall understanding of how the capital structure of a leveraged buyout is composed. A significant proportion of the acquisition cost of the relevant company will Fundamentals of a MIP typically be funded through third-party debt finance with the balance being funded by “equity investment”. Ensuring alignment However, the equity investment itself is rarely as straightforward as comprising a simple issue of ordinary shares. As far as the private The essence of a MIP is to align the interests of the target company equity house is concerned, the bulk of its investment will be made in management with those of the private equity house itself. As such, the form of a preferred instrument (either a loan note or a preference the key elements of alignment include: share) which will carry a preferred return (i.e., an amount equal to the hurdle mentioned above). In addition, the preferred instrument ■ What is measured (cash on cash): One of the distinctive will invariably rank ahead of all ordinary equity, so, in the event that features of private equity investment that is noticeably different from evergreen hedge funds and other open-ended an investment is less successful, on an exit once all debt has been investment structures is the concept of a cash-on-cash return discharged, the first slice of equity value will go to pay that and reward structure at all levels. When evaluating a fund’s preference instrument and its hurdle return before any value flows to iclg to: private equity 2019 www.iclg.com 7 © Published and reproduced with kind permission by Global Legal Group Ltd, London proskauer rose llp mip – the power of incentives

the ordinary equity. In other words, as far as the true “ordinary” and retain such a turnaround team will again require consideration equity is concerned, the preferred instrument represents another to be given to the incentives on offer; only now instead of starting element of leverage that must be discharged in priority to receiving with a blank canvas, the incentive needs to be overlaid on an any value for those ordinary shares held. As a result, the actual cash existing capital structure where the ordinary equity is underwater. price of the ordinary equity will typically be only a small fraction of Where this issue arises, it is best addressed as early as possible and the total “equity investment” being made. In industry parlance, the ideally far ahead of any exit; the private equity seller will want a loan notes, preference shares and ordinary shares held by the private motivated management team that is focused on the turnaround, and equity house comprise the “institutional strip”. a team that is prepared to provide exit warranties, and any incoming “Sweet equity” is the term often used to describe those shares investor will, if nothing else, want comfort that management have offered to management which give the holder a material percentage been incentivised to conduct a thorough disclosure exercise. stake in the ordinary equity for a relatively low cost or returns based Exactly what form the incentive reset takes will vary depending on on a ratchet or similar mechanism. Before any value accrues to that the original capital structure and the new value reality, and may ordinary equity, they will need to deliver (invariably by way of an include creating a new class of MIP shares that participate alongside exit or some combination of recapitalisation and exit) a level of the preference instruments held by the fund, providing options to the return that will discharge debt finance and repay to the private management over the investors institutional strip, bonuses payable equity investor the entire amount of its preferred instrument plus the by the company, bonuses payable by an investor entity and cash preferred return. Also, the business will have to generate sufficient payments being made in return for the management giving free cash flow to service cash interest payable on its third-party debt warranties (all of which may receive very different tax treatments). throughout the life of the investment. The economic result is that A simple “forgiveness” of debt or release of the preferred instrument whilst, for a typical leverage transaction, there may be “equity invariably will be tax inefficient and lead to significant costs both to investment” equal to 30% or 40% of the total price of the asset being the business and potentially the existing and new shareholders. acquired, for a management holder who only has an interest in sweet What is significant here is the timing of the discussion. Left too late, equity, it is as though they are sat behind a structure that is almost this issue can impose substantial additional tax costs, can derail the entirely comprised of leverage. Leverage ratios themselves remain sale process and can leave management feeling disenfranchised and variable by sector and sponsor. Consequently, and as with all unmotivated before the turnaround has even begun. leverage structures, relatively small levels of under-performance can leave that ordinary equity worthless and “under water” with value being exclusively used to discharge third-party debt and to Sweet equity repay the investor fund the majority of their equity investment and hurdle return, whereas strong levels of performance will very Typically, sweet equity is offered to management at the same low rapidly deliver significant value into that ordinary equity stake, price-per-share as the price paid by the private equity fund but with thereby creating a powerful incentive to deliver the higher level of no obligation on management to invest and pay for a proportionate capital gain sought by private equity investors. amount of the preferred instrument. Sweet equity will be subordinate to all third-party debt and the preferred instruments The hurdle subscribed for by the private equity funds. The total amount of sweet equity set aside to operate as an incentive for management will obviously be a key determinant of the generosity of any MIP. A key question as to the level of value that will ultimately flow to Equally, the cost of the third-party debt and the level of return the ordinary shares is what level of hurdle return has to be met on required to be delivered in order to meet the private equity house’s the private equity investor’s preference instrument. The typical preferred instrument hurdle will affect how easy or difficult it is to hurdle rate has moved materially as economic conditions and create value in that ordinary equity. expected returns have moved, with the overall direction of movement tending downwards from a high point before the A current market “standard” allocation has been to set aside 10–15% financial crisis of typically 12–16% to a current more typical range of the ordinary equity for granting of management equity incentive of between 8–12% (in all cases calculated on a basis that will roll up awards, although for some transactions much lower percentages are and compound, in some cases daily and in some cases quarterly or allocated to management whilst in other transactions up to 25% of annually). the ordinary equity may have been ring-fenced for management participation. The fact that a certain “pot” has been made available Increasingly, well-advised management teams (and perhaps is of course distinct from individual allocations, and it is common particularly those teams where the management equity will be not to issue the entire amount of the pot on an initial transaction but tightly held) place their negotiating focus on the hurdle rate rather to reserve an element of that pot for the purposes of attracting new than simply concentrating purely on the amount of ordinary equity talent into the management team in the future, and to proffer a made available to them. The thinking here is simple: it is better to “carrot” to the existing team of future rewards. participate in exit proceeds (albeit to a lesser extent) than not to participate at all due to a particularly onerous hurdle rate. More often than not, managers realising significant value in one exit will be expected and/or required to reinvest a significant proportion of their exit proceeds in the institutional strip – possibly between MIP Resets 20–50% of their net proceeds. This can also apply to new managers of a portfolio company who have a track record in previous portfolio Due to the hurdle rate, it is not unusual to find that either no or very company roles and where people are receiving exit bonuses, often a little value accrues to the ordinary equity on an exit. Where this higher proportion can be required. becomes apparent during the life of an investment, it inevitably raises the question of whether there should be a “reset” of the incentive arrangements. Whilst there are always concerns over Pricing and valuation payment for underperformance, it is typically the case that new management is required to lead a turnaround. The ability to attract If the sizes of the pot available and the hurdle return it sits behind

8 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London proskauer rose llp mip – the power of incentives are key value questions, then equally so is the question of how much different valuation outcomes. This in turn can lead to some it will cost management to acquire a given percentage of the sweet significant challenges when trying to award shares on similar equity. In this regard, UK practice differs from that seen in the US economic terms to internationally diverse management teams. and Europe quite materially. At the heart of that difference between UK and other practices lies Tax elections the question of valuation and taxation. Receiving an offer of shares tends to be treated much like any other As one might expect, a key objective of the MIP is to preserve the employment-related benefit when it comes to taxation. If an value of the incentive by minimising tax leakage on acquisition of individual is receiving the entitlement by reference to their the MIP shares and, more importantly, on their future sale. employment status (or is deemed by tax law to be by reference to In most (although not all) jurisdictions, this means seeking to their employment status, which is invariably the case), and if there deliver capital gains tax treatment. To benefit from capital gains tax is an element of “benefit” to the individual as a result, then the treatment on sale, tax elections will often need to be signed by the element of “benefit” will typically be taxed under the relevant recipients of the equity (and their employer) where the individuals employment tax regime in much the same way as a benefit in kind elect to be taxed under the employment income tax regime for any charge can arise in respect of the provision of company cars, benefit in kind or undervalue element arising on the original entertainment allowances, healthcare benefits and the like. issuance of the equity to them, with the benefit being that, on an Most MIP structures seek to avoid a benefit in kind charge arising ultimate exit, the exit proceeds themselves will be taxed under the through the seemingly simple construct of having individuals pay capital gains tax regime. market value for the shares that they are being offered, so that no However, the way in which such elections work in different element of “benefit” arises. In determining what market value might jurisdictions can be materially different and can have vastly comprise, obtaining an independent third-party valuation for the different consequences. For example, in the US, failure by the equity interest being offered is typical; and the fact that the offer of individual to sign their Section 83(b) tax election within 30 days of securities when the MIP is established is almost invariably combined receipt of their shares, and to file that election with the IRS, will with an arm’s-length third-party acquisition of the underlying target result in all proceeds being taxed as income (and any failure to do so company and the subscription by the private equity investor of is not easily capable of remedy). In contrast, in the UK, the relevant similar forms of security are all relevant valuation factors. tax election (being a Section 431 tax election) need only be retained From a UK valuation perspective, the question is what a willing, by an individual’s employer entity or its advisers and is not filed informed third-party purchaser would pay for the MIP shares. separately with HMRC. Even if such an election is not entered into Where the MIP shares are identical to the shares being acquired by at all in the UK, it will only result in a portion of the exit proceeds the private equity investor, the price paid by the private equity being treated as income for tax purposes where the portion in investor should provide a robust basis for determining the value of question represents the percentage difference between what is called the ordinary equity acquired by the MIP participants (and, indeed, the “restricted market value” of their shares on original subscription there is a “Memorandum of Understanding” between HMRC and and the so-called “unrestricted market value” of their shares at that the British Venture Capital and Private Equity Association time (which is generally considered by HMRC to be about 10– (“BVCA”) which, broadly, recognises this). As a consequence, in a 20%). If, however, the individual actually pays the unrestricted simple private equity structure it is generally possible to ascribe low market value for their shares at the time of receipt, there is no value to the ordinary equity providing that the share rights are “undervalue element” and therefore, notwithstanding the failure to equivalent for the management team and the private equity investor. sign the relevant tax election, the entirety of exit proceeds may still By way of an example, it would not be unusual for the entire be treated as capital gains. It is generally advisable for elections to ordinary equity subscription to be subscribed for £1 million, with a be signed, as that will simplify any future purchaser’s due diligence typical management incentive pot of 10% (with no ratchet or other and tax risk assessment on a future sale of the company. beneficial terms) costing £100,000, and with the bulk of the “equity investment” being provided by the private equity funds in the form Leaver provisions of a loan note or preferred share (even if the £1 million being paid for the ordinary shares represent a tiny fraction of the overall equity commitment being made). The essence of the MIP is to encourage senior management to remain with the business up to and through a successful exit that Having said this, where there are differences between the rights of returns cash value to the private equity owner. As such, for any the private equity investors shares and the MIP shares or, for individual who becomes a leaver it is currently typical for them to be instance, the MIP shares have a ratchet which could deliver 20%, liable to transfer back the entirety of their incentive equity, with the 30% or more of disposal proceeds from a sale with a high return, this circumstances of leaving affecting the value received. simple valuation will likely not be appropriate and significant value might be ascribed (or HMRC might argue that significant value Categorisations of leavers range from, in the case of a position should be ascribed) to the MIP shares. These circumstances, in favourable to the private equity fund, simple categories of good and particular, would merit a robust third-party valuation being obtained bad leaver (with good leaver being limited to individuals whose when any MIP shares were to be issued. departure arises by reason of death, disability or who are, at the discretion of the investor, to be treated as a good leaver, with all The tax valuation methodology used by the US and certain other other leavers designated as being deemed “bad”), through to the jurisdictions can, as well as considering the current value of the MIP more management-friendly position of there being three categories shares, bring into question whether the split between ordinary equity of good, bad and intermediate leaver where intermediate leaver and a preference instrument is or is not an arms-length, status includes termination of the individual’s employment commercially reasonable apportionment. Those alternative arrangements by the company other than for cause (and there are valuation methodologies tend to place less reliance on alignment of more complex formulations that may encompass concepts of very price between the private equity investor and the management team good, good, intermediate, bad and very bad leaver). subscription for ordinary shares, and consequently can result in very iclg to: private equity 2019 www.iclg.com 9 © Published and reproduced with kind permission by Global Legal Group Ltd, London proskauer rose llp mip – the power of incentives

Invariably, in the case of bad leavers, the typical treatment will be ■ Loan notes: In some instances the investor may require the for any bad leaver to be required (by decision of the investor) to incentive equity to be transferred in return for a vendor loan transfer their incentive equity interests either back to the company, note or promissory note which will crystallise the value of the or to an employee benefit trust for recycling to other new joiners, or equity being transferred, but which will not trigger and pay directly to a new joiner, for consideration equal to the lower of the out until an exit occurs. However, with investors’ preference instruments increasingly taking the form of preference shares cost price of those equity securities and the fair market value of rather than shareholder debt, care needs to be taken as to how those equity securities (calculated either at the time the individual that vendor loan note or promissory note ranks. Being a debt becomes a leaver or at the time of transfer). It is relatively rare for instrument, unless specific provision is made, the vendor loan leaver provisions to apply negatively to the institutional strip note or promissory note may take structural priority over the securities held by managers who have reinvested proceeds in the investor’s preference instrument. target, but not unheard of; the most extreme provision we have seen ■ Capped value shares: An alternative method has been to recently dictated that a bad leaver would lose his or her investment crystallise the value of the equity of the leaving individual at for a pound (including their institutional strip securities which will the point of their departure and at that point to create the have been acquired for substantial value). However, in this concept of a capped value share where, until exit, the equity particular context, side letter provisions can be used to offset this securities continue to be held by that individual and are sold treatment and savvy managers may thereby gain an advantage over for the lower of (i) the value of an uncapped ordinary share, their less experienced colleagues. and (ii) the capped amount. This structure has the benefit to the private equity sponsor of not requiring a cash payment to be made until exit arises (when cash is being paid to all Vesting shareholders); it also provides some downside protection so that if the value of the investment were to fall after an For good leavers and intermediate leavers, the concept of time individual leaves the business, then the individual remains on risk for that value reduction. The disadvantage of the vesting normally applies so that depending on the period served structure is that the management leaver will remain a with the company, the individual will receive fair market value for shareholder in the ongoing business, which may complicate “vested” equity securities and the lower of cost price and fair market the ultimate exit process and make it more difficult for the value for all “unvested” securities. In that regard, vesting will seller to deliver a voluntary sale transaction where all typically occur over a number of years from the date of the original shareholders directly sign up to a sale agreement. In addition, transaction. as referenced above under “Drag and Tag”, there will now by A typical vesting schedule would, for example, see 20% of an definition be potentially multiple instances of shares which have different capped values – drag-along provisions need to individual’s equity “vest” for value purposes on the first anniversary be carefully crafted to allow for this or they may be of that individual receiving their shares, with a further 20% per ineffective. Also, maintaining confidentiality around an exit annum vesting up to a maximum of 80% over the following three may be more complex because the network of individuals years. This means that even for a good leaver, full market value will who will need to be contacted for such a voluntary sale not be realised for their stake unless the individual remains in post at arrangement to be organised will now include individuals the point of exit. Similarly, straight line vesting over five-year who may have left the business a significant time ago, and periods is not uncommon. may even be working with competitors. For example, what if the leaver is working for the potential buyer? We have seen Vesting can occur on a “cliff” basis with an additional percentage these situations arise in the past and they are not always vesting on each anniversary of the date of receipt of the relevant easily solved. shares (or, in some cases, by reference to the anniversary date of the original transaction) or on a straight line basis throughout that period. Drag and tag More rarely, ownership vesting will be permitted which will allow the individual to retain ownership of their vested proportion of Whilst MIPs are designed to align economic interests between equity. Whilst clearly advantageous to the individual (who will private equity sponsors and the management teams, control over the enjoy any future uplift in value to exit), this leaves both the private exit process including both the method of exit and the time of exit equity owner and the business with an element of the equity rests squarely with the private equity investor. A drag right, which incentive pot that it cannot recycle and use to incentivise new allows the private equity investor to require all shareholders to joiners, in the event that a senior member of the management team transfer their shares to an incoming buyer, is the key mechanism to leaves before exit occurs and, as a result, ownership vesting is support that ability for the private equity fund to drive the timing present in a small minority of structures. In comparison, value and method of exit as well as its execution. However, whilst all drag vesting, which facilitates effectively recycling the shares held by the rights are intended to confer control over exit for the private equity leaver, is a much more typical market construct. Ownership vesting, house, many drag rights fail to appropriately deal with both the where it is found, tends to be a deal reserved for the founders of a procedural requirements of an exit and with the valuation and business. waterfall payment nuances that typically arise. For example, a simple drag provision that requires all shareholders to sell on “the The fact that incentive equity held by certain leavers is transferable same terms and at the same price” may not operate on a valid basis at the discretion of the investor is only helpful to the extent that the where terms differ (which they invariably will on an exit as between investor or the company is willing to pay out cash to the leaver at a the private equity financial institutional seller and the management time when no exit has occurred and no cash return is being made to team), and will almost certainly be invalidated where the value the sponsor. Increasingly, private equity sponsors are taking the ascribed to different classes of shares under the company’s view that no such cash should be paid until an actual exit occurs constitutional documents are designed to vary. They may even be based on the principle that an equity incentive arrangement is disrupted by agreeing to pay transaction bonuses to certain supposed to be a “cash-on-cash” incentive. Various different shareholders if those bonuses are not offered on an equivalent basis methodologies are being deployed to achieve this result including: to dragged shareholders. Effective drag language therefore needs to

10 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London proskauer rose llp mip – the power of incentives carefully consider the payment waterfall under the company’s protected in shorter investment cycles)). The ratchet entitlement constitutional documents, including any ratchet entitlement that will itself may equally comprise a one-time adjustment (as in the simple accrue to the incentive equity (see below) such provisions tend to example above) or may operate on a sliding scale so that as levels of operate most effectively when based squarely on statutory return exceed various different targets, so the management’s upside compulsory purchase and squeeze-out provisions (in the case of UK grows with that outperformance. In an environment where deals, being those set out in chapter 3 of Part 28 of the Companies competition to win favour with a management team is high, the Act 2006). addition of a ratchet which gives away a share of “outperformance” The inverse of a drag right and a material protection for may be an alternative and a relatively pain-free way of management shareholders is a tag right. This ensures that where the distinguishing one incentive proposal from another. private equity fund sells all or part of its stake to an independent By embedding the ratchet entitlement in the share rights attaching to buyer for value, then the rest of the shareholders have the right to the incentive equity, the objective is to ensure that all the proceeds sell a proportionate part of their own equity alongside them (thus of sale are treated as capital gains in the hands of the management giving management protection against being forced to partner with holders. a new and potentially unknown investor). Where ratchets are used, they will invariably increase the market value of the incentive equity at the time that it is received by the Transfer restrictions management so that the cost of that incentive equity for tax purposes may be greater than a simple percentage of the total of ordinary A MIP is designed to provide targeted incentives to certain members share capital. For example, where the total ordinary share capital is of the management team of the portfolio company and to ensure that to be issued for £1 million and the initial management equity policy those individuals only receive value as and when the private equity is 10%, but a ratchet could result in management receiving 20% of sponsor itself achieves a realisation of all or part of its stake for cash. equity proceeds above relevant targets, then rather than the As such, permitting transfer of management equity interests is management incentive equity being valued at £100,000 on issue fundamentally a “no go” area. Free transferability would both risk (using UK methodology), instead the value might lie between a disconnect arising between the holders of the incentive equity and £100,000–£200,000 (that is, between 10% and 20% of the ordinary the senior managers who it is designed to incentivise, and could also equity value). For non-UK transactions and the many UK allow the realisation of value for that incentive equity at a time when transactions that do not come within the scope of the model capital the private equity fund itself has not received value in cash. Only structure set out in the HMRC/BVCA Memorandum of very limited exceptions to the transfer restrictions are commonly Understanding, the valuation methodology may again look at a found, with those exceptions allowing (if any) some limited capital more fundamental assessment of the value of MIP shares (including gains and inheritance tax planning whereby interests may be the option value attaching to those shares), with the result that the transferred to family trusts or to other family members or controlled initial upfront cost to management of receiving their equity family companies. In all of those cases, however, if the key incentive shares may be materially higher. individual who is designated to receive the incentive leaves the company (whether of their own volition or otherwise), then the Other Areas to Consider leaver provisions will still apply to all the equity interests whether or not they have been transferred or remain directly held. Similarly, if the transferee concerned ceases to be a permitted transferee then Succession arrangements there is almost always a requirement that the relevant equity interests must be transferred back. As businesses are increasingly maintained in private equity ownership for long periods of time, the situation where a Ratchets management team may transition from one private equity owner to another has become increasingly common. Inevitably at some point in time, the original senior management team may wish to reduce Many private equity sponsors take the view that for deals that truly their commitment to the business, both financially and in terms of out-perform their expectations as regards levels of return, they time commitment, and transition their senior roles to new upcoming would be willing to share a greater percentage of the upside with managers who will take the business forward. management teams. The use of a ratchet mechanism which is embedded in the share rights constituting the incentive equity will Private equity houses have become increasingly adroit at handling typically be the method for achieving that. For example, where the questions of succession. In dealing with isolated and/or individual initial management equity pot comprises 10% of the ordinary cases, a simple side arrangement may suffice to clarify expectations equity, it may be intended that management receive, for example, as to how and when transitions should occur and what the 15% of all equity proceeds in the event that the private equity house consequence will be for equity awards made to the outgoing senior has achieved a return greater than 2.5 or 3 times its original manager. In other cases where succession is a broader issue, private investment. equity houses have employed a number of innovative structures including “tranche value” shares to assist in succession planning. A The target triggering a ratchet may be based only on a money-on- tranched value share is a single class of share issued in tranches money multiple or may also include an IRR hurdle with the result comprising different series, with each series having a cap on the that both tests have to be met in order for the ratchet entitlement to maximum value it may receive. As such, where the value of the arise. Following the financial crisis, when the investment hold equity is increasing but there is a gradual transition of power and period became elongated, more ratchets have been based purely on influence from one senior management team to another, different a money multiple basis than was the case beforehand when a double proportions of the value series may be issued to different individuals test was the market normal. In more recent vintages of incentive so the team who were initially responsible for taking the business plan, as hold periods have again reduced, the double hurdle has forward from its original transaction value to the first stage of made something of a comeback (although this may not necessarily success will largely enjoy the fruits of their labours – whilst the be consistent with protecting the IRR (which is more likely to be iclg to: private equity 2019 www.iclg.com 11 © Published and reproduced with kind permission by Global Legal Group Ltd, London proskauer rose llp mip – the power of incentives

incoming team who will increasingly take the burden of moving the matching the demand with the supply through to more sophisticated business further forward to hopefully higher values and to ultimate regular liquidity rounds. These may operate in part on a matched exit, will themselves enjoy a greater proportion of those later phases bargain system and in part with the investor providing some limited of growth. liquidity, with more explicit rules around the maximum percentage of any individual’s stake that can be monetised in any one round, the maximum permitted selldown during the life of an individual’s The challenge of widely held incentive plans investment and so on. In all such cases, more complex questions of securities legislation arise as the desire to create a liquidity system is One of the key questions for both the private equity investor and the effectively creating a market for the securities in question; all senior management team is how widely distributed the equity communications relating to the liquidity rounds, including from the incentive pot will be. Very different philosophies exist in respect to company, will invariably comprise invitations to make an that question with some views also impacted by reference to the investment decision and such communications will necessarily be nature of the underlying business. For a “people business” where made to a broad group of individuals who will often be located in individuals represent the revenue-generating assets of the business, multiple jurisdictions. and where those individuals are numerous, then the argument for a widely held equity incentive plan is clear. In other businesses, In addition, where shares are being offered to wider numbers, where the same dynamics do not apply, how wide to offer the careful consideration needs to be given to whether all the terms are incentive plan is often a subject of hot debate with one school of necessary and workable. For example, having a share valuation thought tending to the view that, to be meaningful and powerful, method that works for a tightly held scheme could impose incentives need to be concentrated to deliver very significant value, unbearable costs on the business in a widely held scheme if every and broadening the breadth of recipients merely has the effect of leaver can request a share valuation. It may be desirable or diluting the incentive effect for the small number of individuals who preferable to simplify the plan terms for all other than the most can really affect business performance. Tax considerations senior managers (one example being that, rather than having (including, for example, the availability of entrepreneurs’ relief for multiple leaver status, the relevant equity documents may specify individual MIP participants in the UK) may also mean that the that any leaver simply gets repaid their money invested at the issue management equity is tightly held (although the conditions for price – although adopting this approach would not be desirable in obtaining entrepreneurs’ relief were significantly tightened in France, for example, where capital gains tax treatment requires the October 2018). If management is spread over a large number of shares to carry valuation risk). jurisdictions, this can lead to further complexity and tension in the tax structuring of the MIP and its composition. It is rare for an Challenges of Complexity international plan to deliver identical value to plan recipients once local taxes are taken into account. This in turn can cause tensions in When one considers the possibility of a MIP comprising multiple the business, particularly if the workforce is highly internationally classes of shares, some with ratchet entitlements, some of which are mobile. capped, some of which are uncapped and some of which may Widely held equity incentive plans pose both administrative and comprise hurdle or growth shares, it quickly becomes apparent that structural challenges which require some additional thought (we MIP arrangements can lead to substantial complexity. Whilst share have seen widely held plans which require around 400 hours of registrars for large listed companies have developed robust tools and lawyer time per year to administer due to their size and complexity). systems to handle the administrative challenge that this may bring, By definition, there is bound to be greater fluidity in terms of both this is less common in respect of most private equity structures. joiners and leavers where the plan is widely held. In addition, the Therefore, it is for the authors of MIP arrangements to consider how, individual investment appetite of the participants in the plan may as a practical matter, day-to-day corporate actions can be made to vary significantly over the life of the plan. For example, where run smoothly including offers of new shares on a normal pre- individuals become more senior and wish to increase their stake in emptive basis. Similarly, planning and delivering an exit can the business as they feel they have more influence over driving an become more complex both as a matter of value allocation and in ultimately successful outcome. Similarly, some individuals may terms of the administration of a sale process. The blend of tax need to realise cash for their investment before an exit to meet efficiency, commercial effectiveness and administrative simplicity personal financial needs. As well as constructing a method which remains the holy grail of incentive plans, and invariably one or more allows for easy (typically electronic) communication with the wider of those concepts suffer in the pursuit of the others. body of shareholders, considering the use of nominees to limit the number of shareholders that need to be dealt with to satisfy corporate actions such as new issuances and other methods for In Conclusion

simplifying administration of such a broadly held plan, consideration also needs to be given to whether to create some It seems likely that MIP structures will become increasingly limited form of liquidity facility that allows individuals in the plan complex and bespoke over the next investment period as bidders for to rebalance their holdings from time to time. Those liquidity valuable assets seek to distinguish themselves from their offerings can be more or less structured and may be as simple as an competition. To maintain competitiveness in this context, it is ad-hoc “matched bargain” system where individuals can specify crucial that MIPs form part of the early discussions between bidders whether they wish to increase or decrease their stake and, to the and their counsel and that management teams have access to extent that mutual demand exists, the company may facilitate sophisticated advisers who can assist them with navigating through the complex and sometimes convoluted world of the MIP.

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Acknowledgments Eleanor Shanks and Rob Day would like to thank Stephen Pevsner, Matt Anson is a senior associate in the Corporate Department and Matt Anson and Polly Cullimore for their invaluable assistance and member of the Private Equity Mergers & Acquisitions Group. Matt contribution in the production of this chapter. has wide-ranging experience advising private equity sponsors on Stephen Pevsner is a tax partner and a member of the Private Funds acquisitions, disposals, management incentive schemes and has and Private Equity Mergers & Acquisitions Groups. His practice acted for a number of sovereign wealth funds on co-investment covers the broad range of corporate and individual tax advice, with matters. Matt has also represented clients in respect of a number of particular emphasis on private equity across a wide range of UK and public takeovers and take-private transactions. He spent just over a international M&A transactions, including buyout, debt and year working in the W&I market and has extensive knowledge of infrastructure asset classes. Stephen is a member of the BVCA Tax customary policy terms and the competitive landscape in the Committee and, according to Chambers UK, he is a notable transactional risk insurance market. practitioner in the corporate tax field, praised for “his ability to Polly Cullimore is a junior associate in the Corporate Department master the intricacies of tax law and understand the commercial and the latest member of the Private Equity Mergers & Acquisitions aspects of the deal”. Group in the London office.

Eleanor Shanks Rob Day Proskauer Rose LLP Proskauer Rose LLP 110 Bishopsgate 110 Bishopsgate London London EC2N 4AY EC2N 4AY

Tel: +44 20 7280 2189 Tel: +44 20 7280 2040 Email: [email protected] Email: [email protected] URL: www.proskauer.com URL: www.proskauer.com

Eleanor Shanks is a partner in Proskauer’s Corporate Department Rob Day is a partner in Proskauer’s Corporate Department and a and their Private Equity Mergers & Acquisitions Group. She advises member of our Private Equity Mergers & Acquisitions Group. Rob’s on mergers and acquisitions, joint ventures, co-investments and other practice focuses on public and private M&A, leveraged buyouts and equity investments. joint ventures, private equity and portfolio company transactions. She has advised leading private equity sponsors, other investors and His clients include asset managers, private equity houses, and global funds (including family offices and sovereign wealth funds), financial corporations advising on their strategically important transactions institutions, corporates and management teams. Amongst the across financial services, consumer, sports, media, technology and investors she has acted for are The Blackstone Group, Cerberus other sectors. European Capital, Colony Capital, CVC, EQT, First Reserve, GIC, Rob has recently advised on management incentive arrangements in Hamilton Lane, Investcorp, KSL Capital, LetterOne, Oaktree Capital, connection with: the sale by TDR Capital of ICWG, the International Round Hill Capital, Partners Group, Pamplona Capital, Schroders Car Wash Group (formerly IMO Carwash and the largest car wash REIT and Third Point. group globally) to Roark Capital; the sale by TDR Capital of Retirement Eleanor is recognised by leading rankings including The Legal 500. In Advantage to Canada Life; the sale by Warburg Pincus of Safetykleen 2016 she was named in the Financial News Top 40 Under 40 Rising to Apax Partners; and the sale by Apax Partners of Azelis, a leading Stars in Legal Services. She was also named the Most Distinguished distributor of specialty chemicals to EQT and PSP. Winner of 2015 and awarded Best Private Equity Lawyer in the Rob is consistently recognised in The Legal 500 and other leading Women in Private Equity Awards. directories.

Proskauer is a leading international law firm serving clients from offices in major financial and business centres around the globe. Our clients consider Proskauer a strategic partner to drive their business forward. We work with alternative investment managers, sovereign wealth funds, family offices, financial institutions and major corporates on their most challenging transactions. We represent a network of the leading asset managers on a global basis. We have handled deals worth over USD 94 billion in aggregate for clients in the last year and over 100 buyouts, portfolio company investments, divestitures and other significant private equity transactions as well as major strategic M&A in each of the past four years. That deal flow provides close insight into market terms and our clients’ needs. Proskauer was founded on the same bedrock values that hold true today. Hard work, mutual respect, cooperation, integrity and an unwavering dedication to client service are as integral now as when our doors first opened in 1875. We have bench strength around the world and it is our business to understand yours.

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alternative exits: legal and Structuring issues in leor landa gp-led Secondaries

Davis polk & wardwell llp oren gertner

I. Introduction II. Interest Tenders vs. Fund Recapitalizations Secondary deals led by financial sponsors (“GP-led Secondaries”) hit the $22 billion mark last year, the highest figure ever recorded.1 In broad terms, there are two distinct flavors of GP-led Secondaries: These deals, which constitute a growing subset of the $72 billion (1) a tender offer for the Existing LP’s fund interests (an “LP secondaries market,2 are drawing ever-larger commitments, with Tender”); and (2) a fund recapitalization (a “Fund Recap”). This transaction volume 38% higher in 2018 than in 2017.3 As this section provides an overview of each, and it addresses key chapter explains, GP-led Secondaries take a variety of forms; but at advantages and drawbacks of each. their core, these are transactions sponsored by general partners (“GPs”), financed primarily by secondary buyers (“Buyers”) and designed to create a liquidity option for existing investors (“Existing A. LP Tenders LPs”). Although these transactions originated as a solution for illiquidity in portfolios reaching the end of a fund’s life, GP-led In an LP Tender, the sponsor solicits offers from one or more Buyers Secondaries have evolved into a creative solution for proactive to tender for all, or a significant portion of, the Existing LP’s portfolio management. GP-led Secondaries can provide the interests. Then, with the consent of the sponsor, one investor (i.e., following benefits for GPs, Existing LPs and Buyers alike: the Existing LP seller) is essentially swapped out for another (i.e., ■ First, GP-led Secondaries can provide a liquidity option for the Buyer). The tender offer construct would typically also be Existing LPs who depend on that liquidity – for example, combined with a vote to extend the fund term and an agreement either to invest elsewhere or otherwise meet their current or between the GP and the Buyer regarding a new management fee and near-term obligations. Existing LPs who would rather carried interest arrangement. decline this liquidity option and remain invested (“Rollover With LP Tenders, the sponsor and its counsel must carefully decide LPs”) can roll over into the new structure, often on mostly whether a proposed transaction would likely be deemed a “tender status quo terms, as further described below. offer” under the U.S. securities laws or any other applicable ■ Second, GP-led Secondaries can extend the amount of time jurisdictions.4 This section explores the U.S. tender offer rules as that a GP has to realize existing assets. This realigns the they relate to private offerings, with an emphasis on the advantages investment horizon with the reality of the asset and its and drawbacks of pursuing this structure in the context of a GP-led prospects, rather than preexisting fund terms. It allows the GP to continue managing its existing assets, and to maximize Secondary. the value of such assets, while simultaneously providing “Tender offer” is not a defined term in the U.S. securities statutes or Existing LPs with the necessary liquidity. regulations. However, courts have examined the question of ■ Third, GP-led Secondaries can re-incentivize the GP with a whether and when a tender offer is deemed to have occurred by new or extended fee stream and a reset of carried interest. applying multifactor tests to the particular facts and circumstances ■ Fourth, GP-led Secondaries can be attractive for Buyers, of a given transaction.5 One frequently cited formulation was first providing an ability to diligence the assets being indirectly set forth in Wellman v. Dickinson, where the court identified the purchased and allowing the GP, who is familiar with these following factors (not all factors must be present for a court to find assets, to continue managing the assets. that a tender offer exists): A challenge that consistently arises in these situations is how to ■ whether there is an active and widespread solicitation to provide an outcome that works for all stakeholders involved. purchase the securities; Accordingly, different transaction structures have emerged, each ■ whether the solicitation is made for a “substantial with its own advantages and drawbacks. percentage” of the securities; This chapter proceeds in two parts. First, it explores those ■ whether the terms of the offer are firm and not negotiable; transaction structures in broad terms, including certain legal ■ whether the offer is open only for a limited time period; considerations raised. Second, it discusses the myriad conflicts of ■ whether the offer is at a premium to prevailing market prices; interest inherent in all GP-led Secondaries with some suggestions ■ whether the offer is contingent on the tender of a fixed for conflict mitigation. number of securities; and ■ whether there is pressure on the existing security holder to sell.

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Based on an evaluation of these factors, if the sponsor and its Finally, there are a couple of complicating factors that sponsors counsel believe that the transaction could be deemed a tender offer, should keep in mind when considering whether to pursue an LP then the private tender offer rules must be complied with, including Tender. First, the sponsor may wish to negotiate additional terms the following: with the Buyer. For example, the sponsor could seek to extract a ■ the offer must be held open for at least 20 business days; higher management fee or supplemental carried interest. This may ■ if the percentage of interests being offered, or the be achieved through a side letter or by funneling the Buyer’s consideration being sought, is increased or decreased, then (i) investment through a feeder vehicle. Second, the Buyer may agree notice of such increase or decrease must be provided, and (ii) to new capital commitments for follow-on investments and Existing the offer must remain open for at least 10 business days from LPs that roll over may be given the option to participate in the the notice date; additional investments on pari passu terms with the Buyer. These ■ the parties must promptly pay the consideration or return the features can lead to meaningful complications, as described further tendered securities, upon termination or withdrawal of the below. offer;

■ the offeror must give notice of the extension of a tender offer, B. Fund Recaps which must include disclosure of the amount of securities already tendered; and What LP Tenders provide in terms of speed and simplicity, they lack ■ the issuer must disclose its position with respect to the in terms of flexibility. Fund Recaps, on the other hand, are bespoke offeror’s tender offer.6 transactions – and importantly, Fund Recaps can be limited to one, Additionally, several anti-fraud and anti-manipulation provisions or a subset of, the fund’s assets. This section begins with the still apply (e.g., Section 14(e) of the Securities Exchange Act of common features of Fund Recaps before exploring a couple of 1934). common structures, which are illustrated by example structure Several additional rules, which arise in the context of public tender charts. Finally, it considers the advantages and drawbacks of offers, do not apply to private tender offers. For example, such pursuing a Fund Recap, which generally reflect a reverse image of offers need not comply with the proration, best price and all holders’ the LP Tender. rules that apply to offers to purchase public securities. Non-U.S. Fund Recaps generally involve the sale or contribution of all, or a tender offer rules may also apply, and accordingly, sponsors should portion of, the assets of the existing fund (the “Existing Fund”) to a consult with local counsel when a particular deal involves non-U.S. new legal entity (the “Continuation Vehicle”). The Continuation buyers or sellers. Vehicle is capitalized by the Buyer, and it is managed by the There are a number of advantages to pursuing the LP Tender Existing Fund’s sponsor. Given their bespoke nature, Fund Recaps structure in a GP-led Secondary. A tender offer is the simplest form provide Buyers with an opportunity to negotiate extensive new of GP-led Secondary, and accordingly, it is often the fastest option. terms and invest incremental capital, which can fund follow-on The transferee’s identity is pre-approved by the sponsor, and investments in existing assets or new investments in complementary diligence is primarily focused on the price of the fund’s assets. assets. Given the fact that the fund’s assets are not being transferred, there Fund Recaps present two options for Existing LPs: they can “cash may be no need to diligence the transfer restrictions that may apply out” of the existing fund structure; or they can roll over into the to such assets. Additionally, there are typically fewer complicated Continuation Vehicle on the basis of the Existing Fund’s terms renegotiations – for example, LP Tenders may not require the (although, typically with a longer term). Under the latter option, it formation of a buyer vehicle and may not trigger carry is important that sponsors preserve, to the extent possible, the status crystallization events. quo for Rollover LPs, especially with respect to economic terms. There are also some drawbacks to pursuing an LP Tender. First, it There are a number of advantages to pursuing a Fund Recap. First, does not provide the same opportunities for custom tailoring the Fund Recaps are more flexible than LP Tenders – for example, they deal to fit the Buyer’s specific needs – for example, it can be provide the ability to surgically carve-out an asset, or assets, from difficult to find Buyers willing to purchase exposure to the fund’s the transaction, and they allow the GP and the Buyer to negotiate entire portfolio or assume fund interests from existing investors new terms through the Continuation Vehicle’s fund documents. with a variety of tax profiles. Second, there is no actual realization Second, to the extent the Existing Fund is in “carry mode” a Fund event for the assets – in other words, interest tenders do not produce Recap can crystallize carried interest for the sponsor with respect to carried interest distributions to the GP or crystallization of clawback the Existing LPs who elect to sell (“Selling LPs”), all or a portion of liabilities from the GP. And third, sponsors and their counsel must which may be rolled over to the Continuation Vehicle. Additionally, carefully evaluate – and potentially navigate – certain tender offer the transaction may de-risk, or shift the economic burden of, rules that may apply, as discussed above. existing clawback obligations.

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Figure A. Single Asset Sale

Transaction Summary: This transaction represents a Fund Recap structure for a single asset sale. Prior to the Fund Recap, Fund A, which is managed by Sponsor A, holds interests in Portfolio Companies A, B and C. In the Fund Recap, Portfolio Company B is carved out of Fund A and placed in a Continuation Vehicle (“Fund A-II”). Sponsor A continues to manage Portfolio Company B, through Fund A-II, and the deal is capitalized by the Buyers. LPs from Fund A are given an option either to receive liquidity (i.e., proceeds from Fund A’s sale of Portfolio Company B) or roll over into the Continuation Vehicle, which provides LPs with continued economic exposure to the performance of Portfolio Company B.

Figure B. Whole Portfolio Sale

Transaction Summary: This transaction represents a Fund Recap structure for a whole portfolio sale. Prior to the Fund Recap, Fund A, which is managed by Sponsor A, holds interests in Portfolio Companies A, B and C. In the Fund Recap, each of the Portfolio Companies is placed in a Continuation Vehicle (“Fund A-II”). Sponsor A continues to manage the whole portfolio, through Fund A-II, and the deal is capitalized by the Buyers. LPs from Fund A are given an option either to receive liquidity (i.e., proceeds from Fund A’s sale of the Portfolio Companies) or roll over into the Continuation Vehicle, which provides LPs with continued economic exposure to the whole portfolio.

There are also some drawbacks to pursuing a Fund Recap. First, III. Conflicts of Interest these custom-tailored transactions are more complex than LP Tenders – for example, Fund Recaps require organizing a Continuation Vehicle structure and negotiating a new suite of fund A. Potential Conflicts documents. Second, these negotiations are typically more extensive than LP Tenders, as they present more opportunities to reset fund A number of potential conflicts of interests exist in all GP-led economics and governance. Third, Fund Recaps involve the actual Secondaries. First and foremost, there is the selling price conflict. movement of assets. Therefore, more extensive due diligence is As the GP of the Existing Fund, the sponsor owes fiduciary duties to typically conducted – for example, legal inquiries around transfer Existing LPs, with a goal of price maximization. Here, the restrictions and change of control are common. Finally, Fund opportunity to crystallize carry or mitigate a potential GP clawback Recaps require the sponsor to sit on both sides of the transaction aligns the sponsor’s interest with that of the Selling LPs’ goal of (i.e., the Existing Fund and the Continuation Vehicle) in a more price maximization. prominent manner (although the fundamental conflicts are similar to those found in LP Tenders as well). Accordingly, such transactions At the same time, the sponsor generally receives new economics are more susceptible to potential conflicts of interest, which from the Continuation Vehicle, which incentivizes the sponsor to sponsors and their counsel must carefully identify and mitigate. The negotiate for a lower price in order to increase the likelihood of following section addresses such conflicts and potential mitigation closing the transaction. Additionally, if the Existing Fund is not in techniques. “carry mode”, resetting the carry, through the Continuation Vehicle to the purchase price, incentivizes the sponsor to negotiate for a

lower price. Finally, as the GP of the Continuation Vehicle, the

16 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Davis polk & wardwell llp issues in gp-led Secondaries sponsor is usually required to roll over most, if not all, of its equity extent possible, vis-à-vis the information provided to the Buyer. In investment. Therefore, the sponsor typically is not directly affected doing so, the sponsor should consider whether and how to disclose: by the purchase price because the sponsor is a fiduciary to both the ■ financial information relating to the fund’s remaining assets; Existing Fund and the Continuation Vehicle; these conflicts do not ■ any pricing discount, including to the most recent valuation, offset one another, but rather, the sponsor has two independent reflected in the proposed transaction and any actual or conflicts, each of which must be resolved. expected material changes;9 In addition to the selling price conflict, sponsors and their counsel ■ the sponsor’s conflicts and the actions taken to mitigate such should examine the following deal features, which tend to give rise conflicts (including information relating to the price to additional conflicts of interest that require careful attention and discovery process); mitigation: ■ the key terms of the transaction, such as the economics the ■ Extending term. sponsor is receiving (e.g., new management fee, new carry or resetting carry, crystallization of carry, rollover carry, ■ Resetting carry. allocation of expenses); ■ Realizing carry. ■ the allocation of transaction-related fees and expenses ■ “Converting” carry into equity or an “equity-like” between the Buyer, the sellers, the Rollover LPs and the GP;10 instrument. ■ all relevant fees and expenses, including broken-deal ■ Additional management fee from the Continuation Vehicle. expenses and the impact of fees on carry; and ■ “Stapled” deals (i.e., where Buyers’ participation in the GP- ■ with respect to Rollover LPs, the sponsor should also disclose led Secondary is conditioned on a pledge of additional fresh the key changes vis-à-vis their existing terms and aim to capital to the firm’s latest fund).7 provide a status quo option, to the extent practical. To that ■ Creating longer relationships with Rollover LPs. end, Rollover LPs should not be compelled to participate in ■ Providing a liquidity option for Existing LPs. any additional follow-on capital commitments and any resulting dilution of Rollover LPs should be done on a fair ■ Setting up a mark for illiquid investments. and reasonable basis. ■ Incurring expenses, including broken-deal expenses. The election process should be held open for a period of reasonable ■ Avoiding out-of-pocket exposure for accrued clawback. duration – ILPA suggests 30 calendar days (or 20 business days), There are various ways to mitigate these conflicts. The following which is in line with the private tender offer requirements.11 To the section describes several “best practices” with respect to conflicts extent that the Buyer received access to portfolio management, the mitigation, although it is intended to be illustrative rather than sponsor should consider whether LPs should receive the same exhaustive. access. As a conflict mitigation tool, it is helpful if a majority of Existing LPs either sell or approve the transaction.

B. Best Practices and Conflict Mitigation IV. Conclusion Sponsors should engage with LPs and the LPAC early in the process, in order to provide a rationale for the transaction, as well as As this chapter has explained, GP-led Secondaries have become an any strategic alternatives considered. In doing so, the sponsor important fixture in the private equity market for reasons favorable should consider sensitivity around disclosing the names of potential to both GPs, LPs and Buyers alike. While this growing subset of the Buyers and the appropriate timing for such disclosure. Generally, market continues to mature, sponsors and their counsel should according to ILPA recommendations,8 the appropriate lead time for understand the various potential structures at their disposal and the a GP-led Secondary transaction should be no less than six months important legal and regulatory issues at play, particularly with before expiration of the term of the fund or the fund extension, as respect to conflicts of interest. applicable. To alleviate concerns around the selling price conflict, sponsors Endnotes routinely engage an independent financial advisor to conduct a strategic bidding process and arrive at a valuation range, particularly 1. Chris Cumming, GP-Led Secondaries Hit Record $22 Billion when the transaction involves a significant number, or size, of Last Year, WSJ PRo (Feb. 15, 2019). assets. In some cases, the GP may decide that the independent 2. Id. financial advisor, which is typically unaffiliated with the financial 3. Id. adviser running the bidding process, should render a fairness opinion. 4. Not all repurchases or third-party secondary purchases of private company stock are deemed tender offers for purposes Another route to mitigate the conflicts of interests relating to GP-led of the U.S. securities laws. Instead, many transactions are Secondaries is to seek consent from the Existing Fund’s LPAC. simply individually negotiated transactions. When seeking LPAC consent, sponsors generally include a 5. See, e.g.: SEC v. Carter Hawley Hale Stores, Inc., 760 F.2d description of the bidding process, including details regarding the 945, 950–52 (9th Cir. 1985) (issuer’s repurchase of shares on final two or three highest bids, along with other key terms of the open market did not constitute tender offer under multifactor transactions, including proposed expense allocations, while test); Polinsky v. MCA, Inc., 680 F.2d 1286, 1291 (4th Cir. highlighting key conflicts. Commonly, the LPAC will not approve 1982) (open-market and privately negotiated purchases did the transaction or opine on the purchase price, but rather merely not constitute tender offer under multifactor test); University provide a waiver of the conflicts of interests. Finally, as mentioned Bank and Trust v. Gladstone, 574 F. Supp. 1006, 1010–11 (D. before, sponsors frequently provide each of the Existing LPs with Mass. 1983) (private solicitations did not constitute tender the option to elect whether or not to participate in the transaction. In offer under multifactor test); Zuckerman v. Franz, 573 F. Supp. 351, 358 (S.D. Fla. 1983) (cash merger proposal did the election process, the sponsor should aim for transparency and not constitute tender offer under multifactor test); Astronics information parity (including access to data rooms, etc.), to the Corp. v. Protective Closures Co., Inc., 561 F. Supp. 329, 334– iclg to: private equity 2019 www.iclg.com 17 © Published and reproduced with kind permission by Global Legal Group Ltd, London Davis polk & wardwell llp issues in gp-led Secondaries

36 (W.D.N.Y. 1983) (private sale held not likely to constitute 8. “ILPA” is the Institutional Limited Partners Association, a tender offer under multifactor test); Ludlow Corp. v. Tyco trade organization for institutional limited partners in private Labs, Inc., 529 F. Supp. 62, 67 (D. Mass. 1981) (open-market investment funds. In April 2019, ILPA released and privately negotiated purchases did not constitute tender recommendations on the practice of GP-led Secondaries. offer under multifactor test); Wellman v. Dickinson, 475 F. The guidance is available at https://ilpa.org/wp-content/ Supp. 783, 823–26 (S.D.N.Y. 1979) (privately negotiated uploads/2019/04/ILPA-Guidance-on-GP-Led-Secondary- purchases constituted tender offer under multifactor test), Fund-Restructurings-Apr-2019-FINAL.pdf. cert. denied, 460 U.S. 1069 (1983); Hoover Co. v. Fuqua 9. For example, in September 2018, Veronis Suhler Stevenson Indus., Inc. [1979–1980 Transfer Binder] FED. SEC. L. REP. (“VSS”) settled with the SEC over failing to disclose its latest (CCH) 97,107, AT 96,150 (N.D. Ohio 1979) (private valuation during a GP-led Secondary process, in which the solicitations constituted tender offer under multifactor test). net asset value of the fund and the EBITDA of the fund’s two But see Hanson Trust PLC v. SCM Corp., 774 F.2d 47, 57 (2d assets had risen subsequent to the offer letter furnished to Cir. 1985) (criticizing multifactor test as not consistently Existing LPs. See VSS Fund Management LLC, Investment determinative of whether activity constitutes tender offer); Advisers Act Release No. 5001 (Sept. 7, 2018). and Brascan Ltd. v. Edper Equities Ltd., 477 F. Supp. 773, 10. ILPA notes that, in cases where the GP clearly benefits from 791 (S.D.N.Y. 1979) (finding multifactor test undesirable either additional fee revenue or through a stapled because of test’s unpredictability). commitment, the GP could consider sharing some portion of 6. The issuer (i.e., the GP) may take the view that its position on the transaction costs. See supra at 8. the offer is neutral, and that each Existing LP should make its 11. Id. own investment decision, which can help mitigate potential conflicts, as discussed further in Part III. 7. In 2015, the U.S. Securities and Exchange Commission (the Acknowledgment “SEC”) announced it would be examining such “staple” transactions with heightened scrutiny. These transactions are The authors gratefully acknowledge Davis Polk associate Trevor beneficial for sponsors because they provide additional Kiviat for his assistance in the preparation of this chapter. investors in the sponsor’s new fund, attracting fresh dry powder and a new fee stream. In that regard, the SEC is concerned that sponsors may tend to undervalue the secondary transaction sale price, in order to make the deal more attractive to the Buyer, at the expense of the Selling LPs. See Dawn Lim, SEC Zeroing in on Stapled Secondary Deals, WALL ST. J. (Jun. 18, 2015).

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Leor Landa Oren Gertner Davis Polk & Wardwell LLP Davis Polk & Wardwell LLP 450 Lexington Avenue 450 Lexington Avenue New York New York NY 10017 NY 10017 USA USA

Tel: +1 212 450 6160 Tel: +1 212 450 4227 Email: [email protected] Email: [email protected] URL: www.davispolk.com URL: www.davispolk.com

Mr. Landa is a partner in Davis Polk’s Investment Management/Private Mr. Gertner is counsel in Davis Polk’s Corporate Department, Funds Group. He advises a wide range of clients on the formation and practicing in the Investment Management Group. His practice operation of private investment funds, including private equity funds, includes structuring and offering of domestic and international private hedge funds, credit funds, secondary funds, real estate funds, funds- equity funds and other alternative investment funds, such as buy-out of-funds and advisory platforms. He also regularly provides regulatory funds, debt funds, real-estate funds, funds-of-funds and managed and compliance advice to his private fund clients. accounts. In addition, he has worked on the organization and documentation of fund sponsors’ internal firm arrangements and a He advises clients on secondary, private equity and public market variety of transactional matters, including secondary transactions. transactions as well as acquisitions of investment advisers. Mr. Gertner provides regulatory and compliance advice applicable to Mr. Landa also represents several large institutional investors that the formation, operation and investment activities of private funds, invest in private funds. including compliance with the U.S. Investment Advisers Act and the Representative private fund clients have included Blackstone Strategic U.S. Investment Company Act. Partners, Credit Suisse, Avenue Capital, Oaktree Capital, Mudrick Capital, Hitchwood Capital, Perella Weinberg Partners, Reverence Capital, Czech Asset Management, Citadel, Fore Research, Morgan Stanley and J.P. Morgan.

Davis Polk & Wardwell LLP (including its associated entities) is a global law firm with offices strategically located in the world’s key financial centres. For more than 160 years, our lawyers have advised industry-leading companies and global financial institutions on their most challenging legal and business matters. Davis Polk ranks among the world’s preeminent law firms across the entire range of its practice, which spans such areas as capital markets, mergers and acquisitions, credit, antitrust and competition, litigation and enforcement, private equity, tax, financial regulation, investment management, insolvency and restructuring, executive compensation, FinTech, intellectual property and technology, real estate, and trusts and estates. Davis Polk has more than 800 lawyers in offices located in New York, Menlo Park, Washington DC, São Paulo, London, Paris, Madrid, Tokyo, Beijing and Hong Kong. For more information, please visit: www.davispolk.com.

iclg to: private equity 2019 www.iclg.com 19 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 5

eu Sustainable Finance rules Start to affect private equity

British private equity & venture capital association (Bvca) tom taylor

“The Task is Large, the Window of Carney says of climate finance policy that “the task is large, the window of opportunity is short, and the stakes are existential”, it is Opportunity is Short, and the Stakes are relatively safe to assume that regulatory change is coming. This Existential” article sets out the key areas, at EU level, where politics and policy

are beginning to harden into concrete regulatory changes that will The integration of environmental, social and corporate governance affect private equity firms. (ESG) issues in private equity reporting and investment processes is

not a new phenomenon. The BVCA published its first Responsible Investment Guide back in 2012, and the UNPRI followed suit in The Foundations of EU Sustainability Policy

2014, with its guidance on Integrating ESG in Private Equity. These are just two of many milestones marking ESG’s steady The EU believes the financial sector is key to the world’s efforts to progress towards mainstream industry practice over the past decade reach the climate and sustainability targets laid down in 2016’s Paris or more. Now, in early 2019, government intervention is beginning Agreement and the UN Sustainable Development Goals. It credits to pick up the pace. the financial services industry with the ability to: re-orient capital towards more sustainable businesses; encourage a more sustainable Some of the new legal and regulatory activity has been domestic. way of financing growth; and help create “a low-carbon, climate The UK Government has recently pursued a more ambitious resilient and circular economy”. programme of policy intervention, delivered in parallel across the “E”; the “S”; and the “G”. Rules governing the “G” are evolving via The EU’s sustainable finance policy is based largely on the a range of UK corporate governance reforms (2018 was a bumper European Commission’s action plan on sustainable finance, which year for consultations in that space) aimed at re-building public trust itself comes from a set of recommendations by the EU’s High-Level in business after the financial crisis and some high-profile corporate Expert Group on Sustainable Finance that began work in 2016. The failures. These reforms tend to be more relevant to investors in action plan covers many areas of financial services, and has public companies, partly because the governance of unlisted spawned a wide-ranging package of legislative proposals that the companies is already one of private equity’s recognised strengths. Commission announced in May 2018. The “S”, too, has recently drawn increased attention from UK For private equity, two key elements of the 2018 package took a policymakers, leading to new legal frameworks targeting various clearer form in April 2019. These are: a new regulation on social issues like modern slavery and the gender pay gap. Finally, sustainability-related disclosures (the “Disclosure Regulation”); and the “E” has witnessed the ‘replacement’ of the Carbon Reporting some targeted technical advice from ESMA on how the AIFMD and Commitment with the Streamlined Energy and Carbon Reporting MiFID II regulatory regimes should be amended in order to framework. integrate “sustainability risks” and “sustainability factors” into Increasingly though, it is the co-ordinated action of international AIFMs’ and MiFID firms’ businesses. policy actors relating mostly to the “E” and, to a lesser extent, the “S”, that are bringing regulation of the full trinity of ESG (or The Disclosure Regulation “sustainable finance”) to the fore. The policy objectives of the 2016 Paris Agreement and UN Sustainable Development Goals (SDGs) The Disclosure Regulation reached political agreement in April are beginning to crystallise into hard rules, such as the FCA’s 2019. It imposes obligations on regulated firms to: (a) disclose Climate Change & Green Finance proposals (consulted on in publicly how they integrate sustainability risks (ESG events that January 2019), and the first elements of the EU’s sustainable finance could adversely affect the value of an investment) in their processes; reforms (approved by the European Parliament in April 2019). The and (b) ensure investors receive meaningful information on how G20 has added parallel impetus, specifically on climate- sustainability risks could affect the value of their investments and transparency, via the Financial Stability Board’s Task Force on the performance of any sustainability-focused investments. The aim Climate-related Financial Disclosures (TFCD), references to which is to force consistent disclosures, which should allow investors to now commonly adorn government consultations and public debate. make more effective ESG-based investment decisions. Perhaps one of the surest examples of international regulatory co- Broadly, the Disclosure Regulation will oblige AIFMs, MiFID firms operation on sustainability is the emergence of the Network of and EuVECA managers to: Central Banks and Supervisors for Greening the Financial System (NGFS), established in 2017. When the Bank of England’s Mark

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(i) Publish sustainability information on their website, including Private equity firms, particularly those that have created their own an explanation of their policies on the integration of bespoke ESG procedures, will be pleased that ESMA’s proposals are sustainability risks in their processes, and of how their principles-based rather than prescriptive. This is partly a practical remuneration policies are consistent with the firm’s response from ESMA to the fact that regulation of ESG and integration of sustainability risks. Firms will be required to sustainability is in its infancy, remains hampered without a common keep this information up-to-date, and if the information taxonomy and reliable data, and is evolving from several sources at changes, to include a clear explanation of the reason for the change. once. For ESMA to be too prescriptive at this stage would be premature, although it has not ruled out more detailed Q&A in due (ii) Publish information on whether the firm considers the course. principal adverse impacts of investment decisions (or investment advice) on ESG matters, respect for human rights, Smaller firms in particular, will be reassured by ESMA’s anti-corruption and bribery. This applies on a comply-or- commitment to the proportionality principle, meaning the measures explain basis, and proportionately, i.e. the requirement is firms will have to implement to meet any new requirements are subject to individual firms’ size, nature, scale of activities and likely to vary according to the size (and resources) of individual the types of financial products they deal with. The option to firms. explain (rather than comply) will cease 18 months after the Disclosure Regulation comes into force for firms (or firms within groups) that have 500 or more employees. “Organisational requirements” of AIFMs (iii) Include sustainability-related risks in pre-contractual disclosures (e.g. AIFMD Article 23 disclosures in PPMs) and A number of ESMA’s proposals would affect AIFMs’ internal ongoing reporting to investors, including pre-contractual organisation. Article 22 (Resources) of the AIFM Delegated disclosure of how the firm integrates sustainability risks into Regulation would make AIFMs “take into account the necessary its management or advisory processes, and the likely impact resources and expertise for the effective integration of sustainability of sustainability risks on financial returns. Again, this is on a risks2” when considering whether they had sufficient people and comply-or-explain basis (with the exception of sustainability- focused products, see below). skills to comply. ESMA also suggests, under Article 57 (General requirements), that AIFMs should “take into account sustainability (iv) Disclose further information in relation to sustainability- risks” when complying with existing requirements on decision- focused financial products, including: (a) publicly disclosing a description of the sustainability objective of the product and making, training, internal controls, reporting and record keeping. methodologies used to assess it (which raises financial BVCA member firms were concerned that these changes could lead promotion issues); and (b) disclosing the sustainability AIFMs to conclude that they needed to hire a dedicated impact of the product in periodic reports. These disclosure sustainability expert(s), and that sustainability risks might be obligations will be subject to detailed requirements and elevated above other types of risk. One cumulative effect of this, as methodologies (to be developed in future regulatory technical well as imposing potentially unmanageable burdens on smaller standards). firms, could have been to separate the consideration of sustainability Much of the detail regarding the content, methodology and risks from other types of risk, rather than integrating ESG more presentation of the new sustainability disclosure requirements will holistically within the investment process. be set out in future technical standards after the regulation comes The risk of sustainability becoming compartmentalised in this way into force. The regulation itself should apply from 15 months after has receded because ESMA’s final advice explicitly states that firms its publication in the Official Journal of the EU, which should occur should not have to hire or designate a specific individual (e.g. a later this year. Chief Sustainability Officer) “at this stage”. Its proposals would instead leave “senior management” collectively responsible for Proposed Amendments to AIFMD integrating sustainability risks and ensuring that individual firms had, as a unit, the skills, knowledge and expertise to manage those ESMA delivered a report (30 April 2019), at the request of the risks. This is particularly welcome news for small and mid-sized Commission, on how the AIFMD Level 2 provisions (the AIFM firms that may not have the resources to hire a dedicated Delegated Regulation1) could be amended in order to promote sustainability expert, but also for the market as a whole, given sustainable finance. The report covers AIFMs’ organisational concerns around the size of the available ESG talent pool. It may requirements, operating conditions and risk management processes. also reduce the likelihood of firms seeing ESG issues as part of a The 2019 EU elections will have altered the Commission’s political mere box-ticking exercise. makeup by the time it reacts to ESMA’s advice, and there is no guarantee that the Commission will fully agree with the regulator’s “Operating conditions” for AIFMs approach. However, the report gives a strong indication of the direction of travel. To address sustainability considerations raised by conflicts of interest, ESMA has proposed a new recital to the AIFM Delegated ESMA’s general approach Regulation. This would require AIFMs to consider what conflicts “may arise in relation to the integration of sustainability risks” as ESMA’s proposals reflect the Disclosure Regulation. The suggested part of their general conflict identification processes. Following amendments connect closely with it, particularly via key definitions industry feedback, the proposals give examples of where such as “sustainability risks” and “sustainability factors”, and sustainability conflicts may arise,3 although it remains unclear ESMA calls for any changes to AIFMD and MiFID to apply from whether this would expand conflict management beyond AIFMs’ the same date as the Disclosure Regulation. This reflects the existing systems. ESMA has also invited the Commission to avoid broader policy aims of encouraging convergence and avoiding giving “excessive prominence to conflicts arising in relation to duplicative or conflicting rules, a common industry concern as Sustainable Finance over other sources of conflicts of interest”, various sustainability regimes develop in the EU and elsewhere. which again accords with industry feedback. iclg to: private equity 2019 www.iclg.com 21 © Published and reproduced with kind permission by Global Legal Group Ltd, London Bvca eu Sustainable Finance rules and private equity

ESMA’s report proposes sustainability-driven changes to the rules organisational requirements) would simply require firms to “take governing due diligence on fund investments, and an additional into account” ESG considerations as part of their internal operations paragraph under Article 18 (Due diligence): when providing investment services to clients (or establishing risk “5. AIFMs shall take into account sustainability risks and, management procedures under Article 23). Helpfully, following where applicable, the principal adverse impact of investment industry feedback, firms would only be obliged to consider ESG decisions on sustainability factors when complying with the considerations “where relevant”. The proposed amendments to the requirements set out in [existing due diligence rules]. Where product governance rules, though less important for private equity applicable, AIFMs shall develop engagement strategies firms, on the whole, continue the themes of flexibility, proportionality including for the exercise of voting rights, where available, and relevance. with a view to reducing the principal adverse impact of investee companies on sustainability factors.” It is clear from ESMA’s accompanying narrative that it would The Future

expect firms to take a principles-based approach to integrating sustainability risks and factors into due diligence processes “at this The industry can take some reassurance from the current landscape stage”. ESMA expressly rejected calls from some quarters to of EU regulatory change in this area. It seems possible that private provide more detailed guidance on how due diligence requirements equity fund managers and investors, in the medium term at least, should be applied in practice, and feels it is clear that firms could may retain much of their current freedom to agree amongst apply proportionality. Again, the report does not exclude more themselves on how sustainability factors should be integrated into granular rules in the future, and the BVCA will continue to monitor investment and reporting processes (subject to upcoming technical this closely. standards). This is important, given that different fund managers have different internal organisational structures, investors, investment strategies, philosophies and geographical outlooks. AIFMs’ risk management policies However, ESMA will increasingly expect firms to show they are considering sustainability issues, and to disclose enough ESMA’s technical proposals on risk management simply state that information to allow investors to shop around on the basis of ESG sustainability risk should feature on the list of risks AIFMs are performance, should they wish to (and should reliable data be required to manage under Article 40 of the AIFM Delegated available). There is also political consensus within the EU that Regulation. This approach accords with BVCA members’ feedback sustainable finance should remain a political priority for the during consultation and should allow firms to continue integrating foreseeable future. Further change is therefore close to inevitable. the consideration of ESG factors in holistic ways that fit each firm’s individual, existing investment strategies, processes and operational infrastructure, rather than forcing a drastic structural re-think or Endnotes encouraging AIFMs to view compliance as an ineffective box- ticking exercise (at least for now). Interestingly, ESMA 1. Commission Delegated Regulation (EU) 231/2013. acknowledges that there are significant “operational challenges” for 2. “Sustainability risks” are defined in the European firms in securing reliable sustainability data, which is notoriously Parliament’s final position on the Disclosure Regulation as hard to come by, but believes that firms should be able to use “an environmental, social or governance event or condition proportionality to comply, for example in the current environment that, if it occurs, could cause an actual or a potential where reliable sustainability information is relatively scarce. material negative impact on the value of the investment arising from an adverse sustainability impact”.

3. “The identification process should include, for example, Similar Principles Lie Behind ESMA’s conflicts arising from remuneration or personal transactions Proposed Amendments to MiFID II of relevant staff as well as any sources of conflicts that could give rise to greenwashing, misselling, misrepresentation of Unsurprisingly, ESMA has taken much the same approach for investment strategies or churning. Consideration should MiFID firms. The regulator proposes a flexible, principles-based also be given to conflicting interests between funds with different investment strategies managed by the same AIFM as and proportionate approach to integrating sustainability risks and well as situations where there are other business- factors into MiFID firms’ conflicts of interest and risk management relationships with investee companies, conflicting group procedures, whilst leaving the door open to more detailed interests, investments in entities with close links or similar requirements in the future, via regulatory Q&A. circumstances” (ESMA’s final report on integrating ESMA’s advice on amending the MiFID II Delegated Regulation4 is sustainability risks and factors in the UCITS Directive and limited to firms’ organisational requirements and the product the AIFMD). governance rules. The proposed changes to Article 21 (General 4. Commission Delegated Regulation (EU) 2017/565.

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Tom Taylor BVCA 5th Floor East, Chancery House 53–64 Chancery Lane London, WC2A 1QS United Kingdom

Tel: +44 20 7492 0400 Email: [email protected] URL: www.bvca.co.uk

Tom Taylor manages the legal and regulatory policy affairs of the British Private Equity and Venture Capital Association (BVCA). He joined the BVCA in 2017 from the private real estate funds department of international law firm CMS, having previously worked as a Knowledge Lawyer at Nabarro, and a private equity fund formation Solicitor at SJ Berwin.

The British Private Equity & Venture Capital Association (BVCA) is the industry body and public policy advocate for the private equity and venture capital industry in the UK. For more than three decades we have represented the industry and delivered authoritative research and analysis, proprietary publications, specialist training, topical conferences and best practice standards. Our membership comprises more than 700 influential firms, including over 300 private equity and venture capital houses, as well as institutional investors, professional advisers, service providers and international associations. We work together to provide capital and expertise to growing businesses, to unlock potential and to deliver enhanced returns to the millions who directly and indirectly invest in our industry.

iclg to: private equity 2019 www.iclg.com 23 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 6 australia Divesh patel

Johnson winter & Slattery andy milidoni

1 Overview and TPG’s takeover of Greencross. According to the AIC, the volume of PE-backed bids for ASX-listed companies is the highest since 2006. 1.1 What are the most common types of private equity transactions in your jurisdiction? What is the current 1.2 What are the most significant factors encouraging or state of the market for these transactions? Have you inhibiting private equity transactions in your seen any changes in the types of private equity jurisdiction? transactions being implemented in the last two to three years? Factors encouraging investment include low interest rates and the low Australian dollar. This is coupled with recent data published by Buyouts constitute the most common type of private equity (PE) Cambridge Associates showing the Australian PE industry transaction in Australia, with Australian buyout funds accounting performing as well as their North American and European for more than six times the assets under management (AUM) of counterparts (and slightly ahead of developed Asia) over a 20-year growth, balanced, co-investment, direct secondaries and turnaround sample, having delivered an annualised return of 13% over that funds combined. Buyouts generated 79% of total new fund period. commitments raised for PE and venture capital in 2018. Factors inhibiting investment include intense competition for value The current high levels of dry powder amongst PE funds have not investments, with high-profile figures from the Future Fund and been seen since December 2011. The Australian Investment Bain & Company recently commenting that the Australian PE Council (AIC) recently reported that investment activity rebounded industry may be peaking. in 2018, with the number of buyout deals slightly up (to 75 for the year) and aggregate value up a sizeable 89% (to $12.5 billion) compared with 2017, which had the second lowest number of 1.3 What trends do you anticipate seeing in (i) the next 12 transactions in the previous 10 years. months and (ii) the longer term for private equity transactions in your jurisdiction? There has also been a slight recovery in the aggregate value of exits completed, from $8.1 billion in 2017 to $9.2 billion in 2018. Fewer PE-backed IPOs were also recorded than in previous years, with PE is expected to be a significant contributor to Australian M&A only nine recorded in 2018 and four in 2017 (with all nine 2018 transactions in 2019. This is notwithstanding the fact that the local IPOs finishing the year lower than their listing prices). PE managers market is under-represented in terms of PE activity, which typically often run a “dual-track” exit process, but are more commonly opting accounts for about 15% of M&A activity (compared to 30% in more for trade sale exits, culminating in a record 73% of buyout exits established markets). conducted by way of trade sale in 2018. Given the high levels of dry powder amongst PE funds and intense The last two or three years have also seen more co-investment competition for value investments in private companies, we opportunities being sought by superannuation (pension) and anticipate public-to-private bids becoming more prevalent. PE sovereign wealth funds. These opportunities prove attractive to managers are expected to seek out bilateral transactions for assets, such funds which have the bandwidth and experience to be involved rather than competing with their contemporaries in auction in the management of such investments, while offering exposure to processes in order to provide alternative forms of investment in the PE sector and limiting the management and performance fees attractive businesses through private credit or special situation that would otherwise be imposed. From the perspective of PE funds. funds, this reduces the need for “club deals” with other PE funds for Until IPO markets open up again, we anticipate that the low larger acquisitions and gives small- and mid-cap PE funds exposure proportion of IPO exits (comprising just 6% of all PE exits in 2018) to larger deals than would normally be available to them. Recent will continue. high-profile examples of such co-investments include Warranty & indemnity (W&I) insurance policies are commonplace AustralianSuper teaming up with BGH Capital on its bids for ASX- in Australia but are tending toward more extensive exclusions (see listed companies, Healthscope and Navitas. question 6.4 below), thereby limiting coverage and driving Similar large take-private transactions have featured prominently in counterparties to look for other forms of contractual protection for recent times, with other notable examples being EQT Infrastructure’s those excluded matters. recently aborted bid for Vocus Group, KKR’s acquisition of MYOB

24 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London hc gnrly a: i rsrcin o vtn rgt; (ii) rights; voting on (iii) mayinvolvearatchetonexit. restrictions and restrictions; (i) transfer and requirements acquisition compulsory has: generally equity, ordinary which of class separate a and for shareholders subscribing loans) management shareholder institutional potentially (and with shares ordinary equity, holding commonly ordinary most for management subscribe and investors institutional Both HoldCo level. at team management and fund PE the structural of interests equity the below positioned stack the of entity provides middle the being level, FinCo also at in structure coming funding with group, the of financiers the “stack” for subordination three-tiered The for themanagementteam. achieved be integrity should criteria to incentive equity subject meeting and regimes, companies group the to available be should repayments debt on interest of deductibility the companies: tax group is structure acquisition selected the efficiency. This is both from the perspective of the PE fund and the for drivers the of One the and (“FinCo”) level second the at acquisition beingmadebytheFinCo’s subsidiary(“BidCo”). in coming debt bank taking management and “TopCo”),or “HoldCo” (the structure the in entity top the in equity investors PE with companies, commonly private holding Australian-incorporated most of deal “stack” three-level leverage a a involves for structure acquisition The Whatarethemostcommonacquisitionstructures 2.1 Johnson winter &Slattery © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 funded byanon-recourseloanand theexpectedtimetoexit. of structuring the been have management’sproceeds on equity,subscription the whether depending vesting with vehicle, holding a in equity the of 5–15% between allocated typically is Management Inrelationtomanagementequity, whatisthetypical 2.5 carefully to veto andcontrolrightsinrespectofcertainmatters. want voting, impose to for will order in arrangements governance (ii) subscribing the structure and including shares; liquidation, preference a convertible on rights preference seeking by risk downside their protect to want may (i) investor: PE minority a be that not save structuring, may of respect there in differences position, material minority a taking is investor PE a If Ifaprivateequityinvestoristakingminority 2.4 Howistheequitycommonlystructuredinprivate 2.3 Whatarethemaindriversfortheseacquisition 2.2 StructuringMatters 2 adopted forprivateequitytransactionsinyour institutional, managementandcarriedinterests)? structures? jurisdiction? acquisition provisions? what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and considerations? position, aretheredifferentstructuring equity transactionsinyourjurisdiction(including companies isrequiredtobemadepublic. private of constitution the nor shareholders’agreement the Neither more with deals (which company bespoke governanceandoperationalissues). target the and holders, right or share other managers, the investor, PE the between into entered the conceptofintermediateleaverisrarely, ifever, seen. UK, the Unlike value)). market fair or cost of lower the of 90% be may price acquisition the (e.g. acquisition compulsory the of costs fair and for account to discount additional an with (sometimes value market cost of lower the for acquired compulsorily shares their but is not otherwise a good leaver. Bad leavers would typically have A bad leaver is generally a manager who “leaves” their employment shares their have and fairmarketvalueincertaincircumstances). typically cost of higher would the (or value market leaver fair for acquired compulsorily good A board. the redundancy or is otherwise deemed a good leaver at the discretion of employment because of death, permanent disability or incapacity or In Australia, a good leaver is generally a manager who “leaves” their are typical. leaver bad and good of formulations constant fairly where US the in than Australia in bespoke more generally are provisions Leaver mere operationalmatters. than rather transactions, material highly and issues constitutional key to restricted rights veto their have normally investors Minority shareholders’ agreement. a under matters operational material other and transactions major the than over rights veto (rather of benefit the have generally investors themselves) investor PE controlling of directors Nominee . Forwhatreasonsisamanagement equityholder 2.6 . Doprivateequityinvestorsand/ortheirdirector 3.2 Whatarethetypicalgovernancearrangementsfor 3.1 Australian The insolvency. or leaver” 2001 agreement), Act Corporations “bad the of a breach in becoming shares of assignment or transfer (including agreement shareholders’ the of breach material as such matters by triggered often are provisions acquisition Compulsory company’s acquisitionofitsownsharesfromashareholder. with fairly generic corporate issues) and th deals ordinarily (which company relevant the of constitution the by PE portfolio companies are customarily private companies governed GovernanceMatters 3 your jurisdiction? position, whatvetorightswouldtheytypicallyenjoy? in yourjurisdiction? usually treatedasagoodleaverorbadin etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such Ch (h (the (Cth) Corporations Act Corporations e shareholders’ agreement www.iclg.com australia rglts a regulates ) 25 australia 26 australia © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com example, for insolvent trading, environmental laws, work health and their under circumstances certain in liability personal (for law Australian of to subject aware be can They generally above). 3.3 question (see be duties directors’ always should directors Nominee Arethereanylegalrestrictionsorotherrequirements 3.6 geographical the and restriction, whichareoftencascadedtoassistwithenforceability). be period and restraint interest the business (including legitimate reasonable a protect to needs restraint contrary to public policy or which oppress the minority; and (ii) any example, for are, which terms general of enforcement the (i) on prohibitions than: other agreements shareholder of enforceability or contents the on restrictions or limitations no Generally,are there Arethereanylimitationsorrestrictionsonthe 3.5 T Arethereanydutiesowedbyaprivateequityinvestor 3.4 their fetter not to and conflicts, discretion. avoid to trading, insolvent prevent to position, their misuse to not purpose, proper a for faith, good in diligence, and care with act to duties include These rights. such exercising when duties statutory and fiduciary general their under a shareholders’ agreement, the directors will still be subject to rights veto contractual of benefit the have may directors nominee act in the best interests of their appointor (being the PE investor) and to entitled is director nominee the that acknowledgment an include shareholders’a Although may constitution company and agreement under ashareholders’ agreement. effective be still may but Act, Corporations the under ineffective by matters be such would shares voting the of of 25% than respect resolution), less holding shareholders in the veto on shareholder cast a votes that meaning the of of resolution 75% special (being a shareholders by Act Corporations the under effected company’s name and varying or cancelling class rights) may only be a changing constitution, a adopting (e.g. actions corporate Certain Arethereanylimitations ontheeffectivenessofveto 3.3 Johnson winter &Slattery shareholders or management shareholders (or shareholders management or shareholders minority. minority law the of oppression common on prohibition the as such and protections shareholder statutory general certain shareholders’ (ii) a (i) and and/or agreement; of: constitution benefit the in the protections have contractual may shareholders minority the ee r n seii dte oe b a E netr o minority to investor PE a by owed duties specific no are here typically addressed? portfolio companies? equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin non-compete andnon-solicitprovisions)? (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements typically addressed? shareholders (orviceversa)?Ifso,howarethese to minorityshareholderssuchasmanagement the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii)

vice versa vice ). However, ). informal clearance) process is voluntary and, if a party wishes to wishes party a if and, voluntary is process clearance) (or informal approval antitrust The clearance). informal in (called approval Australia antitrust seek to requirement mandatory no is There Competition kept confidential). be can process decision the that (meaning extension time voluntary process decision a to consents the investor the that request making alternatively may or public) of effect 90 to the up (having for days period the that further extending order for interim an fee make can application it the receives it application. If FIRB cannot make a decision within this timeframe, after days application 30 an on within decision a as make soon must as FIRB The transactions on practicable. advice FIRB obtain to investors PE approval for their acquisitions. Accordingly, it would be prudent for not incurring shadowdirectorliability(seequestion3.6above). of cognisant be to need will shareholder the However, vote. shareholder a to it referring by resolved be may issue the matter, particular a to relation in interest of conflict a has director a Where relevantly, toavoidconflicts). (most duties directors’ statutory and law general their of director the absolve not will this However, appointor. their as investor PE agreement may permit a nominee director to act in the interests of a shareholders’ a or company a of constitution the above, noted As ( (and even local PE investors which have “foreign investors government investors” PE foreign below, 10.2 question in mentioned As Foreign InvestmentReviewBoard(FIRB) . Howdodirectorsnominatedbyprivateequity 3.7 to referred shareholders tovoteon routinely are matters liability, duty avoid director to of if, issues arise may This directors. nominee the of those than acting in director accordance with the investors’ instructions or shadow wishes rather avoiding to PE accustomed becomes company of the if accrue can liability,which mindful fraud). be as also such should exceptions investors certain to investee (subject their of companies behalf on liability incurring from them protect to veil corporate the of benefit the have generally will investors PE on and costsorliabilitiestothecompanyitself). restrictions penalties certain acts, statutory fraudulent their for (e.g. certain director of a indemnifying are benefit There the indemnity, for of directors. into deeds nominee entered that are access and officers’ and place and insurance in directors’ are both policies that insurance ensure should investors PE an being for or accessory tounderpaymentofemployeeentitlements). offences, tax-related in complicity laws, safety . Whatarethemajorissuesimpactingtimetablefor 4.1 Australian-resident directoratalltimes. one least at have to need companies private addition, Australian In FGIs Transaction Terms: General 4 ) as limited partners) often need to seek foreign investment foreign seek to need often partners) limited as ) of otherportfoliocompanies? disclosure obligationsandfinancingissues? party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust .

iclg to: privateequity 2019 australia ban noml laac fo te utain optto and Competition ( Commission Consumer Australian the from clearance informal obtain Johnson winter &Slattery © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 as treated are property favourable limitationregime(seequestion 6.5below)). more the of intellectual themselves availing (thereby warranties to fundamental relating that warranties insisting buyers is transactions technology in trend Another less much being escrows and common. retentions with regime, exit the changed has insurance W&I of prevalence the however,Recently, lower volume of deals, discernible trends are less readily identified. UK markets, market terms are not as standard and, coupled with the Given that the Australian market is more fragmented than the US or Havetherebeenanydiscernibletrendsintransaction 4.2 consent ofsuchthirdpartiespost-completion. choose to complete even in the absence of such consent and seek the restriction. Often, a PE investor will take a pragmatic approach and control of change a contain leases Australian most UK, the or US the Unlike exercise. time-consuming a be can counterparties such of consent the obtaining and required regularly are landlords and Consents to changes in control from material contract counterparties Change ofcontrol consents package isinplace(seealsoquestion8.2below). security the will until group target the financier from undertakings various with The acquisition. period this in risk residual from themselves protect to try generally the of post-completion days 14 least at until security place in put to able be not will financier its and investor PE the process, the in involved be to agree sellers the Australian 14 the days before the financial assistance is given, meaning that, unless regulator, corporate Investments The and Securities Commission, needs to be notified at least company’s such assistance. of holding giving financial the approve Australian to need ultimate generally will shareholders) target the the Act, (and Corporations the companies members under group company holding target of their shares by acquire to assistance security financial of giving of the constitutes granting the Because Financing –financialassistance market the commencing of weeks 12 enquiries process. to six within decision a parties the the to information further the provide ACCC, make to seeks ACCC whether and concerns competition the of complexity of market enquiries will depend on a number of factors including the duration the While concerns. those of extent and nature the test to to competition concerns, the ACCC will undertake market enquiries rise give may transaction the that however,considers the If, ACCC enquiries. the transaction within two to four weeks without conducting market substantially “clear” generally will the ACCC market, to any in competition lessen unlikely is transaction the that considers ACCC the and clearance informal for ACCC the to apply parties Where transaction maygiverisetocompetition(oranti-trust)concerns. the where completion to prior transaction a for clearance informal seek often parties regime, law competition merger for the of penalties breaches significant are issues there As competition transaction. of a extent from arising and nature the on depending vary terms overrecentyears? ACCC ), the timing of that clearance will clearance that of timing the ), and thetarget (ratherthantheseller)givingwarranties. policy for the to insurance recourse sole on W&I based are which of acquisitions public use the is development new relatively A standard deferredconsideration(essentiallyvendorfinancing). a takeoverbidbyPEinvestor. as such from benefit will who directors participating or management senior insiders” “participating any of respect in place in put be directors) independent the by supervised be to are (which protocols that requires Transactions Control in Participation Insider on Note Guidance Panel’s Takeovers Australian the “insiders”, to relating interest of conflicts perceived or actual potential avoid to Further, to right a granted be not complete duediligence). will bidder hostile a (since diligence due detailed of absence the in obtain to difficult be may financing becomes bid takeover a unconditional. when A consequence of this is acceptances that in a hostile bid context, all for pay to place) in funding have will it that expect to basis reasonable a (or place The Australian Takeovers Panel requires that a bidder has funding in provide the same package of warranties and indemnities to a buyer a to indemnities and warranties of package same the provide In Australia, unlike in the UK, PE investors are typically expected to deferring prefer investors of return ( PE rate internal increase the and payment buy-side, delay to as so consideration the on Conversely, to investor the allows and quickly distributefundstoitsLimitedPartners. proceeds of certainty with seller the provides This adjustment). accounts completion no and retention other or escrow no consideration, deferred no (i.e. completion on payable consideration, cash all prefer investors PE sell-side, the On . Whatdealprotectionsareavailabletoprivateequity 5.2 Whatparticularfeatures and/orchallengesapplyto 5.1 . What isthetypicalpackageofwarranties/indemnities 6.2 Whatconsiderationstructuresaretypicallypreferred 6.1 aspects ofit)iftheirdirectorsdutiesrequirethemtodoso. (or obligation lock-up a of relieved be to directors the a allows that to provision a subject is which target, the regularly of directors the for are out” “fiduciary protections such Importantly, alternative offer. an chooses or discussions from away walks target the if payable often are target) the of value equity the of 1% exceeding (not fees Break obligations. rights” matching “no or diligence” due in various forms of lock-up devices such as “no shop”, “no talk”, “no acquisition public a in protection exclusivity seek may investors PE Transaction Terms: Public Acquisitions 5 Transaction Terms: Private Acquisitions 6 acquisitions? commonly dealtwith? team toabuyer? on thebuy-side,inyourjurisdiction? investors inyourjurisdictionrelationtopublic transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private offered byaprivateequityseller anditsmanagement by privateequityinvestors(i)onthesell-side,and(ii) IRR ). Examples of this may include earn outs, escrows or www.iclg.com australia

27 australia 28 australia © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com The limitationregimeisgenerallybifurcatedbetween: Whatlimitationswilltypicallyapplytotheliabilityofa 6.5 inception. policy on waived are initially,but apply fees underwriting Capped policy limit (including brokerage). GST and stamp duty also apply. the of 1–1.5% between costs typically Australia in insurance W&I employees, fraudandothermattersalreadyknowntothebuyer. as contractors of classification the to relating issues events, cyber forward-looking warranties, environmental liability, and service or product forecasts statements, risks, underfunding, known pension to bribery, relating warranties include exclusions Typical in relationtonon-fundamentalwarranties). accept normally would warrantors that liability maximum of range the (matches value enterprise the of 20–70% from the range typically of 1% and transaction each to tailored approximately are limits Policy value. are enterprise retentions) (or excesses Typical in transactions PE Australia. in commonplace is insurance W&I Buy-side To what extent isrepresentation&warrantyinsurance 6.4 management and policy W&I the restraints (with PE sellers normally averse to agreeing to under a restraint). excluded are otherwise which risks or risks known of completion, respect in to indemnities prior specific employees and records premises, to access and signing consents), leakage covenants and indemnities (in locked box deals), between control conduct of change obtaining with to assistance (including completion relating those the include to provided buyer indemnities and undertakings covenants, Other Whatisthetypicalscopeofother covenants, 6.3 on anindemnitybasis(unliketheUK). warrantors the by given generally are warranties US, the to Similar relevant policy. the under covered, partially only or excluded, are which warranties previously As buy- team. a that require management typically will investors the PE exiting mentioned, by provided those as Johnson winter &Slattery breach ofwarranty. a for team management company’s investee their sue to hesitant be taking material management positions, on the basis that investors will and business the in continuing are they whether on depending team take a different view as to the warranties provided by the management may buy-side the on investor PE a insurance, of W&I absence the In (i) n te a idmiy P sles il fe resis often will sellers PE indemnity. tax the and warranties the of respect in place in put is policy insurance side W&I r ee yas o isrd el. A ageae a o the of equity valuewillalsogenerallyapply; and cap aggregate An deals. insured for years seven or deals uninsured for years five approximately of limit time a have generally and against disclosed be not may warranties), a tax and fundamental warranties. These may not be subject to warranties, covenants,indemnitiesandundertakings? private equitysellerandmanagementteamunder the typicalcostofsuchinsurance? exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) equity selleranditsmanagementteamtoabuyer? undertakings andindemnitiesprovidedbyaprivate e minimis de

r ukt i te ae f fundamental of case the (in bucket or poiig any providing t means thaninstitutionalvendors. team vendors because they are often counterparties of less financial management from sought often more are Escrows claims. liability and/or warranty for security as amount retention or escrow an seek often buyers PE buy-side, the on insurance W&I of absence the In now oftenirrelevant. impede transferred to the insurer meaning escrow for warranties/liabilities is would is risk this the insurance, W&I of prevalence the given However, post sale. immediately as Partners Limited liabilities their to proceeds for distributing security resist strongly any sellers PE providing above, 6.1 question in mentioned As letters disclosure used, when require muchlessspecificdisclosurethanintheUS. Even US. the and UK the common in less than much are letters disclosure commonplace, still are the against where general disclosure of the UK data room is room accepted but the disclosure letters in unlike data that, means This the standard. is of warranties disclosure general Australia, In the limitation regimeprovidedforinthe W&I insurancepolicy. match generally will deals insured in liability on Limitations claims (includingundertakingsandwarranties)totheequityvalue. all for liability aggregate its limit and try generally Awill seller PE Reverse breakfeesarenotprevalent in Australian PEtransactions. the eventofbuyer’s failuretocompleteatransaction. by the buyer and provides some comfort and some compensation in provided be may which deposit non-refundable a is common Less such with documents. compliance of absence the in performance specific to by the PE buyer. Sellers may have rights to contractual damages or normally provided in the form of an equity commitment letter issued the lead financier. Comfort as to the availability of equity finance is by issued sheet terms and letter commitment debt a of form the in provided normally is finance debt of availability the to as Comfort . Do(i)privateequitysellersprovidesecurity(e.g. 6.6 . Arereversebreakfeesprevalentinprivateequity 6.8 Howdoprivateequitybuyerstypicallyprovide 6.7 (ii) the managementteam)? the of 20–70% of range enterprise valuecouldapply. a however, deal; the on depend will liability on cap aggregate The deals. insured for years three or deals uninsured for cycle audit one least at time of limit a have and an against, disclosed for be deals may insured fee), additional in applied be may and deals insured non- in bucket tipping a normally is (which value enterprise minimis a have typically will These warranties). fundamental and tax than other warranties all (i.e. warranties business general If so,whattermsaretypical? under anequitycommitmentletter, damages,etc.)? warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and transactions tolimitprivateequity buyers’ exposure? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and f .% f nepie au, bce o 1 of 1% of bucket a value, enterprise of 0.1% of iclg to: privateequity 2019 australia de 73% in2018. and 2017 in exits 63% to 2016, in all 58% to 2015, in of 32% from increasing proportion a as sales trade and 2018 in 6% and 2017 in 20% 2016, in 30% 2015, in exits all of 53% representing IPOs with exits, buyout total of proportion a as placements private and IPOs of number the in decline continuing a reported has AIC The trade saleexit. a pursuing singularly than common less practically are but tension, Dual-track exit processes are often cited to try and drive competitive often be for a 12–24-month period depending on the circumstances. would This test”. “assets the through admitted is entity listed the Mandatory lock-up obligations may also be imposed on PE sellers if price outperformstheoffer price). the end of a forecast period (subject to certain exceptions if the share with coinciding often months, 12–24 of period a for obligations up agree to a voluntary lock-up to assist with marketing the IPO) lock- sellers the (i.e. underwriter-imposed to subject often are sellers PE an provide not and couldtakelongertoimplementthanatradesale. does IPO an that means immediate and complete exit. IPO An IPO process is also more an involved in sellers on imposed below) 7.2 question (see obligations escrow and Lock-ups Whatparticularfeaturesand/orchallengesshoulda 7.1 Johnson winter &Slattery © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 for capacity with debt forpermitted acquisitionsandgrowthcapitalexpenditure. but sector) and uncommitted “accordion facilities” allowing for the top-up of senior sponsor upon (depending new for debt senior transactions generally with not exceeding 50% to 70% facilities, of enterprise value finance leveraged for years five to three of are tenures typical years, recent the with keeping In banks. investment and commercial offshore and funds, credit Australian by filled being increasingly gap funding the leveraged with market, Australian finance the from banks commercial Australian the by retreat continued a been has there years, recent with Consistent structures. securitisation and bonds than rather facilities, loan term The predominant source of debt funding remains syndicated secured Pleaseoutlinethemostcommonsourcesofdebt 8.1 Doprivateequitysellersgenerallypursueadual-track 7.3 Whatcustomarylock-upswouldbeimposedon 7.2 Financing 8 Transaction Terms: IPOs 7 private equitysellerbeawareofinconsideringanIPO through asaleorIPO? private equitysellersonanIPOexit? exit? bonds). for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare impediment totransactionexecution. statutory an considered be generally Australian not financial should it so settled the prohibition, assistance addresses a which is process “whitewash” There shareholder above). 4.1 (see Act question Corporations the under prohibition assistance financial Australian the address to processes statutory the with compliance section 128F of the of 128F section of requirements the with for comply liability to address AIWTis to Treaty.transactions syndicated for process statutory alternative An Taxation Double relevant a under relief 100% on rely to able not are (2) or office, lending Australian an have not do (1) either who lenders non-Australian to paid interest to relation in gross-up mechanism) a through borrower the of liability a as payable be (and utain neet ihodn tx ( tax withholding interest Australian (i) be: to continue transactions finance leveraged on considerations be through a security trust mechanism). Two to of the primary structuring able being security granted by Australian companies to acquisition financiers with (generally transactions, Australian to finance idiosyncratic leveraged restrictions financing few are There fsoe E ud wl otn sals a pca proe vehicle purpose special a establish often will funds PE Offshore but incontextthisisnotgenerallyseenasproblematic. now in the mid 500bps. Customary call protection will likely apply pricing and structure covenant-lite (generally) amortisation, any) (if minimal tenors, 6+-year approve), to able be Australian will lenders than bank better substantially still but global that attain, level will a sponsors at (not times 5.5 to up of gearing initial their given particularly sources, finance acquisition attractive become and viable have and sponsors domestic good for mid-market upper to mid- the targeted squarely have lenders unitranche addition, In Partners. ING, SMBC,HSBC,NatixisandBNP Paribas. Credit and investment banks include Metrics Bain Capital Credit, Nomura, MUFG, been also have and credits. offshoreleveraged Active syndicated senior in participants AustralianSuper as such IFM funds Superannuation Challenger, include funds credit Australian Active basis). stretched a on (often loans acquisition bilateral) (or syndicated typical provide to funds credit finance leveraged from credits has provided an opportunity for both Australian banks and offshore commercial Australian of retreat In relation to the domestic market (and National as noted in question 8.1), the and HSBC Investec, Australia Bank. include lenders tranche capital super-senioras active Lenders working Nomura. and Suisse Credit Bank, Macquarie Group, Partners HPS, Barings, include be lenders Active without to buyouts. Australian larger and for continue sponsors global by (with tranches) utilised transactions lien B mezzanine/second Term subordinated US and Unitranche . Whatrecenttrendshavetherebeeninthedebt 8.3 Arethereanyrelevantlegal requirementsor 8.2 . Whatarethekeytaxconsiderationsforprivateequity 9.1 Tax Matters 9 financing) ofprivateequitytransactions? off-shore structurescommon? financing marketinyourjurisdiction? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof investors andtransactionsinyour jurisdiction? Are Income TaxIncome Assessment 1936 Act AIWT www.iclg.com wl gnrly apply generally will ) australia (Cth); and (ii) and (Cth); 29 australia 30 australia © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com limited a recourse basisand repayableonanexitevent. on secured often are loans The value. market their for loans being involve made to the management team to purchase the relevant and shares common also are schemes share Loan-funded the requirementsfordeferralaremet. if basis deferred a on or basis upfront be an either on income will as taxed received option or shares the on these discount the Under the provisions, in provisions. scheme shares share employee Australian to the options with accordance in tax to or subject be will they vehicle, shares acquisition with remunerated are partly entity target Australian the of teams management the Where Whatarethekeytax-efficientarrangementsthat 9.2 ( Johnson winter &Slattery ■ any of the integrity regimes that have been legislated as part as legislated been have that regimes integrity the of any ■ with comply parties related with dealings cross-border any as treated is fund PE the ■ by acquired asset Australian the ■ as classified be will holds fund PE offshore the interest the ■ Some otherconsiderationswillbewhether: the relevantlegislationrequirements. an with jurisdiction satisfies itself MIT the with and treaty Australia exchange informal a in resident is non-resident the that things, withholding tax it rates of 15% may apply. (or This requires among if other trust” and investment established “managed be as qualifies could trust unit a or property assets, real infrastructure as such asset capital a acquires SPV the Where leading toanupliftintaxcostsfordepreciation,etc). (possibly costs tax their resetting cases, most in to, assets business underlying the to down” “pushed targetbe the to in shares acquired single taxpayer) regime. This will enable the purchase price for the (or consolidation tax Australian the of use the include perspective tax Australian an from company a being SPV the of benefits The real propertyorinfrastructureassets. hold to trust unit a or assets business hold to company private a be will SPV the depend on the for nature of the asset being acquired. established This will typically structure of type The own. wholly incorporated in Delaware in the US. Such LLCs are usually tax- transparent entitiesinthejurisdictionoftheirdomicile. usually are LLCs Such US. the in Delaware in incorporated They can also take the form of limited liability companies ( companies liability limited of form the take also can They jurisdictions. other in or partners general the as jurisdictions same the in established either Partners Limited the are investors the and partner is established in the Cayman Islands or British Virgin Islands landscape. PE They usually take Australian the form of a the limited partnership where the general in common are structures Offshore SPV (r can f Ps udr utain a wih t will it which law Australian under SPVs) of chain a (or ) shares, deferred/vestingarrangements)? equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate f utai’ rsos t te ED ae rso Profit Erosion Shifting Base Action Items(BEPSProject)applyincludingthe: OECD the to response Australia’s of result; and a as taxation Australian escape not do profits that ensuring cases both in funding, debt excessive on deductions interest or dealings non-arm’s-length combat to seek regimes These regimes. capitalisation thin and pricing transfer Australia’s being heldonrevenueorcapitalaccount; made oninvestments; differenta in result may this as rules returns on treatment tax debt/equity Australia’sunder interest equity or debt a either ■ ■ ■ ■ diverted profitstax;and anti-hybrid rules; multinational anti-avoidancelaw; country byreporting. MIT , concessional ),

LLC ) Some recentchangesinclude: are who team where thereisanexiteventareasfollows: management the for account capital on investment their holding residents tax Australian considerations key The e qeto 94 bv fr eal o dvlpet fo a tax a from developments of perspective. details for above 9.4 question See certain PEinvestors. came into effect toward the end of 2017 that may laws have an impact on competition Australian to changes substantive of number A compliance withtaxationlawsanddatasecurity. to relation in approval its on conditions imposes commonly FIRB be to intended both recognisable toforeigninvestors. partnership, investment limited a corporate and CCIV the or vehicle being vehicles investment collective new establishing legislation of respect in continue Consultations . Havetherebeenanysignificant changesintax 9.4 Whatarethekeytaxconsiderations formanagement 9.3 01Havetherebeenanysignificantlegaland/or 10.1 ■ ■ ■ ■ ■ ■ 0LegalandRegulatoryMatters 10 erd tutrs o ovr atv bsns icm to income rates; tax withholding business lower attracting latter active the income, convert interest to structures geared doubled using from investors foreign deny to amended been have rules capitalisation thin Australia’s 2018, July 1 from anticipated? target the in shares voting the company. of 80% least at of holder This the becomes structure. acquirer the that acquisition things, other among new requires, a in shares receive they if relief rollover scrip-for-scrip the access can they whether in aneligiblevehicle;and and months 12 than less not of period a for investment their when discount their hold they that of things, other among require, will CGT This shares. disposal on 50% gains capital the taxable their apply calculating can they whether investment intoanewacquisitionstructure? anticipated? than 10%). less of interests (typically investments portfolio and income passive to limited be will funds wealth sovereign and funds from 1 July 2019, existing tax exemptions for foreign pension on MIT andaspartofastapledstructure; tax withholding 30% minimum trading income a converted to passive income distributed by an 2019, July 1 from the of been 2 BEPS Project; have Item Action rules to response anti-hybrid Australia’s as new legislated 2018, October 1 from teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities teams thataresellingand/orrolling-overpartoftheir private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting iclg to: privateequity 2019 australia a desiretonotifythe ACCC. have parties the the to whether notified of be regardless will ACCC any FIRB raises to notified transaction transactions Accordingly, concerns. the competition whether on view its provide to asked where a transaction requires approval from FIRB, the ACCC will be the but by ACCC scrutiny enhanced to subject not are investors PE of sale the involving Australian agriculturalassets. sector agribusiness or sector media the in transactions and data personal transfer which businesses involving those include scrutiny enhanced attracting transactions Particular timetable implicationsforFIRBapplications. the for above 4.1 question See etc. funds, endowment university and even more commonly, pension funds for state employees, public 20%; of excess in ownership state with institutions FGI financial other an as and companies targetinsurance banks; funds; investment wealth sovereign an include: of classification in result may the nature of their limited partner base. Examples of ownership that Many foreign and even Australian PE investors meet this test due to government “foreign a investor” ( considered is entity acquiring the where FIRB approval is required regardless of the value of the acquisition, However, FIRB. of approval the a circumstances, limited in except by certain investors from the US acquisitions and certain other countries) must seek for billion $1.154 (or million $266 above valued is that business Australian an of, control or in, interest an acquire to proposing entities Non-Australian regime. investment foreign of form Australia’sthe in in scrutiny Australia regulatory enhanced PE investors (whether based locally or offshore) are often subject to Areprivateequityinvestorsorparticulartransactions 10.2 Johnson winter &Slattery © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 process, typically(butnotalways)fromexternaladvisors. diligence detailed and bespoke a sought) of comfort is the require insurance typically W&I (where insurers W&I and Financiers acquisition. the of circumstances the on dependent any reporting such of form the and thresholds materiality the diligence, such to very conduct approach the with typically acquisitions, of respect in diligence due detailed Australia in investors PE Sophisticated Howdetailedisthelegal due diligence(including 10.3 subject toenhancedregulatoryscrutinyinyour jurisdiction (e.g.onnationalsecuritygrounds)? materiality, scopeetc.)? prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors FGI ). company. portfolio another of liabilities the for liable held be may company portfolio one which in circumstances any envisage to difficult is It include can (which back-pay employee entitlements. accessory to liable be an to employer), an that just not and shareholders, orders make to court section 545 of the of 545 section under or director shadow a as acting as such legislation particular of operation the through circumstances limited in or fraud through to limited is, That pierced. are be can veil corporate the companies which in circumstances portfolio underlying the of liabilities The circumstances in which a PE investor may be held liable for the in sanctioned business jurisdictions or which have relationships with conduct sanctioned which businesses in Australian of of respect acquisitions in expect, particularly would you as or, transactions, counterparties) American North (particularly PE investors international involving Australian transactions anti-corruption in or anti-bribery on compliance focus increasing an is There as at13June2019. This chapter was prepared on the basis of laws and policies in effect in recenttimes. healthy in Australia, highlighted by the record-breaking fundraising is industry PE the above, noted As above. to referred already not in Australia investors PE for concerns additional limited are There 05Arethereanycircumstancesinwhich:(i)aprivate 10.5 contractual protectionsintheformofspecificindemnities. Hasanti-briberyoranti-corruptionlegislation 10.4 11Whatotherfactorscommonlygiverisetoconcerns 11.1 corruption is that they are inherently difficult to conduct due r oiial epsd esn. h dfiut wt biey bribery with difficulty The persons. exposed politically or coverage. As a consequence, an investor may need may investor an consequence, a As coverage. n n, s rsl, r tpcly xldd rm W&I from excluded typically are result, a as and, on 1OtherUsefulFacts 11 the liabilitiesofanotherportfoliocompany? diligence, contractualprotection,etc.)? considering aninvestmentinyourjurisdiction? and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor Fair Work Act 2009 Act Work Fair (Cth), which empowers a empowers which (Cth), www.iclg.com australia to seek other seek to insurance diligence or 31 australia Johnson winter & Slattery australia

Divesh Patel Andy Milidoni Johnson Winter & Slattery Johnson Winter & Slattery Level 25, 20 Bond Street Level 25, 20 Bond Street Sydney, 2000 Sydney, 2000 Australia Australia

Tel: +61 2 8247 9681 Tel: +61 2 8274 9579 Email: [email protected] Email: [email protected] URL: www.jws.com.au URL: www.jws.com.au

australia Divesh is a private equity and corporate lawyer at Johnson Winter & Andy is a taxation lawyer at Johnson Winter & Slattery with over 20 Slattery specialising in mergers and acquisitions, private equity years’ experience in Australian domestic and international tax law. He transactions and foreign investment. He also regularly advises on specialises in the tax implications of inbound and outbound cross-border transactions, equity capital markets, joint ventures, investment, corporate mergers and restructures, managed investment commercial transactions, distressed sale transactions and schemes and stapled structures, funds management, the taxation of restructurings. trusts generally, equity market transactions, debt market transactions and employee share schemes. He has also advised multinationals on He advises a wide variety of domestic and cross-border clients, the transfer pricing implications of their cross-border-related party including private equity sponsors, across a broad range of sectors transactions. He has advised both large and SME corporate groups in including manufacturing, retail, FMCG, financial services, infrastructure, a variety of transactions in a number of industry sectors including aviation and transport, media, technology and telecommunications. technology, oil and gas, mining, manufacturing, property development, healthcare and life cycle, food processing and the financial and superannuation sector.

For over 25 years, Johnson Winter & Slattery has been part of Australia’s legal landscape, impressing our clients with strong legal know-how and commercial awareness. An ethos of always seeking to impress clients, combined with superior service, technical excellence, innovation and collaboration ensures the most relevant specialist expertise and experience is brought to bear on every assignment. We are the go-to law firm for clients across multiple sectors, industries and expertise areas, and our representation of major corporations and private equity groups in many landmark and transformational deals and complex disputes has positioned us as a leading independent Australian firm. In particular, we have one of the leading private equity practices in Australia and our private equity, tax and leveraged finance Partners are consistently ranked as leading lawyers in market publications.

32 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 7 austria Florian philipp cvak

Schindler attorneys clemens philipp Schindler

1 Overview 1.3 What trends do you anticipate seeing in (i) the next 12 months and (ii) the longer term for private equity transactions in your jurisdiction? 1.1 What are the most common types of private equity transactions in your jurisdiction? What is the current state of the market for these transactions? Have you We expect to see an increased deal flow in the venture capital and seen any changes in the types of private equity growth capital segment and a continuing robust deal flow in the transactions being implemented in the last two to midmarket segment over the next 12 months. We also expect to see three years? more distressed transactions over the next 24 months again. Generally, the sentiment appears to be that this asset class will see Austria has seen the full spectrum of private equity transactions. significant deal flow and show good returns. This is also reflected In the large-cap (buyout) segment (deal values of EUR 100 million by more recent LP allocations. and above) the main trend over the last two to three years was the In terms of operation of the market, we expect the DACH markets increased use of vendor due diligence and warranty and indemnity (including the Austrian market) to more and more converge with the insurance as well as the increased interest of debt funds to finance German market. the term loan facilities in leveraged buyout transactions (“LBO”). In terms of sectors, there was no discernible trend. This is mainly 2 Structuring Matters due to the limited number of transactions within that segment. In the midmarket (buyout) segment (comprising deals with values between EUR 10 million and EUR 100 million, which make up the 2.1 What are the most common acquisition structures vast majority of Austrian deals) tax-optimised roll-over structures adopted for private equity transactions in your were increasingly used allowing founders or other sellers to reinvest jurisdiction? part of the proceeds. In terms of sectors, technology, healthcare, industrials and business services accounted for most of the deal flow The typical onshore acquisition structure involves one or more in this segment. Another trend that continued from 2017 is holding companies (“HoldCos”) and an acquisition vehicle increased activity in the growth capital segment with corporate seed (“BidCo”), which then enters into the purchase agreement and capital and corporate venture capital funds becoming increasingly ultimately acquires the shares. From a tax perspective, this multi- active and causing significant competition for traditional venture layer holding structure is no longer necessary (see question 2.2). In and growth capital funds. Investors from Asia (in particular, China) leveraged transactions, interim holding companies are, however, also increasingly played roles. often still needed as senior lenders typically insist that junior lenders On the debt side, specialist debt funds have become increasingly lend a level higher in the structure to achieve not only contractual active over the last two years, not only in the large-cap (buyout) subordination (which is achieved through an inter-creditor or segment. These days debt funds offer all sorts of instruments, subordination agreement), but also structural subordination of ranging from growth capital, stressed financing, acquisition junior debt. financing to bridge and DIP loans. Private equity funds will usually try to maximise debt in the financing structure for a transaction. The difference between 1.2 What are the most significant factors encouraging or available bank debt and the purchase price is financed by the fund inhibiting private equity transactions in your through a combination of debt (so-called, “institutional debt”) and jurisdiction? equity. How much institutional debt can be employed is determined by “thin cap” rules. While there are no statutory rules in place, debt- Please see question 1.1. to-equity ratios of 3:1 to 4:1 are generally accepted by the Austrian tax authorities. Austrian companies often have substantial CEE exposure which is perceived as an opportunity by some private equity funds, but it is Where bank debt is employed, the target company is usually an issue for other funds who must not invest in targets in the CEE, required to accede to the financing documents on an exclusive or with considerable CEE exposure, pursuant to their LPA lender basis (to avoid structural subordination to existing lenders) investment mandate. and to grant guarantees and security interests securing acquisition debt as well as the refinanced target company debt on or shortly iclg to: private equity 2019 www.iclg.com 33 © Published and reproduced with kind permission by Global Legal Group Ltd, London 34 austria © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com the of change a restructurings, corporate as (such actions corporate major for requirements a voting and quorum, shareholders’meeting, call to rights rights, information includes but, protection differs generally, available are protections Which restriction. without amended be can them of which only,and shareholders minority of of them are mandatory, which of them can be amended to the benefit familiar become with the minority protections already to available under the law, important which request is it necessary, process, that In where amendments. and, documents governance the under existing completion following him to available are rights what analyse carefully must investor the rejected, is request that Where 3.1). question see description, a (for documents governance new Private equity investors taking a minority position typically insist on Ifaprivateequityinvestoristakingminority 2.4 for capitalgainstaxationasopposedtoemploymentincome. scheme arrangements, as gains realised upon an exit may be eligible have benefits relative to phantom stock and other contractual bonus may interests) equity other certain (and shares actual perspective, tax a From above. further entities in shares or occur) to expected shares, actual is of exit the which in entity the (or itself company target form the in either the in given often is equity Management or indirect)capitalcontributionsshareholderloans. Austrian HoldCo and the BidCo structure by way of onto one or more (direct passed and offshore given usually is equity Institutional Howistheequitycommonlystructuredinprivate 2.3 a moredetaileddiscussion,pleaseseequestion9.1). (for company target the of profits taxable the with level BidCo and parent HoldCo at expenses targetinterest of set-off the a for indirect allows with This company. group tax a of into enter and still however, HoldCos case capital can, Austrian BidCos on now. in relevant tax are avoided neither capital contributions; be that could and deals contributions goodwill share of on availability the amortisation was structures BidCo and multilayer HoldCo Austrian for argument main the taxes, to regard With under described structures question 2.1aretaxandsubordination. acquisition the for drivers main The Whatarethemaindrivers fortheseacquisition 2.2 maintenance andfinancialassistancerules. capital with compliant terms and amount an to obligors Austrian of obligations the limits which language” “limitation by documents financing the in addressed usually are issues Both transaction. the approved who board supervisory and management the of members rules, on the other hand, are assistance not void but financial may result in liability violating of the Transactions damages. for liability to subject be and may transaction the management approved who board the supervisory of members the addition, In violation. the of known, have should knew,or party third that if bank) financing the (e.g. party third any as well as parties the between as a void and are rules null are assistance rules maintenance capital violating Transactions financial concern. involved, is (“JSC”) company secure acquisition debt, interests capital maintenance and, security where a joint and stock guarantees extent the To completion. after Schindler attorneys considerations? position, aretheredifferentstructuring institutional, managementandcarriedinterests)? equity transactionsinyourjurisdiction(including structures? are disability or incapacity usually goodleavercases. permanent or death age, retirement Attaining underperformance). of breach, case material dishonesty, in fraud, (e.g. leavers bad and leavers good define specifically as ( cause terminates his employment ( make ( dismissed is he provisions leaver bad and if leaver bad a as manager a treat and law employment to reference good form, simplest their In vehicle (oftenapartnership). pooling a in equity management the of pooling on insist often and fund will require a right to drag-along the management upon an exit developments in Austrian labour law. In addition, the private equity recent to due regard that in aggressive less become have structures on the reason for termination (a “good” or a “bad” leaver), although depending varying upon consideration with manager, apply the of provisions termination transfer Compulsory years. five to three of period a over vesting to subject typically is equity Management . Forwhatreasonsisamanagement equityholder 2.6 Inrelationtomanagementequity, whatisthetypical 2.5 and assets, or business the squeeze-outs ofshareholders). of all substantially or all involving dealings association, of articles the to changes company’spurpose, . Whatarethetypicalgovernancearrangementsfor 3.1 association (which has some benefits for some (but not all) of them of all) not (but some for benefits some has (which association of articles the in included are arrangements Toabove the extent the agreed withthefund. terms on agreements employment new into enters personnel) key senior other that certain also sometimes (and insist team management the of all also that will fund the and 2.3) question (see scheme incentive an to up cases, signs management of majority the In as wellreporting,informationandaccessrights. exit rights), drag-along and rights for the fund (via a trade sale, an IPO or a shotgun mechanism) tag-along, refusal, first of rights up, fund, restrictions on dealings with shares (typically including a lock- 3.2), dilution protection for the fund, a liquidation preference for the question (see representative) sponsor the (and/or fund the of rights (if representatives any), sponsor representative liability and conflicts of interest, sponsor veto appoint to (and/or observers) to the supervisory rights board (if any) or advisory board fund’s the equity are documents private governance the in concern of areas main The (if board supervisory and board management the for by-laws newarticlesofassociation; and ■ ashareholders’ agreement; ■ ■ The governancedocumentstypicallyinclude: GovernanceMatters 3 your jurisdiction? acquisition provisions? in yourjurisdiction? usually treatedasagoodleaverorbadin what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such any). he ihie Grund wichtigen ohne entlassen

iclg to: privateequity 2019

) by the company for good cause or if he if or cause good for company the by ) kündigen . oe ohsiae provisions sophisticated More ). ) on his own initiative without austria violation ofacontractuallyagreedveto(ormajority)requirement. in transacts member a if bound not is company the that way a such shareholders’ in the elsewhere or by-laws in the association, of articles limited the agreement, be cannot representation of the parties, power third towards that, noted be must it actions, member board management Regarding clause. accession mandatory a for provides typically agreement shareholders’ the equity where private transactions in case the be a usually will This in agreement. the forth to set requirement shareholders’ majority a a shareholders’ agreement. In that case, all shareholders were a party of of challenge breach in a resolution accepted Austrian the also decision one Court in Supreme that however, noted, be should It majority (or right available. are orders veto desist and cease and damages for actions only a violated, is if agreement shareholders’ the contrast, in forth set In requirement) challenged. be can of articles arrangement the the violating resolutions by-laws), in (and/or association included is requirement majority) (or veto a If maj and quorum with matters, veto of set some on vote and agree investors all that insist generally will they are reduced rights is invest, funds equity interest private veto multiple Where quota. fund’scertain a below such relevant Usually, the if away deal. fall to to structured deal and fund to fund from widely vary requirements specific the although strategy) and plans litigation, business business, the major a of nature disposals, the changing indebtedness, on and strategic acquisitions and representative as actions (such sponsor corporate decisions major a over (and/or board) supervisory fund equity private the of rights veto include typically will documents governance The Doprivateequityinvestorsand/ortheirdirector 3.2 disclosure requirements. addition, certain In arrangements may are have to be disclosed under register.Securities Law they companies the 3.3)), through question accessible publicly (see perspective enforcement an from Schindler attorneys © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Arethereanydutiesowedbyaprivateequityinvestor 3.4 Are thereanylimitationsontheeffectivenessofveto 3.3 ( faith good in shareholders fellow their of interests the consider to duty of loyalty ( a owe shareholders that held consistently have courts Austrian e xoe t laiiy n icmtne wee minority a mattered in the circumstances anyway). where A violation of the duty of circumstances in shareholder is not liability (because his appearance or vote would not have to exposed to be shareholder from be taken or not to be taken. A differs majority shareholder may therefore and shareholder, depending on their ability to cause companies a certain action to held widely That duty is more pronounced for closely held companies than for varying widelyfromdealtodeal. Treu und Glauben und Treu etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor typically addressed? position, whatvetorightswouldtheytypicallyenjoy? typically addressed? shareholders (or to minorityshareholderssuchasmanagement the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) Treuepflicht ) and in line with line in and ) vice versa ) towards one another, requiring them

)? Ifso,howarethese bonos mores bonos ority voting requirements voting ority ( gute Sitten gute ). ). n utin oail ed f h olgto t tase i t be to is transfer to obligation enforceable the (note: a German notarial deed is considered if equivalent). deed notarial Austrian an of form the in up drawn be must it right), drag-along a or option an as (such company liability limited a of shares transfer to obligation It should be noted that where a shareholders’ agreement includes an can berequested(butnotcompliance). payment future its only penalty employee’scontractual a by the up backed If limit prospects. unduly not does restriction the that the extent the to and is year one to up of period a for shareholders), valid only generally and law employment management under scrutinised for be also case will restriction the be could (which employee an also was shareholder a thereafter.Where years three) of loyalty (see question 3.4)) and for up to two generally (in exceptional period, cases, that duty (for law-based corporate the are with shareholding compete restrictions contractual the of provisions period the for non-solicitation enforceable and Non-compete pone a aaig ietr f sbiir o o another of or be subsidiary or a of positions), company to whose supervisory board a member of the management director group managing for a exceptions appointed and double counting positions chairman (with positions board supervisory JSC) listed exempt are from that restriction). They must not hold more than 10 (eight for a representatives (employee company portfolio the of subsidiary,employees a or of or company portfolio the of directors managing be not must members of board conflicts Supervisory exist: preventing interest at aimed provisions and positions board supervisory of number aggregate the to respect with Restrictions Restrictions questions 3.6and3.7willfocusonsupervisoryboardnominees. under answers the reason, that For management. in involved get uidcin Ti i mil bcue ipts eae to related disputes because mainly is shareholders’ This agreements are usually supported by arguments based jurisdiction. have typically company the of seat the at courts competent the and law Austrian by governed typically are agreements Shareholders’ ( board supervisory the of members more) (or one nominate to rights request usually Sponsors documents). governing the for matter a is (which vote a for board supervisory the before brought matters the the supervisory board is responsible for monitoring and resolving on company,while the of management day-to-day the for responsible is board management The structure. board two-tier a has Austria General . Arethereanylimitations orrestrictionsonthe 3.5 . Arethereanylegalrestrictionsorotherrequirements 3.6 or achallenge( orders, desist and cease damages, for claims in result may loyalty eoe h cut a te et f h cmay Hwvr where However,particular shareholder, arbitrationissometimesagreedasanoption. company. the a of jurisdiction of the in enforceable not are judgments court seat Austrian the at courts the before on Austrian corporate law and corporate law disputes must be brought Aufsichtsrat non-compete andnon-solicitprovisions)? portfolio companies? (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin

) or observers to the supervisory board, but hardly ever Anfechtung ) o f shareholderresolutions. www.iclg.com austria

35 austria 36 austria a, oee, eoe ibe o hs w cnut including, conduct, own his without limitation: for fraud ( for liable become however, may, member board supervisory A law. of criminal can or breach law company’s administrative members portfolio a board for liable supervisory held be not care, generally of duty corporate their not is long as there is no breach of the duty of loyalty. Absent a breach of member board supervisory A prohibited to compete with the business of the portfolio company, as confidentiality. of a duty and interest); own his in not and shareholders its and company the fund’s transaction costs, or influencing management so that a that so management influencing or costs, transaction fund’s the the or benefit own benefit of another (e.g. requiring the company’s his management to pay to board supervisory or management the of members influence to trying for law corporate on based liability law civil face could investor equity private the Further, damages. for liability law civil and penalties law criminal face may investor equity private the investor, the of benefit the for offence criminal riuae n cnen h my ae; dt o loyalty of duty a have); may he ( concerns to any and informed reasonably articulate be to obligation an includes which te cnttet) a uy f ae ( care of duty a constituents): any other to or them appointing investor equity private the to not (and company portfolio the to owe board supervisory the of Members Risks andliability time. sufficient devote to and required is opinion expert an when assess to able be and statements financial understand the board, before supervisory brought business the of understanding basic a least at business). In general terms, a supervisory board member must have retail the in is that company a of member board supervisory a from a of member skills and knowledge different board have to have will supervisory company biotech a is, (that company particular the of member board supervisory diligent and proper a of care of © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com portfolio companyoftheinvestor). every However, care of association. ( duty its meet be to of able be must can articles member board supervisory requirements the Such in introduced members. board supervisory for Corporate law does not require a specific qualification or experience Requirements belongs toagroup( company that (unless appointed is company portfolio the of board Schindler attorneys tascin nedd o ila aohr; o bec o trust of breach for another); ( mislead to intended transaction a ( Act Responsibility Association the of meaning the within investor the of decision-maker a is time, same the at who, nominee sponsor a where circumstances in addition, In above)). (see shareholders of interests transaction the to adverse a is which or on another mislead to intended member the with collaborated has investor the criminal law penalties and civil law liability for damages (e.g. where face could investor the that, beyond involvement is there whenever However, investor. that by nominated was member that because just board supervisory the of member a of act to failure a or act an for responsible held be not generally will investor equity Aprivate (see legislation companies question 10.4below). anti-bribery of in violations for auditors, or company’s filings); register the to statements shareholders’ meeting, a in statements shares, acquire to invitation earning public a in or or statements financial financial the in information assets, related or company’s position portfolio the to with regard (e.g. misrepresentation for shareholders); of interests the to business opportunity is not pursued and remains availa Treuepflicht Sorgfalspflicht Untreue Verbandsverantwortlichkeitsgesetz ) (e.g. by entering or approving a transaction that is adverse ) (requiring the member to act in the best interest of the

) requiring the relevant member to exercise the level

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) (e.g. by entering or approving Sorgfaltspflicht “VbVG” – , omt a commits ), (e aoe – above (see ) ble for another nirs cerne wih ae fu wes f lae in ■ cleared if weeks four takes (which clearance antitrust ■ timetable: the for factor a typically are requirements clearance following The and doesnotparticipateinanyrelatedmeetings. sponsor nominee director the does not vote with that respect the to the sure matter in question make of to board supervisory chairman the of the chairman inform the of responsibility to the then is has It accordingly. board he supervisory matter, any to with respect interest of conflict a has director nominee sponsor a Where increasingly become 1.1) question relevant, notonlyforLBOtransactions. (see funds dept Specialist particular in discussed, where privateequityinvestorsaresellers. frequently more and is warranty insurance Similarly, indemnity without). sometimes report, diligence warranties given by the seller or the management on the vendor due in common more and/or reliance with coupled (sometimes and targets bigger of auctions more becoming is diligence due Vendor ih ead o iig set rltd o public-to-private to related aspects timing transactions, seequestion5.1. to regard With . Whatarethemajorissues impactingthetimetablefor 4.1 Howdodirectorsnominated byprivateequity 3.7 . Havetherebeenanydiscernibletrendsintransaction 4.2 laac prun t te oeg Tae Act Trade Foreign the to pursuant clearance ■ and title of acquisition (the clearance transfer estate real ■ Transaction Terms: General 4 five monthsifclearedinphasetwoproceedings); phase one proceedings (if no exemption is granted) and up to disclosure obligationsandfinancingissues? of otherportfoliocompanies? terms overrecentyears? Minister ofEconomic Affairs beforesigning). the of approval advance to subject is national Swiss Austrian supply, services, telecoms, traffic or universities by a non-EEA or non- security certain water and energy defence, services, in rescue and emergency hospitals, as involved such business industries, a protected in interest controlling a and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof ( and law)); state on (depending approval or notification advance to subject is interests, such holding companies over control non-EEAby estate real in interests other certain or nationals, otoln itrs i te akn, nuac, utilities, insurance, advance to banking, subject notification or approval of the competent regulatory authority); is sector the aviation or telecoms in gambling, or qualified interest a of controlling acquisition the (e.g. clearance regulatory Außenwirtschaftsgesetz iclg to: privateequity 2019 ) (the acquisition of 25% or more or more or 25% of acquisition (the ) austria

nue ht h ncsay ud ae eue pir o the to prior ( secured Code Takeover Austrian the to pursuant expert are independent an by funds necessary confirmed be must latter The offer. takeover the of announcement the that ensure In the context of the takeover offer, the private equity investor must request ofaqualifiedshareholdermajority(75%). request and a shareholder resolution with at least 75% majority or a the of ahead months six than earlier no published was bid takeover a that years, three least at for listed were securities the that requires that thenecessaryfundsrequirementhasbeencompliedwith. itself satisfy to satisfied, been have control) sole private investor’s equity the within those than (other precedent conditions all that evidencing documents with together agreements finance definitive the of copies (ii) and fund, the from letter commitment equity the A regular delisting pursuant to the Stock Exchange Act ( Act Exchange Stock the to pursuant delisting regular A not valid). good for supported probably is supported, is not bid competing better a because or is reason, bid a because triggered a fee whereas break-up valid, be should bids competing of solicitation active upon triggered solely is that fee break-up (a triggered is it which in competing bid will probably not be valid); and (ii) the circumstances management keep from considering competing bids or deter others from considering a will that amount an in fee break-up (a fee the of amount the (i) factors: two on depend primarily should this that little is is opinion Common valid. there be would they extent as what to guidance common not are they but public discussed sometimes a involving transactions is takeover bid) where the target company would have to pay, they are (that acquisitions public In public a involving takeover bid). not transactions is, (that transactions private in common quite are arrangements cover cost and fees Break-up ( Act Exclusion Shareholders are the to shares pursuant squeeze-out outstanding a by the followed tendered, of 90% that condition the to subject offer aimed at control ( takeover voluntary a involves transaction going-private typical A Whatparticularfeaturesand/orchallengesapplyto 5.1 Schindler attorneys © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 depends on the target business, with the most common combination adjustment closing a in included are parameters Which norm. the are adjustments closing requirements), clearance other or antitrust of because (e.g. long is closing of structures, date anticipated the and signing box locked prefer to between gap the sell-side. Where the on are they when particularly tend investors equity Private Whatconsiderationstructuresaretypicallypreferred 6.1 Whatdealprotectionsareavailabletoprivateequity 5.2 Übernahmegesetz Transaction Terms: Private Acquisitions 6 Transaction Terms: Public Acquisitions 5 transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private acquisitions? commonly dealtwith? on thebuy-side,inyourjurisdiction? by privateequityinvestors(i)onthesell-side,and(ii) investors inyourjurisdictionrelationtopublic Gesellschafterausschluss-Gesetz ). The expert will typically require (i) a copy of copy a (i) require typically will expert The ). freiwilliges Angebot zur Kontrollerlangung ) and the delisting. delisting. the and ) BörseG ), ) irto, rniinl evcs n gop euiy neet and interests guarantees. security group de-branding, and on services covenants transitional migration, include may and case will particular the sellers equity private typically try to resist). Other post-closing covenants will depend on (which covenants non-solicitation and non-compete on insist will buyers Usually affairs. pre-closing to covenants post-closing to relation in assistance sometimes and records and books to access limit to try will sellers equity Private himself with post-closingwarrantylitigation concern not need fund equity private the that benefit to the linked has option latter usually The insurance). indemnity (then and warranty buyer’s and instead warranties management management buyer from the offer or warranties insurance indemnity and warranty seller’s underwrite back-to-back seek often they warranties, business give to have sellers equity private Where amount paidintoescrow)aswellanyotherpost-closingliability. an to (e.g. claims warranty for recourse limit to keen very be will sellers equity private experienced business addition, In capacity). avoid and title to try on warranties provide just will instead (and indemnities and warranties sellers equity private Experienced quantum canbeassessed. and risk materialisation that provided well, as insured be usually Indemnities for risks identified in forward- the course of the due diligence and can underfunding receivables). pension accounts collect to ability the (e.g. warranties looking of, aware was insured the matters disclosed, matters fraud, include exclusions and carve-outs Typical purchased. cover the of 1–3% of range the in be to tends but transaction the on depend will premium full The value). enterprise the cover also can but value enterprise the of 20% around at cap overall under the the purchase agreement) and buyer policies (usually match they start they (usually policies seller between vary limits Policy consideration. the of 1% around is excess typical The process. flips into a buyer’s policy) are sometimes put in place early on in the which process auction the of part as seller the by organised policy (see warranties business up or a is (that policies flipping auctions, back well-prepared In 6.2). question to willing (innocent not is misrepresentation seller equity seller’s the private a where particular buyer,in the by out taken are otherwise) from buyer the protect (which policies buy-side often, More common. that not but indemnity the used sometimes are misrepresentation) innocent own its from seller protect (which and policies Seller warranty gap”. the “bridge use to insurance sometimes sellers equity Private . Whatisthetypicalscope ofothercovenants, 6.3 Whatisthetypicalpackageofwarranties/indemnities 6.2 . To whatextentisrepresentation&warrantyinsurance 6.4 capex. Equityadjustmentsaretheexception. (sometimes) and capital, working debt, net for adjustments being equity selleranditsmanagementteamtoabuyer? team toabuyer? the typicalcostofsuchinsurance? undertakings andindemnitiesprovidedbyaprivate offered byaprivateequityselleranditsmanagement exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) www.iclg.com austria 37 austria 38 austria © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com but security provide to prepared generally are sellers equity Private Do(i)privateequitysellersprovidesecurity(e.g. 6.6 Whatlimitationswilltypically applytotheliabilityofa 6.5 Schindler attorneys Financiallimits,including: ■ Time limitationforbringingclaims: ■ Common limitationsonwarrantiesinclude: iiec fnig) r acpe, iiain ae sal heavily usually due are specific limitations negotiated. accepted, or are compliance findings) Other diligence environmental and cap. overall contamination the for and (e.g. indemnities other If negotiation. limitation of matter a are limitations loss direct a conduct tax provision, specific a to subject only usually is indemnity tax The knowledge. or disclosure by qualified not generally are Indemnities Limitations onindemnities and fairly”disclosed. This isusuallyheavilynegotiated. to try and warranty) each introduce a disclosure threshold requiring that a matter must be “fully for disclosure separate specific (i.e. for disclosure push occasion will purchaser whatever the at while warranties) advisors all its qualifies and purchaser the everything to (i.e. disclosure disclosed general for push always will seller The information which can be obtained from publicly accessible registers). (e.g. letter disclosure the the or agreement of acquisition operation the of by provisions disclosed deemed are or manner) certain a (in and disclosed been indemnities have that matters by qualified usually Warrantiesare warranties, under recovery Qualifying warrantiesbydisclosure double No Obligationtomitigateloss. ■ Noliabilityifcoveredbyinsurance. ■ No liability for mere timing differences ( ■ Noliabilityifthepurchaserkneworcouldhaveknown. ■ Noliabilityforcontingentliabilities. ■ ■ and indirect to opposed Exclusionofclaimstotheextentcausedby: (as loss direct to ■ Limitation ■ warranties, covenants,indemnitiesandundertakings? the managementteam)? warranties /liabilities(including anyobtainedfrom (ii) privateequitybuyersinsist on anysecurityfor escrow accounts)foranywarranties /liabilities,and private equitysellerandmanagementteamunder ■ a cap on the total liability (where there are multiple sellers, multiple are there (where liability total the on cap a ■ environmentalwarrantiesfiveto10years. ■ taxwarrantiestypicallyaroundsevenyears;and ■ businesswarrantiesbetween12and24months; ■ a at years 10 survive usually warranties capacity and title ■ mnmm grgt cam trsod “akt or anexclusionof (“basket” threshold ■ claims aggregate minimum a ■ insurance policies. changeoftaxoraccountingpolicies. ■ changeoflaworinterpretationlaw; ■ of course ordinary the of (outside purchaser the of acts ■ agreedmatters; ■ consequential loss(includinglostprofit)). each may seek to limit its liability to the shares sold and sold otherwise shares the to liability its limit to seek may each minimum; “deductible”); and business);

pro rata de minimis

); claims.

Phasenverschiebung ). underwrite, particularlyinauctions. equity an on insist will sellers experienced signing, at place in not are agreements financing definitive where but, exception the rather An equity underwrite of the debt component of the purchase price is damages. for claims to limited typically are sellers with, complied will be available at closing. If those financing commitments are not or on satisfied around the signing date, to been provide comfort that the necessary funds have control) sole investor’s equity documents private with together agreements evidencing that all conditions precedent (other than those within the financing definitive the of copies and fund the from letter commitment equity executed the of copy a provide to willing be typically will buyers equity Private rvt eut sle cn el no h IO I adto, the addition, to ability seller’s equity In private the limit which 7.2) question (see IPO. the into sell underwriting agreement will usually provide for lock-up restrictions can seller equity private new Any shares issued in rules). the IPO will naturally limit maintenance the number of shares the capital to related argument an on (based costs associated the of most bear to seller equity private the ask typically will management the issued, are shares new no where least) (at and company the of cooperation the requires that of All underwriting an into enter shows. road in participate to have will to management and agreement have will company the addition, In prepared. prospectus a and performed diligence due adjusted, be by-laws and association of articles the that requires exit IPO An to judicialreview. subject be would fee the of amount the close, to failure for penalty contractual review.a as judicial structured is to fee break subject reverse be the if Conversely, not should fee the of amount the If structured that way (i.e. a condition linked to a withdrawal right), seller). the to fee break reverse the pay to has but contract the from withdraw can buyer equity private the closing, at available are not is they agreed, are they If typically linked to a financing condition (that is Austria. where the financing in common very not are buyer’s equity closing private at available not is financing a necessary the case in exposure limit to means a as fees break Reverse . Howdoprivateequitybuyers typicallyprovide 6.7 warranties comefrommanagementonly). a secondary transaction where the seller is a SPV, or where business is a listed corporate there is less need for security than in the case of agreed warranties and the credit of of the set seller (that the is, where the including seller factors, various on depends security on insist buyers equity private not or Whether 6.2). question (see security will, in turn, often require that the buyer’s recourse is limited to such . Whatparticularfeaturesand/orchallengesshoulda 7.1 Arereversebreakfeesprevalentinprivateequity 6.8 Transaction Terms: IPOs 7 under anequitycommitmentletter, damages,etc.)? exit? If so,whattermsaretypical? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and private equitysellerbeawareofinconsideringanIPO transactions tolimitprivateequitybuyers’ exposure? iclg to: privateequity 2019 austria hte mzaie s ple. ih il i tpcly only typically is of thetransaction. yield High considered for post-completion refinancing but applied. not for the financing is mezzanine whether institutional debt. On large-cap transactions it is a matter of pricing and senior just usually is there transactions small-cap and mid- On transactions. mid-cap for 40% and funds) equity private international (involving transactions the large-cap for 50% around are tap and deal the of size to the able are which international markets. Debt-to-equity levels also funds, vary depending on equity private international and banks), domestic from finance debt typically seek differ or equity (which all finance transactions funds equity equity private private domestic for for substantially finance debt of Sources which ultimatelyresultedinatradesale. there have only been a few attempts aware, in the last are couple of years, we all of as far As Austria. in rare are processes Dual-track Whatcustomarylock-upswouldbeimposedon 7.2 agreement. underwriting the in warranties give to required also are nominees equity fund and the shares it sells into the IPO. Sometimes director private the to the relating matters to in warranties those limit warranties to able be give to asked be underwriting agreement. In most cases the private equity seller will usually will seller equity sell any shares it has retained following the IPO. Finally, the private Schindler attorneys © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 (“ Banking Act the Austrian by regulated is Lending Arethereanyrelevantlegalrequirementsor 8.2 Please outlinethemostcommonsourcesofdebt 8.1 Doprivateequitysellersgenerallypursueadual-track 7.3 pcait et ud mngd y lcne AF (e the (see as thelendingbusinessiscovered by their AIFM licence. AIFM Austria. licensed in a place) by discussion under take question 10.1) do managed not require such a licence to as long funds deemed debt is Specialist (or place takes lending if licence EU passported or Austrian an have to lender a requires the shareholders’ agreement,butthisisrather theexception. in included be already may requirements lock-up addition, In IPO. seller’s shares to be locked-up for a period of about 180 days after the The underwriting banks will usually expect some of the private equity Financing 8 bonds). through asaleorIPO? private equitysellersonanIPOexit? financing) ofprivateequitytransactions? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare BWG ”) which ”)

EU countries. has concluded a double taxation treaty over entities from other non- among the latter, entities from non-EU countries with which and, Austria entities non-EU over preferred usually are entities EU issue, issue, since pre-exit distributions are very rare. Still, to address that an of less usually is dividends on taxes withholding of Avoidance no (i.e. applies in relation to Austrian target companies). residents tax taxation Austrian for available gains is exemption capital participation resident, an is seller tax the If Austrian shareholder. exiting the of residence of state the to gains capital tax to right the assign usually treaties taxation double that account into taken be should it exit, future a Regarding rarely but discussed sometimes is which method, second A (2) an between group tax a establish to is method first The (1) two methodstoachievethis: with are there principle, In level. company target level the at generated profit BidCo Austrian at expense interest offset to structure offset tax a implement to seek will fund equity Usually,private the funds inquestion1.1. debt specialist of activity increased the on discussion the see Please . Whatarethekeytaxconsiderations forprivateequity 9.1 Whatrecenttrendshavetherebeen inthedebt 8.3 answer toquestion2.1. With regard to implications on transaction structuring, please see the Tax Matters 9 xlrd hn priua cs spot te necessary the supports sometimes case is arguments. particular route a this when why explored is which banks, financing the to interest great of is point last the particular, In banks. financing the to value greater of be will thus and above) (see rules maintenance capital Austrian the under limitations the to subject not are assets) cash-generating the (holding entity merged the by granted interests security and guarantees and interest parent, profit, against offset BidCo be can debt the acquisition the on expense to pass company target the in shares the that be would merger upstream such of result The may,BidCo into targetcompany the of however, feasible. be be not will merger upstream an cases, company exceptional certain In registered. target the into BidCo the of merger downstream company,a target the of shares the of purchase pretty is it clear that where the BidCo Court, carries the acquisition debt for the Supreme Austrian the of decisions past upstream merger of the target company into BidCo. Based on an is involves, it risk significant the of because implemented taxed onastandalonebasis. retroactively are members group the period), minimum the allocation tax tax is (which the years three of lapse If the a to prior collapsed is group office. The tax requires the to group application periods. an and tax agreement future such to of BidCo formation the by forward is carried company target the the BidCo and the target company is negative, the loss can and be BidCo of consolidated at BidCo level. If the aggregated fiscal result of result fiscal the group, tax such In company. target the and BidCo Austrian off-shore structurescommon? financing marketinyourjurisdiction? investors andtransactionsinyourjurisdiction? Are www.iclg.com austria 39 austria 40 austria r nags n led eitn mjrt hlig n h target the in holding majority company. existing already an enlarges or (“ © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com involved. trust to the trustor)) which should be considered where real estate is in held shares of attribution full and previously) 100% to compared 95% (now threshold consolidation share lower a is, (that taxation transfer estate real to relation in changes certain been have There Transfer Tax transfer pricingissues. requests in relation to pre-exit reorganisations, but also in relation to become also will rulings available for value added tax. In practice we binding increasingly see ruling 2020, January 1 with From connection abuse. in questions and taxation international of areas the in available also are rulings tax binding 2019, January 1 Since reorganisations, ago. years few a introduced was pricing transfer and taxation group of areas the in rulings tax binding for providing regime ruling new a after common, more Taxbecoming are rulings Tax Rulings parent. be can an Austrian of base tax corporate the in, subsidiaries included and to, attributed foreign controlled of banks) and insurances of activities and income, leasing financial shares, of sale the from interest (e.g. income payments, royalty low-taxed payments, taxable dividend payments and and income passive that provide which implemented been have establishments permanent and companies” foreign “controlled for rules CFC 2019, January 1 of as Effective CFC Legislation Havetherebeenanysignificantchangesintax 9.4 a is taxation gains capital ( triggering contribution without structure new small stake in the target company, the only option to roll-over into a and thus triggers capital gains taxation. If management only holds a An exchange of shares is treated in the same way as a sale of shares Whatarethekeytaxconsiderations formanagement 9.3 (see 55%) to (up income question 2.3above). employment as taxation to opposed as applies (27.5%) taxation gains capital that ensure to important therefore is It teams. management to nature substantial of benefits tax other or reliefs tax for provides that regime specific no is There Whatarethekeytax-efficient arrangementsthatare 9.2 Schindler attorneys UmgrStG investment intoanewacquisitionstructure? shares, deferred/vestingarrangements)? anticipated? teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities teams thataresellingand/orrolling-overpartoftheir equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate ”) of their shares into a holding which thereby acquires thereby which holding a into shares their of ”) Einbringung udr h Rognsto Tx Act Tax Reorganisation the under ) iec fo te utin iaca Mre Authority Market Financial Austrian the ( from licence investment funds (“AIF”). Managers of an AIF (“AIFM”) require a oee, e wr o te eea cerne eurmns (see requirements clearance general should, question 4.1above). the funds of equity aware Private be however, scrutiny. specific equity private no is there transactions, to regard With above. 10.1 question see please funds, equity private over scrutiny Withregulatory to regard “ ( Investment (EU Act Alternative AIFMD Austrian Manager the the of by implementation 2011/61/EU) Directive the was private industry the impacting equity development recent significant most The f h prflo opn udr utin a. n addition, In law. any with concerned Austrian be will investors under equity private company international portfolio the of case there is an administrative in or criminal offence by any representatives liability company portfolio transaction. and management the for defence of time the a as serve can it at monitored, appropriately is system such Provided existing already not if closing following place in put is system compliance a that sure make will investors) international bigger particular (in funds equity private Also, agreement. investment or purchase the in as well as process diligence due the in areas those on placed been has emphasis enactment, more their Since Austria. in transactions equity private on Anti-bribery and anti-corruption legislation had a significant impact due Compliance diligence. due legal diligence issometimesdonein-house. all conduct outside to engage usually counsel buyers equity Private process). auction to 10 weeks) or an auction (in which case the timing is driven by the a is proprietary situation (in which case the due diligence can take eight it whether on much very depends timeframe The scope. the of rest the covering then phases latter the and items value-driving few a covering only phase first the with auctions), in (particularly phases different in diligence due split often buyers equity Private 02Areprivateequityinvestorsorparticulartransactions 10.2 Havetherebeenanysignificantlegaland/or 10.1 04Hasanti-briberyoranti-corruptionlegislation 10.4 Howdetailedisthelegalduediligence(including 10.3 for the for which casesuch AIFs onlyneedtoregisterwiththeFMA. in used)), is leverage no (where million 500 EUR than less or used) is leverage (where million 100 EUR than less of assets with AIFs Finanzmarktaufsichtsbehörde – Finanzmarktaufsichtsbehörde AIFMG 0LegalandRegulatoryMatters 10 jurisdiction (e.g.onnationalsecuritygrounds)? anticipated? diligence, contractualprotection,etc.)? materiality, scopeetc.)? subject toenhancedregulatoryscrutinyinyour private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors de minimis de ) Piae qiy ud tpcly ulf a alternative as qualify typically funds equity Private ”). lentvs netetod MngrGst – Manager-Gesetz Investmentfonds Alternatives exception (which applies to managers of small of managers to applies (which exception

iclg to: privateequity 2019 “ FMA ”), unless the AIF qualifies AIF the unless ”), austria of an underlying portfolio company. Exceptions apply, Exceptions company. portfolio underlying an of liabilities the for liable not is investor equity private a principle, In Arethereanycircumstancesinwhich:(i)aprivate 10.5 extra- claim them of both as territorial jurisdiction. Act, US Practices the and Corrupt Act Foreign Bribery UK the under requirements additional Schindler attorneys © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 ( investor equity private the of assets the from separated be cannot company the of assets the records, accounting the on based where (iii) default), a in result to likely is which equity the and business the of risks the between imbalance obvious an is there where (only utn te otoi cmay t ik ( ( risk at company Eingriff portfolio the putting otos h mngmn o, h udryn prflo company portfolio underlying ( substantially the of, or management manages, the factually controls investor equity private the where (i) including veil, corporate the piercing of concepts under Sphärenvermischung Insolvenzverursachung atsh Geschäftsführung faktische and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof the liabilitiesofanotherportfoliocompany? (hr te netr ae ato cuig insolvency causing action takes investor the (where ) , n (v i css f hrhle action shareholder of cases in (iv) and ), ), e.g.accelerationofaloanindistress). , i) n ae o undercapitalisation of cases in (ii) ), existenzvernichtender inter alia inter , The above principles apply principles above The company cantakerecourseagainsttheprivateequityinvestor. creditor,the portfolio pays the company portfolio the if addition, in investor equity over); is crisis private the until suspended is company portfolio the the against of claim recourse the case which (in first investor equity private the against claim to creditor the request gaate r euiy neet euig la o a portfolio a (“ of Act Reorganisation loan Company the in a (defined “crisis” securing in company interest security or guarantee a granted investor equity private the where secured amount the to up In addition, a private equity investor may become liable to a creditor contact throughtrustedadvisors. the initiate or partner local a with up team often they reason, that For owned. family is business Austrian the where access particular in to businesses, difficult it find investors equity private Most another portfoliocompany. of liabilities the for company portfolio one of liability potential of 11Whatotherfactorscommonlygiverisetoconcerns 11.1 URG 1Other UsefulFacts 11 considering aninvestmentinyourjurisdiction? should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor ). n uh icmtne, h prflo opn can company portfolio the circumstances, such In ”)). mutatis mutandis mutatis www.iclg.com in relation to the risk the to relation in austria 41 austria Schindler attorneys austria

Florian Philipp Cvak Clemens Philipp Schindler Schindler Attorneys Schindler Attorneys Kohlmarkt 8–10 Kohlmarkt 8–10 1010 Vienna 1010 Vienna Austria Austria

Tel: +43 1 512 2613 500 Tel: +43 1 512 2613 Email: [email protected] Email: clemens.schindler@ URL: www.schindlerattorneys.com schindlerattorneys.com URL: www.schindlerattorneys.com austria Florian’s practice is focused on corporate and finance, in particular Clemens’ transactional practice is focused on corporate and tax. He is whenever private equity is involved. Florian is admitted to the admitted as both a lawyer and a certified public tax advisor in Austria. Austrian, New York and Polish Bar. Before establishing the firm as a Before establishing the firm as a co-founder, Clemens spent six years co-founder, Florian was a partner at Schoenherr, where he co-headed as partner at Wolf Theiss, where he led some of the firm’s most the private equity practice and was involved in some of the firm’s most prestigious transactions. Prior to that, he practised with Haarmann prestigious private equity transactions in Austria as well as the wider Hemmelrath in Munich and Vienna, as well as with Wachtell Lipton CEE region. Rosen & Katz in New York. Clemens’ practice focuses on corporate and tax advice in relation to public and private M&A, private equity and Florian has received the following awards and is ranked in/listed as: corporate reorganisations (such as mergers, spin-offs and migrations), ■ Chambers Europe. most of which have a cross-border element. ■ Chambers Global. Clemens is ranked in/listed as: ■ The Legal 500. ■ Chambers Europe. ■ IFLR1000. ■ Chambers Global. ■ Best Lawyers in Austria – (Best Lawyers). ■ The Legal 500. ■ Private Equity Lawyer of the Year – Austria (ACQ). ■ IFLR1000. ■ Trend (as one of the top 10 CEE lawyers in Austria). ■ The International Who’s Who of Corporate/M&A Lawyers. ■ The International Who’s Who of Corporate/M&A Lawyers. ■ The International Who’s Who of Corporate Tax Lawyers. ■ Best Lawyers in Austria – (Best Lawyers). ■ JUVE (as one of the top 20 Corporate/M&A lawyers in Austria).

Schindler Attorneys is a leading Austrian law firm focused on transactional work, with a strong focus on private equity. The members have an impressive private equity track record and an excellent understanding of the needs of financial sponsors. The firm’s integrated tax practice is a key differentiator from other firms on the Austrian market and is particularly appreciated by financial sponsors. The firm usually acts for financial sponsors, but also advises banks on leverage buyout transactions.

42 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 8 Belgium luc wynant

van olmen & wynant Jeroen mues

1 Overview 2 Structuring Matters

1.1 What are the most common types of private equity 2.1 What are the most common acquisition structures transactions in your jurisdiction? What is the current adopted for private equity transactions in your state of the market for these transactions? Have you jurisdiction? seen any changes in the types of private equity transactions being implemented in the last two to The structure most commonly used for domestic private equity three years? funds is a Belgian company limited by shares (naamloze vennootschap (NV) or société anonyme (SA)). The most common types of private equity transactions are management buy-outs (MBOs) and management buy-ins (MBIs), The shareholders can be corporate entities or individuals, and either very often within the framework of a buy-and-build strategy. The Belgian or foreign. The minimum share capital is EUR 61,500. In market for these types of transactions is stronger than it ever has general, shares are freely transferable. However, company law been since the global financial crisis. The changes in the types of permits transfers to be restricted by means of either a shareholders’ private equity transactions being implemented in the last two to agreement or a statutory clause. three years that have taken place are mainly related to the focus of There exist specific types of undertakings for collective investment investment. Firms in the professional services sector are a good (instelling voor collectieve belegging or organisme de placement example of an increased interest by private equity firms. collectif ).

1.2 What are the most significant factors encouraging or 2.2 What are the main drivers for these acquisition inhibiting private equity transactions in your structures? jurisdiction? The main drivers for these acquisition structures are the flexibility The still solid economic conditions, abundant cash holdings, a strong from a corporate perspective and the favourable tax conditions demand and the favourable consequences they had for investors (including the possibility of obtaining tax rulings prior to any helped boost confidence in the private equity market. The legal structuring). In 2018, the legal framework governing the private system is well-developed, whereas corporate law provides sufficient privak has been thoroughly revised in order to render this particular flexibility in view of structuring private equity transactions. vehicle for private equity investments much more attractive.

1.3 What trends do you anticipate seeing in (i) the next 12 2.3 How is the equity commonly structured in private months and (ii) the longer term for private equity equity transactions in your jurisdiction (including transactions in your jurisdiction? institutional, management and carried interests)?

The trends we anticipate in (i) the next 12 months, and (ii) the longer The equity in private equity transactions is commonly structured term for private equity transactions in Belgium are (a) an increased under the form of equity (ordinary and preferred shares), debt use of private equity (e.g. succession of family-owned enterprises), (shareholders’ loans and/or (convertible) bonds) and carried and (b) a continued change in the investment focus of private equity interests and management incentives (warrants, profit certificates, firms (such as an increased focus on companies with a sustainable, ratchets or otherwise). social and/or environmental impact). Finding new affordable companies will remain one of the main challenges in the coming 2.4 If a private equity investor is taking a minority period. position, are there different structuring considerations?

Except for appropriate investor protection mechanics which can be included in a shareholders’ agreement and/or the articles of iclg to: private equity 2019 www.iclg.com 43 © Published and reproduced with kind permission by Global Legal Group Ltd, London 44 Belgium © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com This company. the of directors of board the of members more or A private equity investor is usually granted the right to nominate one Doprivateequityinvestorsand/ortheirdirector 3.2 board made publicintheBelgianOfficial Gazette. two-tiered be will directors of a appointment The director. sole structure, a or structure governance board and single-tiered Companies of Code a either of creation Belgian the for allows Code) new (Companies Associations the 2019, May 1 Since Whatarethetypicalgovernancearrangementsfor 3.1 permanent disability, without cause),themanagerwillbetreatedasagoodleaver. death, as (such invalidity, serious illness, retirement or termination by the company circumstances other In service agreement. contain the terminates agreement that may under breach a that so agreement defaults cross investment The misconduct). wilful or material of manager reasons which would qualify as cause for termination (such as fraud the by infringement obligations (such as non-compete and non-solicitation) or in case of the event), leaver good a or company, the of behalf on termination breach material a a of because (except manager a by agreement management the leave they of termination unilateral the covers typically situation Aleaver bad if company the in options) voluntarily oraredismissedforcause. share (or equity their of some or all forfeit to required are managers most Additionally, agreements. A widerangeoftermsareusuallyimposed,including: It is usual for management to enter into management or employment Forwhatreasonsisamanagement equityholder 2.6 be often will provisions acquisition included intheinvestmentdocumentation. that compulsory understood being and it higher), vesting (or 20% to 5% between level The typical range of equity allocated to the management will be at a Inrelationtomanagementequity, whatis the typical 2.5 a if private equityinvestoristakingaminorityposition. considerations structuring different no are there association, van olmen&wynant ■ ■ ■ GovernanceMatters 3 your jurisdiction? acquisition provisions? position, whatvetorightswould theytypicallyenjoy? etc.)? Ifaprivateequityinvestor takesaminority disposals, businessplans,related partytransactions, corporate actions(suchasacquisitions and nominees typicallyenjoyvetorightsovermajor in yourjurisdiction? arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such employees of respect and/or customers). (in undertakings Non-solicitation Non-compete undertakings. Confidentiality provisions. usually treatedasagoodleaverorbadin what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and such asmanagementshareholders. shareholders minority to investor equity private a by owed duties no are there obligations, and rights agreed contractually for Except nominee director level. the at or veto level of shareholder effectiveness the at the arrangements on limitations particular no are There (or toadirectorappointedbytheinvestor). minority investor and then the granting veto rights to to that shares class of of shares class separate a issuing by achieved often is This company oritssubsidiaries. the by directors the of indemnification and exoneration prohibits directors together). In contrast, the Companies Code now explicitly which vary from EUR 250,000 to EUR 12 million (aggregate for all for is limited to specific amounts, correlated to the size of the company, exceptions (with Code directors’the liability fraud), and faults gross faults, Companies light recurrent principle new general the a by As introduced Code. Companies new the by imposed as liability,directors’ assessing for standard the is circumstances” what a normally prudent and cautious director would do in the same Whether a director has acted or not within the “reasonable margin of without ageographiclimitationwillalmostneverbeenforceable. shareholder of non-compete and non-solicit provisions). A non-compete provision enforceability (ii) and jurisdiction, or and law governing (i) contents (including agreements the on restrictions or limitations no are there time, in limitations certain from Apart . Arethereanydutiesowedbyaprivateequityinvestor 3.4 Arethereanylimitations ontheeffectivenessofveto 3.3 corporate actions,suchas: specific over rights veto granted be also can shareholders Minority the in found shareholders’ be agreement. to likely more much is but (a nomination) association binding of articles company’s the in included be can right . Arethereanylegalrestrictionsorotherrequirements 3.6 Arethereanylimitationsorrestrictionsonthe 3.5 ■ ■ ■ typically addressed? typically addressed? divestments, investments, borrowing, lendingandguaranteeing. certain to relation in Decisions Appointment ofmanagingdirectorsandkeymanagers. Use ofauthorisedcapitalbytheboarddirectors. portfolio companies? non-compete andnon-solicitprovisions)? shareholders (or to minorityshareholderssuchasmanagement the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements iclg to: privateequity 2019 vice versa )? Ifso,howarethese Belgium and moneywithratherlimitedchancesofsuccess. competitive whereby private equity investors can invest a lot of time unseen to very often leads are auctions consequence, a As powder”. “dry of subsequently levels which the this, invested limits equity to further of industries addition amount some In in financing debt companies. aggressive privately-owned Belgian in recently, more and, interest increasing an showing are individuals and families wealthy investors foreign buyers, Strategic attractive is find targets. it to supply, investors the equity private exceeding for on difficult keeps extremely deals for demand the As for timetable the on impact substantial transactions. a have can that issue major the is approval antitrust sector), telecom or services financial regulatory specific the in from transactions to relation in as (such law by imposed approvals Apart the years. of the closing over stable final relatively to remains process average contact the of duration first the Overall, from transaction. months six to four around takes transaction equity private a for process average The the to approval general shareholders’ meeting. for the submitted be interest, will of transaction the conflict or a decision have simultaneously to directors duty the all the has director if or “conflicted” director one has only company the withdraw. AAdditionally,if interest. of conflicts potential on rules stricter for provides Code Companies new The Howdodirectorsnominatedbyprivateequity 3.7 van olmen&wynant © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 equity private to available protections deal specific no are There Whatdealprotectionsareavailable toprivateequity 5.2 are treatedinthesamemanner. investors equity private and bidders industrial such, As financing. private their and transactions public-to-private in to involved investors equity apply that challenges and/or features particular no are Other than the applicable legislation in relation to public bids, there Whatparticularfeaturesand/orchallengesapplyto 5.1 Have therebeenanydiscernibletrendsintransaction 4.2 Whatarethemajorissuesimpactingtimetablefor 4.1 rnato em:Pbi custos Transaction Terms: Public Acquisitions 5 Transaction Terms: General 4 party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof terms overrecentyears? disclosure obligationsandfinancingissues? of otherportfoliocompanies? acquisitions? investors inyourjurisdiction relationtopublic commonly dealtwith? transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust prvl, h cnieain tutr cn nld a id of kind a include antitrust can of case compensation fortheintermediaryperiod. structure in consideration (e.g. closing the of approval), date the the between and exists date gap signing certain a When level). capital working hehl ad uain n my e urned y various issues. by guaranteed relation to be tax, other financial matters, and social and environmental may and in given those include warranties and Representations instruments. duration and threshold cap, by limited usually are sellers’obligations The indemnification the shares. any provide own they that confirmation than other warranties or representations to reluctant extremely often are sellers Institutional as follows: Typical clauses included for the protection of contractual buyers are not (but (closing adjustment mechanism referring to, regularly will mechanism similar investors other any or locked-box a propose exclusively) equity private buy-side, the equity investors on the sell-side are the locked-box mechanism. On private by preferred typically are that structures consideration The . Whatconsiderationstructuresaretypicallypreferred 6.1 . Whatisthetypicalpackageofwarranties/indemnities 6.2 certain obtaining not tosolicitanybidbythirdparty). by offer and/or shares, their of dispose to not and public offer the support fully to a of commitment a (e.g. shareholders reference the success from commitments of rate the investor can approach such reference shareholders in order to secure The by one or more acquisitions. reference shareholders. As a bidder, a public private equity dominated typically to is companies relation traded publicly of in shareholding deal a secure to order in approach pragmatic more a use also can investors equity Private company’s interest. the board of directors of fee, a target company break-up needs to take such into account the to agree to not or whether deciding the When (ii) and fee, such of amount circumstances inwhichcasethebreak-upfeecanbetriggered. the (i) are fee break-up such of validity the evaluate to order in factors main The not. or valid be will fee break-up a whether guidance little is there law, case In very not common. are they but acquisitions, public are to fails relation bid the in if available bidder the to fee a pay to company target the investors in relation to public acquisitions. Break-up fees obligating ■ Transaction Terms: Private Acquisitions 6 on arepresentationorwarrantyif: and representations of warranties made by the sellers. comprised A buyer is not allowed to rely is agreement purchase (non-management). warranties and Representations team toabuyer? on thebuy-side,inyourjurisdiction? by privateequityinvestors(i)onthesell-side,and(ii) offered byaprivateequityselleranditsmanagement ■ ■ in thedataroombeforetransactionwascompleted. was false, based on the information disclosed by the seller representation the that or known have reasonably should he representation the that knowledge warranty wasfalse;or actual had he www.iclg.com inter alia Belgium , net debt and The 45 Belgium 46 Belgium © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com (fundamental claims notifying for limitation time a (i) Limitations onwarranties: covenants, warranties, under team indemnities andundertakings. management the and equity seller private a of liability the to apply typically will limitations following the whereby negotiation of matter a are limitations The Whatlimitationswilltypicallyapplytotheliabilityofa 6.5 classic account into and (taking retention insurance such of cost typical The condition ofassets,taxlossesandtransferpricing. unpaid leave entitlements. Specific exclusions generally will be the (v) and obligations), historic from (distinct (iv) underfunding pension leakage), (including adjustments post- price (iii) purchase substances, completion hazardous (ii) buyer, the to known issues (i) include policies insurance such from exclusions and Carve-outs value. deal of 50% be will limits policy and excesses typical The private as equity firms. such is investors place institutional in by insurance requested such increasingly have to requirement the but limited relatively still is insurance warranty & representation of use The To whatextentisrepresentation&warrantyinsurance 6.4 portion ofthepurchasepricetocoverindemnityclaims. not expected to be solvent after closing, it may be desirable to escrow a is seller the where or anticipated, are problems major Where buyer are: a to team management its and seller equity private a by provided indemnities and undertakings covenants, other of scope typical The Whatisthetypicalscope ofothercovenants, 6.3 van olmen&wynant be increasedwithinsurance-relatedtaxes). to (percentages 1.5% to 1.3% included, are warranties” “synthetic or,warranties) fundamental so-called for when coverage (including ■ ■ ■ equity selleranditsmanagementteamtoabuyer? by doingso.Possiblesolutionsinclude: warranties. and representations of However, accurate they are usually reluctant to incur personal liability make can (management who warranties portfolio company). and Representations arnis yial srie 0 er a te minimum, the and environmental warrantiesthestatuteoflimitation); at years 10 business warranties between 12 and 24 months and survive tax, social typically warranties warranties, covenants,indemnitiesandundertakings? private equitysellerandmanagementteamunder the typicalcostofsuchinsurance? exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) knowledge ofthem. actual had buyer the whether of regardless problems, those can be required to indemnify against any losses arising out of sellers diligence, due the in identified are problems specific Where escrow). and indemnities (specific solutions Other usually requestedfromthemanagement. is undertaking non-compete A undertaking. Non-compete undertakings andindemnitiesprovidedbyaprivate ■ ■ best-knowledge basis. a on only representations make to management requiring limiting liabilitytoaspecifiedamount;and e minimis de ees wl b aon 1 t 1.3% to 1% around be will levels) Management are often the only people Reverse break fees to limit a private equity buyer’s exposure are not that confirm Such usually sufficient funding willbeavailableattheclosingoftransaction. will agreement. sheet the term of and/or signing letter the commitments of time the at sheet term bank or letter commitment equity an provide usually will buyers equity private finance, equity (ii) and finance, debt (i) to relation In as follows: Typical clauses included for the protection of contractual buyers are . Do(i)privateequitysellersprovidesecurity(e.g. 6.6 . Arereversebreakfeesprevalentinprivateequity 6.8 Howdoprivateequitybuyerstypicallyprovide 6.7 i pcfc oeat o udraig wl b pr o the of part be will undertakings or covenants Specific (i) Limitations oncovenantsandundertakings: findings diligence due specific as (such indemnities Specific (i) Limitations onspecificindemnities: under recovery double no and loss mitigate to obligation the (v) or knew buyer the if or liabilities contingent for liability no (iv) matters, agreed by caused extent the to claims of exclusion (iii) (ii) financial limits, including limits, financial (ii) ■ ■ ■ ■ If so,whattermsaretypical? under anequitycommitmentletter, damages,etc.)? to limited requested fromthemanagement. (typically management). undertaking Non-compete price tocoverindemnityclaims. Escrow. of knowledge actual them. had buyer the whether of regardless to problems, those required of out arising be losses any can against indemnify sellers diligence, due the in identified indemnities. Specific sellers (seequestion6.2). the by made warranties and representations of comprised is warranties. and Representations the managementteam)? warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and transactions tolimitprivateequity buyers’ exposure? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i) debt finance,and as incaseofanon-competeprovisionformanagement). and, as the case may be, without any financial limitation (such provision) non-compete a of scope (e.g. process negotiation usually are ). and thereof knowledge or not unlimited or limited generally to the disclosure purchase price (or a substantial are part issues) by social or qualified tax e.g. to, relation in warranties, indemnitiesandinsurancepolicies. could haveknown;and accounting policies; or tax of change or law, of interpretation or law of change a acts of purchaser (outside of the ordinary course of business), general, aliability (in liability total the on cap a and (“basket”) threshold claims It is not unusual to escrow a portion of the purchase nncmee netkn i usually is undertaking non-compete A iclg to: privateequity 2019 pro rata hr seii polm are problems specific Where de minimis de ); The purchase agreement purchase The , a minimum aggregate minimum a , Belgium

the closingdate. are expected to agree upon a lock-up arrangement of 360 days from company concerned the of directors and officers as whereas date, closing the from days 180 of arrangement lock-up a upon agree to In general and subject to customary exceptions, sellers are expected exit inBelgium. of forms popular most the remain sale trade the and sale secondary the that mean Belgium in IPOs for conditions market stock current exit, profitable and prestigious most the remains IPO the Although Whatparticularfeaturesand/orchallengesshoulda 7.1 place, noristhereanyrelevantcaselaw. prevalent in private equity transactions. No specific legislation is in van olmen&wynant © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 loans, oneormore banksgenerallyarrangeasyndicated facility. larger For finance. acquisition arranging in specialise that teams finance acquisition have banks commercial Most financing. of debt sources main the of one been always have banks Commercial private of equity fundsthatprovidemezzanine finance. number a also are There bank agent. investment placement a an as acting without bonds placed privately purchasing sellers by company a to directly money lend usually investors Institutional the acquisitions, private in themselves (vendorloans). and, investors, institutions institutional from financial loans usual are The financing 80%. debt as of high sources as be can occasionally which debt by provided is buy-out a of finance the of part Generally,substantial a Pleaseoutlinethemostcommonsourcesofdebt 8.1 when factors deciding whichbidtoaccept. other consider can sellers the therefore and bidder highest the to sell to obligation fiduciary absolute no also is There Doprivateequitysellersgenerallypursueadual-track 7.3 Whatcustomarylock-upswouldbeimposedon 7.2 take place by auction but there is no specific legislation covering this. In case of an exit through a sale, it is common practice for buy-outs to a possibleexitthroughsale. choose to go down the path of conducting an IPO while also pursuing would transaction exit an on planning company a whereby process” It is rather exceptional that private equity sellers pursue a “dual-track Financing 8 Transaction Terms: IPOs 7 private equitysellerbeawareofinconsideringanIPO through asaleorIPO? private equitysellersonanIPOexit? exit? bonds). for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare

n eea, neet n dvdn pyet ae ujc to subject are payments dividend and withholding taxof 30%. interest general, In Withholding tax of theinvestor’s paid-incapital. amount the to up income tax- taxable from deducted be can loss capital not are shares on losses deductible, except following the liquidation of a company when the Capital income. corporate from exempt are subsidiary a in shares of Belgian sale the a on company by holding realised gains capital million, 2.5 EUR than lower or capital share the of 10% than less of holding a of case in Except Capital gains tax treatmentoncapitalgainsanddividends. favourable enjoy company,general, liability in limited Belgian any 100 EUR above value million areusually42%equity-financed. transaction a with deals whereas 21% is size of the deal. For the micro-transactions, the equity-to-value ratio the with increases contribution equity the general, in that, clarified as being it 31%, around such is debt) subordinated and mezzanine-financing shares preference (including buy-ins and management The buy-outs years. management previous in with contribution line (semi-)equity in average is multiple This 3:5. is ratio NFD/EBITDA- average the financing, debt of levels the Regarding still is transactions of abundant inthecurrenteconomiccircumstances. type this for financing 2019) debt May that confirms School, Business (Vlerick Monitor M&A 2019 The an increaseduseofthesafeharbourregulation. flexible regime for financial assistance which certainly will result in more remain a provides Code Companies new will the past, the to Compared rule capitalisation thin 5:1 applicable. current tax the to payments interest havens, for also and loans these For loan). the “fundamental” of duration no the or rate interest the parties, contracting date, the instance, for to, this relating modifications of (i.e. as made been which, have modifications to 2016 June 17 to In 2020. of as force principle, the rule does not apply to loans that were concluded prior into enters only rule new “threshold This so-called the amount”). (the of million 30% 3 of EUR amount or higher EBITDA the taxpayer’s “exceeding to up that only incurred are stipulate they rules capitalisation which in period tax the in deductible be only will costs” borrowing thin new The Apart from the special tax regime applicable to and investors Incentive schemes equity private for considerations transactions aremainlyrelatedto: tax key The . Whatrecenttrendshavetherebeeninthedebt 8.3 Arethereanyrelevantlegal requirementsor 8.2 . Whatarethekeytaxconsiderationsforprivateequity 9.1 Tax Matters 9 financing marketinyourjurisdiction? financing) ofprivateequitytransactions? off-shore structurescommon? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof investors andtransactionsinyourjurisdiction? Are www.iclg.com privaks Belgium , investors in 47 Belgium 48 Belgium © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com rulings) tax to relation in (including authorities tax of practices the in and legislation tax in changes significant years, previous the In Havetherebeenanysignificantlegaland/or 10.1 management teamsandprivateequitytransactions. investors, equity private impact certainly will which occurred have rulings) tax to relation in (including authorities tax of practices the in and legislation tax in changes significant years, previous the In Havetherebeenanysignificantchangesintax 9.4 of view in value ratchet) structures). market fair as (such equity sweet of of case in (e.g. plans incentive principle management the (ii) capital and any of gains, taxation of absence the (i) to related are structure acquisition new a into investment their of part rolling-over and/or selling are that teams management for considerations tax key The Whatarethekeytaxconsiderationsformanagement 9.3 when theoptionsbecomeexercisable). share determines (which well-designed vesting of period a a for provide can addition, plan option In Plan). Action Employment Belgian 1998 the to relating 1999 March 26 of (Law grant the of the that provided gain, year the capital following years three than earlier exercised not are options tax-free a realise to and options share the of grant the of time the at tax upfront low relatively pay receive can to possible is it example, For Belgium. in they treatment tax favourable because used often also are plans a option Share managers the give to is combination ofsharesandoptions. incentive management common A Whatarethekeytax-efficientarrangements thatare 9.2 As such,off-shore structuresarenotcommon. are company parent its to exempted fromwithholdingtaxwhentheparentcompany: subsidiary a by allocated Dividends However, manyexemptionsexist. van olmen&wynant ■ ■ 0LegalandRegulatoryMatters 10 shares, deferred/vestingarrangements)? subsidiary foranuninterruptedperiodofatleastoneyear. its of capital the in 10% of share minimum a maintained has and with state a in convention; taxation double a concluded has Belgium or which State Member EU another in located is anticipated? private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting anticipated? teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities investment intoanewacquisitionstructure? teams thataresellingand/orrolling-overpartoftheir equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate weeks. eight to six is diligence due a such for timeframe Atypical topics. commercial and technical pensions, environmental, financial, legal, equity private investors prior to any acquisitions will by be detailed and usually cover conducted diligence due legal the principle, In enhanced regulatory scrutinybasedon,e.g.nationalsecurityground. to subject not are investors equity private principle, In for vehicle particular private equityinvestmentsmuchmoreattractive. this render to order in revised thoroughly portfolio the liabilities ofanotherportfoliocompany. by laws applicable of no companies), or (ii) companies one portfolio company may be held breach liable for the portfolio to are underlying due the there (including of liabilities company, the holding for held liable be may any investor equity private a of (i) which in circumstances shareholder a by guarantees) as (such undertakings agreed contractually for Except any applicableanti-corruptionoranti-briberylaw: under provision any violating from parties following the prevent to aim provisions The documents. investment in practice common becoming is provisions anti-bribery thorough of introduction The 04Hasanti-briberyoranti-corruptionlegislation 10.4 Howdetailedisthelegalduediligence(including 10.3 Areprivateequityinvestorsorparticulartransactions 10.2 private the governing framework legal the 2018, In management teamsandprivateequitytransactions. investors, equity private impact certainly will which occurred have 05Arethereanycircumstancesinwhich:(i)aprivate 10.5 ■ ■ ■ ■ ■ ■ ■ ■ materiality, scopeetc.)? jurisdiction (e.g.onnationalsecuritygrounds)? the liabilitiesofanotherportfoliocompany? Any otherpersonactingonbehalfofthecompany. An employee. An agent. A manager. A supervisor. An officer. Any memberoftheboarddirectors. The target company. diligence, contractualprotection,etc.)? approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors subject toenhancedregulatoryscrutinyinyour and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof iclg to: privateequity 2019 Belgium privak was rvt eut fns Croae a poie a ra rne of range broad a flexible solutionsinviewofstructuringatransaction. provides law Corporate funds. equity private as such investors foreign for open and transparent relatively stable, very is market Belgian The investors. equity private for concerns There are no specific factors in Belgium that commonly give rise to Whatotherfactorscommonlygiverisetoconcerns 11.1 van olmen&wynant © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 and each have over 25 years of experience in their specific niche. In this respect, the network of Chris Van Olmen and of Luc Wynant within the business worldisacorecompetence which isnotreplaceable,andaleverageforthefirm. within Wynant Luc of and VanOlmen Chris of network the respect, this In niche. specific their in experience of years 25 over have each and specific cases because of the experience and knowledge we have in our domains. The founding partners are well-known in for the Belgian firm legal scene law our choose clients Wynant: & VanOlmen to come clients reason main the and competences core the of one is firm law niche a Being and restructuring options, stock securities, debt and liquidation. equity of offering private and public structures, equity as such projects and issues complex Van Olmen & Wynant is well-known in the Belgian market for its focus and its dedication to “special projects”. In this respect, the firm handles more The corporateandM&A practicecounselsandassistsclientsinallaspectsofcorporatelaw, privateequity andmergersacquisitions. Founding Partner Luc Wynant leads the dedicated team of experienced, multilingual professionals in Van Olmen & Wynant’s corporate department. the lawfirmsinceitsincorporationin1993. of driver main the been has focus This corporate/M&Aemployment. law: and of areas two only covering firm, law niche a is VanWynant & Olmen Belgian legalsceneandrecognisedassuchinallmajorrankings. Vanof partner founding As Wynant,& Olmen the in well-known is Luc (non)successful of view in private equity-backedbuy-outs”)). contracting private good of of field the (“Concepts in equity Leuven KU Business and Ghent in of University (Doctorate School, Researcher PhD Business Vlerick the at a programme PhD joint – (DBA) Administration also is Wynant Luc divestitures, funds formations, mergers and company reorganisations. buy-outs, management (leverage) markets, venture capital debt acquisitions, and assets capital and on share specifically domestic focuses and He international work. financial and transactional both in equity private and acquisitions and mergers regarding particular in M&A and equity private law, practice. Luc has corporate extensive experience in all aspects the of corporate law, of head is Wynant Luc 1OtherUsefulFacts 11 should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor considering aninvestmentinyourjurisdiction? R:www.vow.be URL: [email protected] +3226440511 Email: Tel: Belgium B-1050 Brussels Avenue Louise221 Van Olmen&Wynant Luc Wynant a eprec wrig o ntoa ad nentoa non-profit international and national organisations. for working experience and has restructurings, business and transactions financing and estate real corporate ventures, joint liquidations, acquisitions, (de)mergers, his transactional and work for companies active in diverse industries. Jeroen specialises in international experience and of national in years includes specialises 10 practice corporate over Wynant, has & Jeroen Olmen law. Van corporate at Counsel Mues, Jeroen R:www.vow.be URL: [email protected] +3226440511 Email: Tel: Belgium B-1050 Brussels Avenue Louise221 Van Olmen&Wynant Jeroen Mues www.iclg.com Belgium 49 Belgium chapter 9 Brazil claudio lampert

Faveret lampert advogados João F. B. Sartini

1 Overview with these factors, a tax-efficient ambiance to host PE investment is accounted in any investment decision. The main factors inhibiting PE transactions are the political 1.1 What are the most common types of private equity instability, the financial crisis and some relevant bureaucratic steps transactions in your jurisdiction? What is the current investors must face while establishing and conducting business in state of the market for these transactions? Have you Brazil. Nonetheless, it is part of the new elect government’s seen any changes in the types of private equity political platform to create solutions to decrease the level of transactions being implemented in the last two to bureaucracy and, as such, expedite the formation of new business three years? entities and structures to host PE investment. The most common private equity (“PE”) transactions are investment (acquisition) and divestment (sale) of both minority and controlling 1.3 What trends do you anticipate seeing in (i) the next 12 equity stakes. PE transactions are usually carried out via acquisition months and (ii) the longer term for private equity or disposal of equity stakes in the target company or assets with the transactions in your jurisdiction? execution of relevant documents, such as investment agreements and shareholders’ agreements that foresee a set of governance rules, Expedited processes of formation and establishment of businesses restrictions on transfer of shares, registration rights and rules entities and fund formation are for sure a key element to promote a disciplining exit strategies and creating liquidity for investors. market prone for massive PE investment. Upon confirmation of the There are no substantial changes in the way PE transactions are economic recovery and the consolidation of the new elected carried out in Brazil in recent years, and the local model of government – through the approval of several important reforms, investment, as a general way of doing business, follows the patterns such as the pension and the tax reforms – an increase of PE of other jurisdictions that are investment friendly (such as the US transactions in Brazil is expected, especially in the middle-market, and Europe). Brazil has recently undergone substantial changes in both in the number of transactions and in their expression, and the its political life and trends. If the Brazilian economy recovery and volume of investment per deal. Until then, we expect that PE consolidation is confirmed in the coming years, and paramount investors should probably maintain high levels of liquidity and little changes are implemented by the new elected government, it is exposure to risks and lay low observing the political changes and reasonable to expect an increase of PE transactions and foreign market trends. money coming into Brazil. In recent years, Brazilian PE funds and foreign investors have 2 Structuring Matters focused on middle-market companies and family businesses with strong goodwill, a bright future, sizeable growth and consolidation on the horizon. It is hard to spot a specific segment that has received 2.1 What are the most common acquisition structures more attention and money than others. We have witnessed a large adopted for private equity transactions in your variety of investment in various sectors and business segments, such jurisdiction? as heavy industries, retail commerce, real estate, infrastructure, e-commerce, tech business, and several other kinds of services. PE transactions are commonly structured through investment funds called Fundos de Investimento em Particpações (“FIPs”) and/or businesses entities such as limited liability companies (sociedades 1.2 What are the most significant factors encouraging or limitadas) and corporations (sociedades anônimas). inhibiting private equity transactions in your jurisdiction? FIPs are regulated by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários or “CVM”) and are The substantial upside of the opportunities, the historic legal organised as a condominium of assets. FIPs ought to have a legal certainty (sustained by a long-established democratic environment administrator and an asset manager, both also regulated by CVM. and the strong presence of rule of law), the tax-friendly regime for FIPs are authorised to invest in several assets issued by the target international PE investors and the little exposure of key investment company, including shares, quotas, convertible and non-convertible opportunities to macroeconomic fluctuations are the most bonds, subscription warrants and should play an active role in the significant factors encouraging PE transactions in Brazil. Along target company’s management.

50 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London vial i trs f otata poiin – ih h necessary adaptations toconformwithBrazilianlaw. the with – provisions contractual of terms in available for internationally shelters are that solutions and patterns the the follow Usually,protection implement. to easy and contractual be to avoid abuse of control power and overwhelming the situations should agreement, negotiation and afterwards in the documentation, and the mechanics investment the in the first sought be should of protection Minority vehicle. invested by-laws the the to amendments and in agreement shareholders’ the especially negotiating when investment, observed be should approaches different protection, legal considering However,when structure. transaction PE a to down comes it when differences substantial no are There of location investments andinvestmentgroups. and jurisdiction investor PE the including variables, several on depend will interests carried contemplate that Structures and consultantsappointedbyPEinvestors. key in managers professional company with along (C-level) the positions management in kept usually are shareholders Founding a result,willholdequityand/orsecuritiesofthetarget investment. entity,Brazilian a of FIPequity the as hold allows which, to format is formed and placed between the FIP and the target company. This transaction and the use of debt financing, a Brazilian business entity PE the for designed structure the on Depending securities. and/or seeks funding, after equity of acquisition targetvia in companies invest to opportunities which, FIP a to funds provide investors PE this systemisbothfinanciallyefficient andinvestmentprotective. investors, foreign regarding Especially investors. PE for protection legal of level comfortable a and regime tax friendly a carry funds to investment these as transactions PE for structure common most the related protection are FIPs legal why reason the is This and investors’liabilities. PE potential efficiency regulatory and Tax Whatarethemaindriversfortheseacquisition 2.2 Faveret lampertadvogados © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 bad the to close comes This cause. for terminated is or resigns professional the if company the to back shares of sale compulsory a imposing manager or officer the to shares of transfer effective an is there where plans option stock the in clauses see to frequent also is It shares. of acquisition the through company the in plan option stock the to pegged not compensation variable their of percentage a also is It frequent that officers earnings. and managers with options are forced fixed to invest of top on compensation less variable have apply normally to reference a as just will structures stock phantom or plans aggressive business established whereas plans, the of target. Greenfield investment tends to have more aggressive option profile and investment of amount the on depend will This Inrelationtomanagementequity, whatisthetypical 2.5 If aprivateequityinvestoristakingminority 2.4 Howistheequitycommonlystructuredinprivate 2.3 considerations? institutional, managementandcarriedinterests)? structures? acquisition provisions? what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and position, aretheredifferentstructuring equity transactionsinyourjurisdiction(including agt s oae. n cmeca rgsr fl i pbi and public is file registry commercial accessible forconsultationandcopies. Any located. the and is where state filed target the are in registry they commercial as the before by-laws, registered the for except obligation, such subject to full disclosure rules. Private companies are not subject to are documents companies’corporate listed publicity,all Regarding of officers; and(d)rulesforspecificcommittees. (c) rights to appoint members of the board of directors and/or board protections. rights; disclosure (b) rights; veto (a) create: investors where is That and rules governance specific more with agreement shareholders’ execute often FIPs regulation, CVM the with Along beneficiárias ( bonds beneficiary including certificate participation annual any of compulsory (d) disputes; issuance of prohibition (e) an and statements; financial the of auditing settle of choice to (c) chamber company; arbitration target party the related by for executed of agreements obligation board disclosure all (b) for office members; of directors’ term two-year unified (a) including: requirements, governance for provides FIPs for regulation CVM’s Please seetheanswertoquestion2.5above. plan; (d) approval of annual budget; (e) indebtedness; (f) mergers (f) indebtedness; (e) budget; annual of approval of (d) plan; issuance (b) reduction; and/or securities, especially convertible increase securities; (c) approval of business capital (a) as: such actions corporate major Usually,over rights veto have investors PE evidently themostcommonones. are resources receive to necessity the and investment of volume the where factors different several from derive control the and rights veto of size the on obtaining in Leverage depend capital. the of target’sneed all the and of investment will it life before, the said inside As step business. and managers, and veto, and officers control appoint exercise to capacity their in reduction a see to normal is it positions, minority take investors PE When processes. approval and the quorum voting usually reflect in to by-laws mirrored the are of amendment and rights agreement shareholders’ Veto the in established stakeholders. negotiation and underlying acquired the stake among equity the on directly range their depends and investors PE to granted typically are rights Veto . Whatarethetypicalgovernance arrangementsfor 3.1 Forwhatreasonsisamanagement equityholder 2.6 . Doprivateequityinvestorsand/ortheirdirector 3.2 other in be definedinthedocumentation. used usually and methodology for ascertaining the right are price companies, for the non-listed stock should in issue an that always is Pricing jurisdictions. clauses leaver leaver/good GovernanceMatters 3 in yourjurisdiction? your jurisdiction? position, whatvetorightswouldtheytypicallyenjoy? arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such usually treatedasagoodleaverorbadin etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor ). www.iclg.com Brazil partes 51 Brazil 52 Brazil © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com the shareholders’ sure agreement is being kept and is available in the files of make and PE steps deal, bureaucratic the up the follow should of of investors consummation the enforceability Following company. the target the before secure filed is document the to that is agreements shareholders’ requirement non-solicitation main and The non-compete of conditions arrangements toavoidenforceabilityissues. and terms of payment years. PE investors should draft detailed provisions highlighting – the requirements certain five to up of limitation time and limitations territory compensation, to attention pay investors as long so enforceable fully are non-solicitation and Non-compete to itsenforcement. and law foreign complexity add by will that factor a is jurisdiction other any to subject governed agreement Brazil. shareholder in a place Having take effects agreement shareholders’ most that fact the and Brazil, in judgment foreign a recognise to procedure expensive and time-consuming complex, the to due unusual is that but law, foreign a by governed be may agreements Shareholders’ Arethereanylimitationsorrestrictionsonthe 3.5 voting of exercise rights tooverwhelmminorityinterest. and power control of abuse govern that rules in especially companies, Brazilian publicly held companies. acquiring Special attention should in be directed to the in stake interested equity if obligations to controlling and rights obligations be such should of and investors aware PE rights therefore, and, additional shareholders controlling foresees law Brazilian in plan. business business approved and the goals corporate their with develop accordance and company) the of shareholder other target’sthe any in like rights (just voting interest their best exercise should investors PE transaction. PE Brazilian a with dealing when special duties and/or obligation that PE investors should be aware of differentno are investors PE shareholders. other from no are There Arethereanydutiesowedbya private equityinvestor 3.4 conditions oftheagreement. and terms the with accordance in rights voting their exercise will shareholders the that ensure to shareholders agreements other shareholders’to proxies Often, grant to. party a is shareholder such which to agreement shareholders’ the by for provided conditions and terms the against exercised vote shareholder a cast to refuse to ought chairman the such, As shareholders’agreement. the in forth of board the of set obligations and provisions chairman the meet and observe must the directors level, board At company. target the and shareholders the upon performance specific to subject and At the shareholders’ level, the shareholders’ agreements are binding Arethereanylimitationsonthe effectivenessofveto 3.3 programmes; and(i)relatedpartyagreements. and acquisitions transactions; (g) capex investment; (h) stock option Faveret lampertadvogados typically addressed? non-compete andnon-solicitprovisions)? (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements typically addressed? shareholders (or to minorityshareholderssuchasmanagement the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) vice versa )? Ifso,howarethese D&O insurance and indemnification and hold harmless agreements. the are directors and officers for protection liability common Most are company’s by-laws. claims the and/or law in of breach and/or managers power of abuse to of related usually Involvement funds. of foreclosure electronic via cash and assets finding of capacity huge a achieved and records virtual on courts running fully connected to the cases banking system, judges and with clerks have and era digital the In in case ofunpaidlabourwages,taxesandsocialsecurityobligations. directors and officers against approaches aggressive follow to company’s the regarding labour,tend judges Brazilian obligations. tax and/or security social especially cases, certain in company’sobligation target the for liable jointly held be may Management where care andloyaltyareoftheessencemandate. position, that fiduciary a taking sanction from individual legal the bar other would any and racketeering, embezzlement, fraud, practices, corruptive in bankruptcy engagement of sort funds, other any and of bribery misappropriation fraud, to related crimes for sentenced been have not and slate, clean a carry should They officer. an as or director a to as either requirement position the for relevant qualify some meet should members Appointed and rulesthatapplytonon-resident investorsoftheFIP: FIPs must be registered before the CVM. There are special features best interestofthecompanywheredirectorisoccupyingaseat. the against clearly are that interests defending or positions taking other from arises interest Takingof conflict company. The target the at position directly management interest. the exercise to not eligibility and impartiality their does affect of companies portfolio conflict in positions a management involving matter any on targetvoting company.the from of barred benefit also are They the in judgment best their apply to have always will they as them, nominated that party the of interest specific the is which matter not their on focus have and loyalty, fiduciary responsibility. Once they undertake their mandate, care, it does of duties their by bound be and business the of interest best the in act always must Directors . Arethereanylegalrestrictions or otherrequirements 3.6 target companyasaninterveningpartytotheagreement. the having by satisfied be can formality This company.target the . Whatarethemajorissuesimpactingtimetablefor 4.1 Howdodirectorsnominatedbyprivateequity 3.7 Transaction Terms: General 4 portfolio companies? disclosure obligationsandfinancing issues? of otherportfoliocompanies? equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin and otherregulatoryapprovalrequirements, transactions inyourjurisdiction, includingantitrust party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof iclg to: privateequity 2019 Brazil its officers anddirectors. target, the on also but aspects, financial and legal on only not no. (Law scrutiny compliance tighter a to subject Act and intense diligence more Anticorruption become have sectors Brazilian regulated within transactions PE 12,846/13), the of enforcement ocr fr E netr. ic Since investors. PE for concern a currently is diligence Anticorruption environment. credit the of the with speed regain decrease transactions of the interest rates and PE the flexibilisation and development leveraged expected is It Faveret lampertadvogados © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 A public-to-privatetransactionusuallytakeplace eitherby: Whatparticularfeaturesand/orchallengesapplyto 5.1 Have therebeenanydiscernibletrendsintransaction 4.2 ■ ■ ■ (with orwithoutrestrictions)simplyrejectthetransaction. to (extendable for another 90 days), CADE provided may approve the transaction days services 240 within concentration, the of analysis the completing After and products of consumers. quality the at and things, other diversity among the ensures aiming, CADE competition, of analysis. preservation under sector the to related aspects and whether there is transaction rivalry on the part the of competitors, in in addition to other involved companies the of share market the example, for observes, CADE act, concentration a analysing When the to of competition betweenthecompaniesinvolvedmustbemaintained. prior conditions the occur decision, final CADE’s will until is, acts that transaction; concentration the these preceding of year control the The in Brazil, in turnover transaction, equaltoorgreaterthanR$75million. total a or the sales preceding least year at and the million, 750 in gross annual registered has transaction the in involved group another R$ than Brazil, greater in or to turnover equal transaction, total a or gross annual sales registered has transaction the in ( involved groups the authority antitrust of any concentration act, in the any economic sector, where at least one of that Econômica Defesa de Administrativo defines Act Antitrust Brazilian the of 88 Section approvals, antitrust to pertains what In time. the of most authorities competent the of authorisation prior require will sectors regulated within transactions PE aspect, regulatory to As ■ ■ rnato em:Pbi custos Transaction Terms: Public Acquisitions 5 terms overrecentyears? drc, tagt edr fe t aqie h cnrl f the of control target. the acquire to offer tender straight direct, a financial similar conditions thatweregiventothecontrol group);or shareholders minority to securing stake, minority protect to feature a is MTO (the acquisition stake by a mandatory tender offer (“MTO”) in case of a controlling the target company’s control group, which ought and be followed investor PE the between executed agreement private a commonly dealtwith? transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private appoint alocalsecuritiescustodyservicesagent. the appoint arepresentativeforlocaltaxpurposes;and by authorised institution an either Brazilian CentralBanktoperformthisduty; be or must institutions which financial Bank), (Resolution Central Brazil Brazilian in 4,373/14, representatives more or one appoint or “CADE”) must be notified be must “CADE”) or prço Lavajato operação n the and Conselho

deals inplace. for sure lowered the speed of PE investors and the number of public have mechanics Protective stake. company’s target the acquiring in interested investors other of interference mechanics or competition provisions and/or pills poison PE typical extent, face such To usually investors frequent. became offers public via control gain to attempts against measures protective of adoption the Brazil, in activity IPO intense of era the during especially years, recent In into acloselyheldbusinessratherthatinpublicacquisition. more are running is investment they private where context a Nonetheless, in found frequently shareholders. its and business the of interest best the in created and levels reasonable at set are they if Brazil in legal are fees Break-up transactions. private for available protections deal same the consider should transactions to-private public- for protections deal in interested investors PE acquisitions. public in investors PE for protection or shelter specific no is There any losses incurred due to facts and/or acts that occurred prior to the against and from investors PE indemnify to and liabilities closing financial closing takes place. Sellers are usually responsible befor pre- to limitations and actions followed until such time of when conditions precedent are cleared, and basket a and run, will the business which under date, parameters the closing documentation until the in business out setting of course target ordinary the the keep in will company managers/administrators and investors PE subject tocertainmilestonesagreedbytheparties. and period certain a for value transaction PE the of indemnification part or entire encompass should the hold to accounts escrow and/or provisions package earn-out obligation, be the should investors package PE maximum controlling and/or active for the whilst warranties and representations non- investors, or passive PE For controlling management. company’s the in investors PE the of participation the and transaction the of stake equity the of and investment the of size the to related directly is package The warranties and representations negotiate provisions. sides both PE Usually, sell-side, the On investors prefer structures with indemnification limitation and caps. liabilities. pre-closing the from company’s protect target to provisions earn-out and/or accounts escrow instalments, in payments guarantees, of number and value quality, highest the with structures for look investors PE buy-side, the On . Whatconsiderationstructuresaretypicallypreferred 6.1 Whatdealprotectionsareavailable toprivateequity 5.2 . Whatisthetypicalscopeofothercovenants, 6.3 Whatisthetypicalpackageofwarranties/indemnities 6.2 Transaction Terms: Private Acquisitions 6 acquisitions? equity selleranditsmanagementteamtoabuyer? team toabuyer? on thebuy-side,inyourjurisdiction? by privateequityinvestors(i)onthesell-side,and(ii) investors inyourjurisdictionrelationtopublic undertakings andindemnitiesprovidedbyaprivate offered byaprivateequityselleranditsmanagement www.iclg.com Brazil 53 Brazil 54 Brazil © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com the of capital the raise or price purchase the for pay to investor PE the of liquidity also breach, the of nature and case, specific the largelyon depends procedure strategy litigation civil right the of defining However, rules is damages. federal performance the per Specific as available commitments. investment the under rights their enforce to relief court seek may sellers documentation, the in agreed been has what meet to fails investor PE the If place. the in are finance equity all or debt that sellers investment to showing or,yet, financial closing once for mature investors is deal the the the and on met are precedent capital conditions under call to commitment obligations a as financial the such formats, different in come may comfort Such documentation. all meet PE investors normally comfort sellers showing their commitment to Howdoprivateequitybuyerstypicallyprovide 6.7 appear asagoodsolution. accounts escrow case, this In viable. longer no is indemnification investors, to proceeds of distribution the after that given complex is investor more little a PE becomes it investment, the exiting and stake its selling the When exposures. labour and for tax limitations, in of example, statute the with associated terms potential or for liabilities date drop-dead pre-defined a parties’ usually is the it times for the set term of most the and – documentation investment the under follows responsibilities normally release its and diligence during liabilities of terms in found is what to tied usually is security The shares. on liens even and escrow,hold-backs, price in funds of segregation for goes normally buy-side The case. each a set to difficult pattern or a formula. The types and levels of security are defined in somehow is It negotiations. on depend largely M&Aand any transaction to similar very is format the again, Once Do(i)privateequitysellersprovidesecurity(e.g. 6.6 commercial negotiationsamongtheparties. the to and process diligence due the of result the to related usually are limitations Such cap. and time to related often are Limitations Whatlimitationswilltypicallyapply totheliabilityofa 6.5 not are insurance common inBrazilianPEtransactions. indemnities and warranty and Representation To whatextentisrepresentation&warrantyinsurance 6.4 this from acquisitions transactions. deal PE a essence, In perspective happens under the same format of ordinary mergers and date. closing transaction PE Faveret lampertadvogados warranties, covenants,indemnitiesandundertakings? the typicalcostofsuchinsurance? under anequitycommitmentletter, damages,etc.)? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and the managementteam)? warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and private equitysellerandmanagementteamunder exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) PE investor. a for alternative best the be to appear moment, this at not, does IPO will an through IPO. exit an An through exit an find and risk undertake agenda, political and ideas determine whether investors will find its a comfortable environment to taking into congress drive and changes these implement to government new the of capacity its fiscal and monetary policies. The next two years, along with the of reshaping immediate on dependent are which changes, political capital facing is chapter,Brazil this the in here explored have we markets. As in liquidity and conditions market are process public going- a igniting in elements relevant most the However, in public Brazil. go to track right the create and investors to confidence The roles of CVM and Bovespa have also been a key factor to build system. our to trustworthiness of layer of extra an added rules compliance strict and governance of standards the high and of – development exchange stock the in invest to players and foreign markets attract capital the in evolution substantial allowed a boom build This to Brazil ago. years few a place took that boom IPO the after especially environment, markets capital sophisticated and efficient an built has Brazil conditions. market on depends largely public go to decision the else, anywhere As IPO. an to driver key and law However, local knowing process. these steps and siding this with the right of in professionals is not the essence the intricacies of is regulation the securities financial understanding and consultants and right the advisors Hiring IPO. an to you take in ultimately will that runs steps necessary the all take you process how and Brazil the how of aware fully be must investor PE The Reverse breakfeesarenotcommoninBrazil. apn atr h iiil iig t V ad eoe icoig the disclosing which before and – CVM at public filing becomes initial the deal after happens the before moment last very the until hold strategy,investors exit dual-track a using Usually,when six-month lock-upisusualandacceptable. a business, the in position share relevant a holds and power control any lock-up. For larger stakes, and if the PE investor is vested with (either exiting or staying in the business), stake will be minority averse to a accepting with investor PE a that expect to reasonable is It . Whatparticularfeatures and/orchallengesshoulda 7.1 Arereversebreakfeesprevalent inprivateequity 6.8 closing. and signing between wrong gone specifically has what and shares), of sale secondary or primary a is it whether on (depending target . Doprivateequitysellersgenerallypursueadual-track 7.3 Whatcustomarylock-upswouldbeimposedon 7.2 Transaction Terms: IPOs 7 exit? If so,whattermsaretypical? through asaleorIPO? private equitysellersonanIPOexit? private equitysellerbeawareofinconsideringanIPO transactions tolimitprivateequitybuyers’ exposure? and (ii)weremoredual-trackdeals ultimatelyrealised private equitysellerscontinuing torunthedual-track, exit process?Ifso,(i)howlateintheprocessare iclg to: privateequity 2019 Brazil regarding newchangestosuchlimitations. debt extended by the creditor. Please see the answer to question 8.3 of amount the and FIP the from equity with capitalised be to have will company intermediate an acquisition, the of funding the with associated debt is there FIP,and a through runs investment PE the legal that FIPs, by their nature, have as limitations to take debt. Thus, when debt basis, the case-by-case to related financing structured for the PE transaction. But a it directly is relevant to note are on restrictions and/or analysed requirements be should This of sources foreign funds –islikelytohappen. from especially – an investment place, PE in of reality increase new a With bonds increase. high-yield to expected the is and market credit to access government, new the foreign of attraction upon and the recovery of the Brazilian economy and the consolidation jobs, of and years, coming the new in turnover a see we fact, in If, investment. of creation the growth, GDP fast-pace a to country the the redirecting environment, economic in changes promoting of purpose clear the hold Government new the by up lined been have that measures Several life. political have pointed out above, Brazil is undergoing relevant changes in its market. PE we the As foster to dentures of issuance the underwrite and credit extend ordinarily Local that institutions financial the are banks thereof. combination a or – are (debentures) Brazil bonds in and loans deals PE finance to debt of sources common Most Pleaseoutlinethemostcommonsourcesofdebt 8.1 consummated viaIPOs. usually are deals dual-track seen, have we what From prospectus. Faveret lampertadvogados © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 has thefollowing advantages: equity investment fund, the so-called FIP. The use of such an structure of incorporation the is Brazil in investments equity private for structure common most the benefits, tax applicable the of view In Whatarethekeytaxconsiderations forprivateequity 9.1 a FIP assets. as FIPs, the allowing market development agencies), with a limitation of up to 30% of the debt, from take debt as (such situations certain in to debt incur to consequence, funds the for latitude more opened have FIPs for regulation CVM the to changes Recent Whatrecenttrendshavetherebeeninthedebt 8.3 Are thereanyrelevantlegalrequirementsor 8.2 Tax Matters 9 Financing 8 for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin financing) ofprivateequitytransactions? bonds). off-shore structurescommon? investors andtransactionsinyour jurisdiction? Are financing marketinyourjurisdiction? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof ragmn fr rvt eut tascin i Bai, especially Brazil, when foreigninvestorsareinvolved. in transactions equity private for arrangement tax-efficient main the as considered often is FIP a of incorporation the Nonetheless, basis. case-by-case a on made be should followed be to arrangement tax-efficient most the of analysis the Therefore, residents. local or foreign are investors the if and investment the of characteristics the funding, the of origin the as such issues, several most the efficient as investment strategy to be followed, will vary depending on well as investment, equity private to applicable Tax by the investment community, since the tax efficiency of the deferral re-evaluated be to have will investments equity private for FIPs of use the approval, congress pass law of bills current the of any case non- treatment as tax qualified same the applied to other Brazilian business FIPs entities, such as corporations. to In subject assets; be of should entities disposition investment the of time the at gains capital of realisation the upon taxation to subject be should entities investment as qualified FIPs regulation. CVM the under framed is it how on depend should funds to applied regime tax the close-end profits until March 2019 should be in subject to taxation. Additionally, investments to applicable investment funds, such as the FIPs. regime According to such bills, accrued tax the change to analysis legislative undergoing currently law of bills are There is transaction finalised andcapitalisationtakesplace. the that time the at investor the by paid and levied be to have would taxes applicable the case which in assets, these of value market fair the on based made be rolled-over be to assets the frustrated. There are cases that be the law requires may that the valuation of transaction the of effect tax neutral FIP,the a is structure acquisition new the new vehicle, as it is usually tax-neutral. However, into when the new investment Rolling-over structures are usually made by means of a contribution of assets into on taxation gains. to related capital are considerations tax key the structures, acquisition new into investments over rolling and/or selling When . Whatarethekeytax-efficient arrangementsthatare 9.2 . Havetherebeenanysignificantchangesintax 9.4 Whatarethekeytaxconsiderationsformanagement 9.3 ■ ■ shares, deferred/vestingarrangements)? such exemptions andmaximiseprofits. of benefit off-shore the enjoy Therefore, to used commonly are met. structures are conditions certain as long so shares, FIP of redemption upon tax income be from exempt also may FIPs in shares holding investors non-resident taxable bythetimeofredemptionshares;and be will thereto related profits FIP,the the to paid is it case in and Brazil in tax-exempt are dividends that mind in bear shall one dividends, of payment the by profits investments of of case redemption in that however, the Note, investors. of FIP as the by moment shares tax-exempt, the to are deferred investments is taxation from gains and income anticipated? investment intoanewacquisitionstructure? equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities teams thataresellingand/orrolling-overpartoftheir www.iclg.com Brazil 55 Brazil 56 Brazil 01Havetherebeenanysignificantlegal and/or 10.1 the by redeemed are shares the when investors willnolongerbeavailable. moment the to taxes of government at all levels, and also run international a full-blown check on officers see and officers to public with relations practices, its business, the screen uncommon not is compliance auditors coming It on board to join the diligence team and path. independent a substantial role in the diligence phase, and sometimes even its own and value investment affect could impact the future of that the business. These days, compliance negotiating has taken liabilities all assessing successful valuation; and a to closing; head to right structure capital a up putting the conditions; finding the quite same: is itself work The investor. the with along discussions team of consultants, wherein financial advisors and lawyers lead off a engages investor PE Usually,the M&A transaction. other any of Due diligence ordinarily follows the same pace and levels of details Howdetailedisthelegalduediligence(including 10.3 government bodiesandsubdivisions. other and agencies regulatory the by analysis of levels higher with and scrutiny stricter a under run to tend segments these transactions involving Therefore, policy. such, public as of and, principles by security protected and interest national of be to deemed are often are etc.) subject utilities, to prior approval by the competent authority, public as these sectors healthcare, insurance, sectors (banking, regulated covering transactions PE above, mentioned As Areprivateequityinvestorsorparticulartransactions 10.2 Among others,themainchangesimplementedare: framework regulatory the applicable toFIPs. including markets, the of capital regulation the Brazilian in changes of series a promoted has CVM years recent the over regime, tax the to changes the to addition In ■ ■ ■ ■ ■ ■ ■ ■ © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com Faveret lampertadvogados 0LegalandRegulatoryMatters 10 private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting materiality, scopeetc.)? jurisdiction (e.g.onnationalsecuritygrounds)? authorisation forinvestingabroad. authorisation foroperationswithderivatives;and possibility ofinvestinginquotasotherFIPs; target the over company’s obligation management; influence the of flexibilisation permission toinvestinnon-convertibledebentures; so-called (the increases “AFAC”); capital future for to advances and companies make liability limited in invest to permission the by CVM regulation; defined as investors qualified to FIPs of restriction emerging capital, research, developmentandinnovationmulti-strategy); (seed the in to portfolio production economic intensive infrastructure, companies, according their categories of into composition FIPs of classification anticipated? prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors subject toenhancedregulatoryscrutinyinyour liability peggedtotheirprofessionalperformance. no is there that ascertain and profile right the build to directors and the internationalscene. Brazilian the and enabled has goods and in works compliance how understand better to trend community business of new a acquisition is This and equipment. chain; supply inspectors; with the compliance strengthen and original bar interactions relations; government segments: the all in the policies internal raise of to tend safety investors of PE and practices, level closing, the After on behind. depending practices unorthodox or liabilities the hidden leaving without with and values and principles legal and ethical starts moral, high with It target the of business the conducted have slates, actions. post-closing clean carry individuals its and company the in both that confirmation or diligence in either topic hot the become has this 10.3, question at mentioned As iiec o te iiain akt hud las e are out carried be always Due should matters. basket of litigation variety the a on on diligence procedures of list long a face to civil reflected lengthy in the life of target companies, wherein an investor and is likely normally dockets is reality This processes. litigation labour and procedure clogged some find literally to normal with common is It of jurisdictions busy. is are it courts our and that environment knowledge litigation-prone a is Brazil a deeppocket. for shopping and actions civil frivolous taking from parties moving civil of stops normally rule This rules expenses. court and fees attorney for pay federal the that in procedure foresee that in any civil action the strategy,defeated party ought to litigation of terms PE investor or PE fund; not only is this uncommon, but also risky in same the by controlled are they that fact simple the for companies could also uncommon for a plaintiff to is same direct claims against It other portfolio exposures. the environmental and and relations consumer in – happen responsibilities fiduciary with directors above, and officers implicating in seen aggressive more are courts have labour some we As funds. and assets corporate the to only recourse have should plaintiffs and company target the of burden a to claim a supporting fraud disregard the legal entity, of the general rule is that liabilities evidence should be strong is there Unless narrow. too far is pocket the shareholder the pierce reach to and vail test corporate the and tight, very are law civil case of and rules procedure federal local the limited, very is Brazil in disregard doctrine the of applicability The possible. not is this rule, a As 05Arethereanycircumstancesinwhich:(i)aprivate 10.5 Hasanti-briberyoranti-corruptionlegislation 10.4 11What other factorscommonlygiverisetoconcerns 11.1 1OtherUsefulFacts 11 diligence, contractualprotection,etc.)? considering aninvestmentinyourjurisdiction? the liabilitiesofanotherportfoliocompany? and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor iclg to: privateequity 2019 Brazil e nr reeat h frt ure o te e gvrmn has government new the of quarter first The irrelevant. nor few be to issue election, and the challenges to be sensitive faced by the new office are neither a last the in orientation also ideological its changed has is Brazil observed. situation political current The impact theprojectedreturnonallocationoffunds. will consequence, natural a as which, – business the of valuation initial the on and/or investment the on impact material a cause may nature, their of regardless litigation, pending in expressed liabilities the Usually, business. labour-intensive a in especially thoroughly, Faveret lampertadvogados © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 hr h ws n o te edr o te nrsrcue n projects and infrastructure practices forover10years. the of leaders the of one was has he where He Miami. Janeiro, de Rio in Veirano of Advogados joined He Traurig. Greenberg University and McKenzie & the Baker – years six from for firms law foreign LL.M. with worked an attained and University State Janeiro de Rio the from graduated Lampert Claudio being involvedinsomeofthemostcomplex cases,transactionsandprojectsinrecentdecadesBrazil. by gained have they that experience the from and work the in partners senior the of participation continuous and direct the from benefit clients Our gas and oil to team dedicated to transportation pipelines,processingfacilities, petrochemicalsandthemarketingtradingoffuels. sales) and and regasification solid (including LNG a (upstream), production and from chain, projects value entire complex the comprises and field large the in in expertise Our largest working the transactions. of of record some track for proven acting a currently have Ipanema), We and Downtown Brazil. in in (offices companies Janeiro de Rio in headquartered boutique law business a are We issues, corporate on disputes, projectdevelopmentandfinancingofassetsintheenergy,advising naturalresources,logisticsandinfrastructure sectors. field, infrastructure Brazilian the in lawyers experienced most the of some by formed firm law a is Lampert Faveret Port new which the Statute thatcurrentlyguidesinvestmentsinthesector. sector, 12,815/13, Law port of enforcement the the of to lead framework ultimately legal the change legislative to the in process company the oil of work institutional and the led also cargo, has general bulk, handling multi-cargo he LLX, of executive an as phase, this In storage. and transshipment a of Açu, do capacity Porto with and year terminal, per ore iron of tons million 50 handle to capacity with de terminal bulk Rio a in Sudeste, Porto ports – super Janeiro two with operation into head and develop to largest the private S/A, integrated logistics project in Logística Latin America, where he LLX was able of officer executive an was Lampert akt cptlsto, euain n ohr ea wrs n the in works legal other and operational phaseofthebusinesses. regulation capitalisation, markets of vehicles, development purpose equity), construction agreements, equipment supply agreements, capital or regulatory special debt via (either companies of project of structures as capital of formation formation the such businesses, mandates, greenfield different many development, mining, performed has he project energy,sectors, these Within sectors. gas & the oil and logistics in in M&A and experience finance, project solid deals, infrastructure and vast holds Lampert R:www.ftlt.com.br URL: [email protected] +552120421995 Email: Tel: Brazil Ipanema, RiodeJaneiro Visconde dePirajáStreet,no572,7 Faveret Lampert Advogados Claudio Lampert

th floor nes a ae f rvt ivsos no rzl r te t the to tied are Brazil into investors definition ofthecountry’s politicalfutureforthenextfouryears. private of race a unleash be to yet are resources) established. We foreign have the view that today all and the gates and hurdles to money domestic for (both risk undertake and investment host to base confidence the create articulation that parties. markets opposing financial with the in stability the All strong and compromise, demand to will capacity ability, framework political tax and structure funds pension public the on changes fundamental for approval legislative the that shown eraiain) cmais poet ad etutrn, and to theareas. restructuring, related litigations commercial and arbitrations several in structured work also to and projects Sartini transactions, allowed experience Such CVM. the before matters regulatory companies’ M&A reorganisations), (including corporate and industry equity private placements, public transactions, complex matters of execution and corporate negotiation the in particularly market practice, capital and corporate the of in experience area relevant has Sartini the in always Mellon, BNY and Corporate LawandCapitalMarkets. Trust Oliveira as such institutions financial and Rezende Advogados, Vieira and Advogados Aragão e Mussnich Barbosa as such firms law prestigious in worked Before joining Faveret Lampert Advogados in 2015 as founder, Sartini and Law Corporate on Capital Markets. books of and co-author and assistant FGV teaching at a researcher also Brazilian is the João at and (“IBP”). Sector Institute (“FGV”) Petroleum Energy Foundation the Vargas for Compliance Getúlio Anticorruption at Markets Capital and Rio de Janeiro (“PUC-Rio”) and has a specialisation in Corporate Law do Católica Universidade Pontifícia from graduated F.Sartini João B. R:www.ftlt.com.br URL: [email protected] +552120421995 Email: Tel: Brazil Ipanema, RiodeJaneiro Visconde dePirajáStreet,no572,7 Faveret Lampert Advogados João F. B.Sartini www.iclg.com Brazil th floor 57 Brazil chapter 10 canada michael p. whitcombe

mcmillan llp Brett Stewart

1 Overview 1.3 What trends do you anticipate seeing in (i) the next 12 months and (ii) the longer term for private equity transactions in your jurisdiction? 1.1 What are the most common types of private equity transactions in your jurisdiction? What is the current state of the market for these transactions? Have you Market conditions are expected to continue to favour sellers through seen any changes in the types of private equity 2019 given the large amount of dry powder waiting to be deployed transactions being implemented in the last two to by private equity firms and the increasing interest in the market three years? from U.S. private equity investors. As a result of these conditions, auction sales processes have been growing both more common and Canadian private equity deal activity remained high in 2018, more competitive, often with multiple bidders proceeding through resulting in the second highest total deal value of the decade with an to advanced stages of the bid process. This is increasing the “cost- aggregate value of over $52 billion. The Canadian market continues to-play” and is pressuring bidders to offer both higher prices and to be viewed very attractively by foreign entities, especially U.S. more seller-friendly transaction terms such as weaker indemnification investors, driving significant U.S. participation. The trend of larger- packages, smaller escrow sizes and shorter survival periods for sized deals continued in 2018, with the Canada Venture Capital fundamental representations and warranties. Association reporting that $1 billion+ deals accounted for 65% of While dual-track exit processes have not historically been the norm private equity dollars invested in Canada in 2018. in Canada, they were increasingly popular in 2018 and, if market In terms of industries, industrial and manufacturing captured the volatility continues through 2019, this trend will likely continue, at largest portion of private equity investment in Canada in 2018 least for more significant exits. (22%) followed by information communications technology and If the available dry powder and the competition for assets continue consumer and retail. to grow, private equity firms can be expected to apply the same Continuing the trend of recent years, add-on deals accounted for strategies in Canada that are emerging as solutions to similar nearly two thirds of Canadian private equity deal activity in 2018. problems in the U.S. and globally. Many of these tactics involve With Quebec and Ontario leading the way in terms of both numbers firms decreasing their reliance on their traditional buyout activities of deals completed and value of dollars invested. to drive returns. Such strategies include increasing buy-and-build or add-on activity to arbitrage deal multiples, using large-scale mergers that can compete with strategic buyers and diversifying 1.2 What are the most significant factors encouraging or fund offerings. inhibiting private equity transactions in your jurisdiction? 2 Structuring Matters There was a steep decrease in PE fundraising in 2018. This is likely indicative of a market correction reflective of the large amounts of dry powder that funds currently have to be deployed. As such, the 2.1 What are the most common acquisition structures seller’s market continues. Private equity firms are flush with capital adopted for private equity transactions in your and Canada is highly ranked by a number of sources as an attractive jurisdiction? country for foreign companies to invest in. The Canadian political scene continues to be stable and the legal system is fully developed Privately held Canadian businesses are generally acquired by and similar, in many respects, to the American system. Those private equity buyers either through a purchase of assets or a factors, coupled with the comparatively low valuation of Canadian purchase of shares. Private equity investors will typically dollar, have created favourable conditions for private equity activity incorporate a Canadian acquisition corporation and fund it by way in Canada, in particular, by non-Canadian investors. of interest-bearing debt and equity on a 1.5:1 basis in order to comply with Canadian thin-capitalisation rules. This acquisition entity then acquires all of the shares/assets of the Canadian target and, in the case of a share acquisition, the acquisition corporation and target are then “amalgamated” under the relevant corporate statute to align the leverage with the operating company. Often,

58 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London pin (oe a efcie o patm tc otos ls tax- (less effective) Stock arealsocommonlygranted. options stock phantom equity). or effective) (incentive tax (more value options threshold certain a than more (including for sold eventually co-investors is business the if only management any continuing out pay and to designed class second fund a over priority in the management), as such investors, structures Typical include transactions. multiple classes of equity with one in class designed to pay out negotiation of point major a interests offered to, or required of, continuing management are often equity the of terms precise The purchaser. corporate a into equity Sellers of businesses, including key management, will often rollover both buyerandseller, alsocontinuetobepopular. both shares and assets of a target entity, providing tax advantages to of acquisition the involve which transactions, “Hybrid” proceeds. tax lifetime personal capital gains exemptions perspective, to shelter a portion of the seller’s individual 2019) 1, January of (as $866,912 as their utilise to able be may sellers the transactions share From favour generally considerations third-party requirements. trigger to consent likely a from less simple and relatively is perspective sale conveyancing larger share a in contrast, In complex contracts. more significantly be material for consents third-party more require can and transactions to tend sales asset majority of “legacy liabilities” can be left with the seller. However, The acquired. be will that liabilities and assets the choose and pick the purchaser, potential a of greatest benefits of an asset view sale are tax advantages and of the ability to point the From positions. respective their leverage to ability parties’ the and transaction the of circumstances the on depend will factors these to given weight The considerations. non-tax and tax by driven is shares or assets Whether a Canadian acquisition should be completed by purchasing Whatarethemaindriversfortheseacquisition 2.2 trend. smaller growth equity deals, continues in to be an increasingly popular common only once positions, minority taking private investors investment, equity of form preferred the remain buyouts While will company operating the acquire theshareorassetsofanaddontarget directly. whereby acquisition direct of way by transactions add-on make typically then will company operating their rolling management amalgamated then The stake. equity key their maintaining and interest include structures buyout these mcmillan llp © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 a or shares preferred convertible of convertible debtinstrument. form the in taken often is has flexibility with regards to their exit strategy. A minority interest investor equity private the and ensure to key are put provisions drag-along Likewise, decisions. critical over influence) primary significant of become least at (or power veto have agreement firms equity private ensure to concern shareholders’ the in stipulated rights minority The control. of lack the to due issues structuring differentconsider to firms equity private require positions Minority Ifaprivateequityinvestoristakingminority 2.4 How istheequitycommonlystructuredinprivate 2.3 institutional, managementandcarriedinterests)? structures? considerations? position, aretheredifferentstructuring equity transactionsinyourjurisdiction(including a saleofthecompanybyprivateequityinvestor. options The of event the in exit. automatically vest typically management to granted the the where following on the lands or exit” ultimately whether “bad management a or on exit” “good based a was employment termination of termination following Options exercisable employment. are they whether of on vary may management termination to granted a upon certain company the by and/or time, repurchase for allow to Generally,structured is equity management of of achievement passage stated financialreturns. the as such the requirements, performance/success and employment certain of achievement continued either to tied the typically are conditions Those conditions. upon exercisable become and vest to options for call plans option stock most interests, align to order In essential. is company the of success and growth continued the with managers continuing to granted interests equity the Aligning but basis typically rangesfrom10–20%. deal-by-deal a on vary will management to Allocation aain euaos o rn te icoue f wesi of the ownership to amendment recent of disclosure the Canadian corporations into bring alignment with other major countries. A to regulators publicly Canadian currently not on interests foreign by brought are being pressure is There available. companies private of shareholders directors are publicly available information. However, the names of of boards companies’ private of addresses and names the Canada, In investment. their of period the for company portfolio the run to their to directors principals and nominees. As such, they typically have the authority of board the on negotiated seats assign or to positions, rights, minority equity their utilise firms equity Private are leavers Good usually thoseleavingduetodeath,disabilityorretirement. leaver”. “bad a as treated be will business the with competition in acting is or terminated is holder equity exiting an where circumstance Any dismissal. of grounds general more to reason, that For leaving as a “bad leaver” are establish. not tied to a causal dismissal but rather to holder equity management hard exiting an to and amounting circumstances high “for employee very an is firing cause” for threshold the law Canadian Under . Forwhatreasonsisamanagementequityholder 2.6 Inrelationtomanagement equity, what is thetypical 2.5 . Whatarethetypicalgovernancearrangementsfor 3.1 is not publicly disclosed, it is indicative of a trend towards more transparency thatweexpecttosee continueinCanada. towards trend a of indicative is it disclosed, publicly not is beneficial owners in their corporate records. While this information of record a maintain to businesses incorporated federally requires GovernanceMatters 3 acquisition provisions? in yourjurisdiction? your jurisdiction? usually treatedasagoodleaverorbadin what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such Canada Business Corporations Act Corporations Business Canada www.iclg.com canada now 59 canada 60 canada © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com that in that doesnotcontain anytimelimit. covenant role restrictive a enforce former not will individual’scourts Canadian the business. and reach, geographic its What is reasonably necessary depends on the nature of the business, livelihood. a earn to freedom individual’s an restrict unnecessarily Canadian courts will generally not enforce restrictive covenants that a of liabilities and duties director undercorporatestatutesor otherwise. powers, rights, the inherit power that given are who shareholders corporation, the of affairs and business To the extent the USA restricts the powers of directors to manage the certain statutory requirements and fetter certain powers of directors. legislation of out Corporate contract to shareholders of ability shareholders. the recognises a all expressly by contrast, signed be In must and statute. corporate statute of creature a the is (“USA”) agreement shareholder relevant unanimous and corporation the the of of by-laws provisions and articles is It the contract. to commercial subject regular a as treated is company a of A shareholder agreement that is not signed by all of the shareholders Arethereanylimitationsorrestrictionsonthe 3.5 in Canadadonotoweafiduciarydutytominorityshareholders. In contrast to some American jurisdictions, controlling shareholders Arethereanydutiesowedbyaprivateequityinvestor 3.4 portfolio of directors duty fiduciary the companies owetothecompanycannotberestrained. notably, most and, shareholders’agreement unanimous a by director fettered be can certain discretion only level, director be the At must nature. it in default permitted, unanimous the where supplant veto legislation to corporate or forth of directors provisions sets the of that discretion the agreement fetter shareholder a arrangements to be enforceable against a subsequent shareholder, to for order In Arethereanylimitationsonthe effectivenessofveto 3.3 the issuance ofnewequityordebtandthedispositionkeyassets. team, management and board the to changes acquisitions, as veto position, such matters business critical over minority enjoyed typically still are rights a holds investor equity private a Where benchmark. given a below reduced is interest equity investor’s equity private a where apply to cease rights veto such Often, company. portfolio the over control ultimate has investor equity private the ensure that typically supplemented through unanimous shareholder agreements are legislations corporate under provided rights dissent default The Doprivateequityinvestors and/ortheirdirector 3.2 mcmillan llp position, whatvetorightswouldtheytypicallyenjoy? non-compete andnon-solicitprovisions)? (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements typically addressed? shareholders (or to minorityshareholderssuchasmanagement typically addressed? the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor vice versa )? Ifso,howarethese n aaa cran ag tascin tigr dac notice advance trigger transactions large the under requirements certain Canada, In applicable. e opee utl h ed f rve pro. Pre-merger period. review a of end the until completed be protection; taxation;pensions;andbankruptcyinsolvency. governing: labour and those employment compliance; include securities matters; liability corporate director The impose that corporation. the statutes by wrongdoing for liable personally held or,care, of and loyalty of duties the breaching as instances, other in be such failure, or wrongdoing own can their for liable personally be may to exposed Directors varies. liability are potential this for basis the and extensive directors liabilities statutory potential The corporation. the of interest best the corporation, in act to the duty a including to duties fiduciary owe directors all Canada, In four than fewer has members. board the if Canada of resident one least at include or directors Canadian resident 25% least at of consist must statute Ontario or federal the either under incorporated certain companies to subject of be for directors may Notably,of boards board requirements. residency minimum corporation the Canadian incorporation, a of of directors jurisdiction the on Depending under the under for required approval timetable regulatory the the by governed often process, is transactions diligence due typical the from Aside transaction or contract the except innarrowcircumstances. approve to resolution any on voting In disclosed. be must situations of conflict, the statutes require the director to refrain from companies, portfolio other and/or party the director has, as a result of their relationship with the nominating the conflicts potential or to conflicts all such, party As transaction. or a contract in, interest material a has or of, officer or director the director is a party to the contract or transaction personally or is a whether applies provision This corporation. the with transaction or the nature and extent of their interest in a proposed material contract writing in disclose to directors require statutes corporate Canadian particular a of thecorporation,notshareholderwhonominatedthem. of nominees are interest best the in act who to duties fiduciary to subject are shareholder corporation a of Directors . Arethereanylegalrestrictions orotherrequirements 3.6 . Whatarethemajorissuesimpactingtimetablefor 4.1 Howdodirectorsnominatedbyprivateequity 3.7 Transaction Terms: General 4 portfolio companies? disclosure obligationsandfinancingissues? of otherportfoliocompanies? equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof Competition Act Competition Competition Act Competition iclg to: privateequity 2019 and the and Investment Canada Act Canada Investment . Such transactions cannot transactions Such . canada , where , Canadian insured warranty and transactions. representation in typical very using that product. For instance, double materiality scrapes are now Canadian deals in “market” are terms what impacts and market equity private the in common increasingly be to continues insurance warranty and market. representation U.S. of the use the as well, As has as deals, style” “public seen increasingly has market Canadian the and downwards trend to continue U.S., the in than Canada in to higher significantly still while caps, indemnity of size the example, shifted gradually For market. the American have in those to similar increasingly become which terms transaction has U.S., influenced the from typically investment, foreign in increase The they willbeof“netbenefit”toCanada. whether determine to investments proposed screen to government to subject are issues security national involve or business cultural a to Act In addition to competition regulations, under the are structuredaslimitedpartnerships. as treated that funds equity private traditional on now impactful especially be will are control indirect “affiliates” and will thus be included in the threshold analysis. or This direct common the under to entities non-corporate and amendments corporate all as notification pre-merger Recent Act Competition exceeded. are “shareholding” other or thresholds amalgamation where relating to the “size of the parties”, the “size of the transaction” and Canada an in business or a establish shares to combination or proposed assets a of with connection acquisition in required are filings notification mcmillan llp © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 transaction’s the value, isnowtypicallybasedonenterprise value. of 2–4% of range the in traditionally fee, break The payable. becomes fee break the which upon out, fiduciary a to subject typically is clause” “no-shop The provisions. “no-shop” In friendly acquisitions, break fees are often seen in connection with Whatdealprotectionsareavailabletoprivateequity 5.2 privatisation Canadian plan ofarrangement. uncontested a by completed most are investors equity private involving transactions flexibility, this to Due etc. managements, to benefits collateral provide to flexibility more for allow and nature in conditional be can hand other the on bid a that effect the arrangement of plans Statutory financing. on conditional be cannot with made, be (an must arrangements statement) adequate interpreted that require bids takeover Canadian What particularfeaturesand/orchallengesapplyto 5.1 Havetherebeenanydiscernibletrendsintransaction 4.2 rnato em:Pbi custos Transaction Terms: Public Acquisitions 5 , foreign investments that exceed prescribed values or that relate netet aaa Act Canada Investment terms overrecentyears? acquisitions? investors inyourjurisdictionrelationtopublic commonly dealtwith? transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private may result in more transactions being subject to subject being transactions more in result may prvl Ti alw te federal the allows This approval. Investment Canada closing obligations. post- of scope and size the structures minimise that variability,and less consideration with simple private prefer sell-side, typically the investors On equity basis. debt-free cash-free, a on invest and facility credit own their arrange generally firms equity Private means tolimitpost-closingpriceadjustments. a as Canada in structure common more a become also has UK, the entity post-closing. The use of “locked box” structures, common in target the of success financial the to consideration ultimate seller’s also often contemplated by private equity buyers in order to link the are provisions Earn-out adjustment. capital working net a on based Typically,are these target. the of condition financial the reflect to adjustments price purchase require typically buyers equity Private xoue s ny iie t isacs f ru, r becoming are fraud, of instances to increasingly common. post-closing limited seller’s only equity is private exposure a where exits, Public-style as much as undertakings. provisions and covenants post-closing other as well indemnity as possible, of scope and length the limit post-closing limiting on typically they above, referenced As possible. insist as much as exposure generally sellers equity Private . Whatisthetypicalpackageofwarranties/indemnities 6.2 Whatconsiderationstructures aretypicallypreferred 6.1 . To whatextentisrepresentation&warrantyinsurance 6.4 Whatisthetypicalscopeofothercovenants, 6.3 te hg-ik el pcfc em. oiy rmus for premiums Policy terms. specific representation and warranty insurance have been steadily declining deal high-risk other and matters environmental certain funding, pension taxes, closing pre- for remain they but significantly quite decreased has policies such from exclusions and carve-outs typical of number the years recent Over transaction. on a of price purchase the of 10–20% at used out widely cap typically limits now Policy transactions. is equity private and which Canadian representation Canada of in use insurance the in warranty increase marked a saw 2018 0- tp ad ersnain y ieal uig materiality using sellers arealsoincreasinglyinsistingonpublic-styleexits. liberally by Private provision. anti-sandbagging an representation including by and qualifiers and type 10b-5 limit their exposure by ensuring they do not include to a full disclosure, try further will sellers equity Private given. representations for period survival short a on insist and warranties and representations Private equity sellers and management teams will try to minimise the Transaction Terms: Private Acquisitions 6 team toabuyer? on thebuy-side,inyourjurisdiction? the typicalcostofsuchinsurance? equity selleranditsmanagementteamtoabuyer? offered byaprivateequityselleranditsmanagement by privateequityinvestors(i)onthesell-side,and(ii) exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) undertakings andindemnitiesprovidedbyaprivate www.iclg.com canada

61 canada 62 canada © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com fixed a as negotiated typically are fees These transactions. equity Reverse break fees are becoming more common in Canadian private Are reversebreakfeesprevalentinprivateequity 6.8 Howdoprivateequitybuyerstypicallyprovide 6.7 typical. also are payment earn-out the against rights set-off provision, out private equity buyers and sellers in Canada. In the event of an earn- both for common still also is escrow or holdback price purchase a more becoming with coupled indemnity seller popular,a of approach traditional the is insurance warranty and representation While Do(i)privateequitysellersprovidesecurity(e.g. 6.6 Whatlimitationswilltypically applytotheliabilityofa 6.5 mcmillan llp plig wees e e te pe ed o te ags more ranges the of ends upper the commonly ontrulydomesticCanadiantransactions. see ranges these we of whereas end lower applying, the to correlated often is U.S.-based especially participants, participants, foreign of Involvement price. non- sale the of 5–30% of range the in often representations) (for fundamental cap indemnity negotiated and longer) lasting warranties and representations fundamental (with months 12−18 lasts sale the equity private which for amount responsible. are investors Typically, dollar on indemnification post-closing the on placed be should limitations and basis several a on so do should breach a of respect regard. Private equity investors required to indemnify a purchaser in this in knowledge in-depth have will who shareholders management by given properly more are company’soperations portfolio are the to as investors fund that warranties required to give on a sale transaction. Representations and covenants and representations of scope the on restrictions build to investors equity private for advisable is It 1% as low as figure this see to common now is It declined. similarly have policies these under required amounts retention The limit. policy the of 2.5–4% between range may now and years recent in etr fo te hr-at lne o bn ae yial tbe to tabled typically are bank provide comfortwithrespecttothedebtfinancing. or lender third-party the from letters agreement Comfort acquisition funding. the provide to funds sufficient has investor equity The private the that conditions. warranty and representation a contains also generally certain of satisfaction the upon acquisition the complete and fund to investor equity private acquisition agreement which generally contains a commitment for the the in provided often is financing, equity the to respect with Comfort, lender. third-party a from financing debt and investor equity private Private equity transactions typically involve equity financing from the ofenterprisevalue. warranties, covenants,indemnitiesandundertakings? If so,whattermsaretypical? transactions tolimitprivateequity buyers’ exposure? under anequitycommitmentletter, damages,etc.)? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and the managementteam)? warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and private equitysellerandmanagementteamunder

they typicallylast180days. negotiation, to subject are agreements lock-up of terms the While IPO. the after soon too market public the enter not do shares their ensure to underwriting the to condition a as agreement lock-up a into enter to shareholders these require will IPO an in Underwriters for aperiodoftimefollowingtheIPO. lock-up to subject provisions which will limit the be investor’s abilities to will sell their shares exit final equity’s private the that and that an IPO will not allow for an immediate exit of its entire position aware be to seller equity private the for important also is It show. road a and prospectus a of preparation the includes which IPO, the marketing and for preparing of costs the of aware be should sellers a not still is but 2018 common form of exit. in When considering an IPO exit, private grow equity to continued activity IPO seller, equity private a for exit ideal standard, gold the as seen Generally o Cnda piae qiy rnatos ed o eeo FX banks andcanbe costly. develop to need transactions traditional by provided only typically are which strategies, hedging equity private Canadian for sources debt U.S. utilising investors equity Private financing. debt Canadian obtain or them with financing debt American their bring substantial a for portion of private equity investment in Canada. account U.S. investors often U.S.-based, largely investors, Foreign increasing as time valuations. same the at while public go to attempt failed a of risk the hedge to ways seek buyers as 2019 in continuing trend Following well. as Canada several dual-track processes being in utilised in 2018, we anticipate the common more becoming them see to expect we States, United the in processes these of increase in norm recent the the and conditions market current been given However, Canada. not have processes dual-track recently, Until . Whatcustomarylock-upswouldbeimposedon 7.2 Whatparticularfeaturesand/or challenges shoulda 7.1 break feeonatransaction,rangingupto10%ofenterprisevalue. negotiated the than higher often are fees break reverse deal, failed the to a Due from damage potential to entity target value. the of exposure enterprise increased of percentage a or amount dollar . Pleaseoutlinethemostcommonsourcesofdebt 8.1 Doprivateequitysellersgenerallypursueadual-track 7.3 Transaction Terms: IPOs 7 Financing 8 private equitysellersonanIPOexit? exit? bonds). through asaleorIPO? private equitysellerbeawareofinconsideringanIPO for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare iclg to: privateequity 2019 canada oee, h Ognsto fr cnmc oprto and Cooperation have significantlyimpactedtheusageofsuchintermediaries. Economic for Canada. Development’s Base Organisation Erosion and into Profit Shifting (“BEPS”) initiative investing the funds However, equity private foreign-based by utilised been often have Netherlands the and Luxembourg as such jurisdictions tax-favourable in entities intermediary Historically, tax from equity ofthe“specifiednon-residents”inCanadiancompany. the times loans one-and-a-half interest-bearing exceed that of non-residents portion specified a on from interest companies deducting Canadian prohibit that with rules themselves thin-cap Canada’s familiarise also should investors Non-resident treaties inmostinstances. 25% a to subject withholding tax, although generally this rate is substantially reduced under are tax to investors companies equity portfolio private foreign Canadian by made payments Dividend particular. importance when transacting with foreign private equity investors in added on take may that considerations several buyers. are there strategic However, with transactions to equally apply funds equity Many of the common tax considerations in transactions with private increase theirrelianceonthistypeoffinancingthrough2019. to intend firms many and transactions Canadian their for financing Most private equity firms currently use private lending as part of the equity transactions. private Canadian in financing debt for used structure of choice the impact that restrictions or requirements legal relevant no are There Arethereanyrelevantlegalrequirementsor 8.2 of way by (usually financing subordinated debt)throughbanksorotherfinancialinstitutions. mezzanine by supplemented Canadian private in equity transactions. Senior financing secured debt will also debt at times be of source common most the remains loan, term or facility credit revolving a of form the in often bank, Canadian domestic a from obtained debt secured Traditionalsenior mcmillan llp © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 for arrangements units. stock compensation deferred and rights appreciation stock stock-based include management popular tax). of Other rate equivalent capital-gains a for eligibility general and exercise until taxation (no treatment favourable their to due tool, compensation stock-based popular most the remain options Stock Whatarethekeytax-efficientarrangementsthat 9.2 Whatarethekeytaxconsiderationsforprivateequity 9.1 Whatrecenttrendshavetherebeeninthedebt 8.3 Tax Matters 9 debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof off-shore structurescommon? financing marketinyourjurisdiction? financing) ofprivateequitytransactions? shares, deferred/vestingarrangements)? equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate investors andtransactionsinyourjurisdiction? Are respects with,sharesintherelevantforeigncompany). material all in equivalent economically are and for, exchangeable of use the are that company Canadian through a of shares (i.e., shares” “exchangeable circumstances latter the in available be may workaround effective An company. non-Canadian a of shares for another Canadian company, but not when such shares are exchanged of shares for company the in shares their exchanging when rollover tax-free a permitted generally are company Canadian a in Investors rnatos ht rge avne oie eurmns ne the under requirements Competition Act. notice advance trigger that the transactions to amendments recent regulatory Act above, Competition specific noted to as subject however, not scrutiny; are investors equity Private Havetherebeenanysignificant changesintax 9.4 Whatarethekeytaxconsiderations formanagement 9.3 02Areprivateequityinvestorsorparticulartransactions 10.2 Havetherebeenanysignificantlegaland/or 10.1 ht s osdrd a aflae fr h proe o apyn the applying of Act Competition purposes the for affiliate” “an considered is what the to amendments Recent of privateequitytransactionstriggeringthenoticerequirements. of the parties” threshold and is expected to result in a greater number This increases the number of entities these that may count towards the “size entity. same the by Under any controlled funds sister and structured similarly other control their under companies portfolio both affiliates. of affiliates as entities amendments, funds structured as partnerships will now be considered non-corporate includes market valueofanymanagement/administrativeservicesprovided. will be obligated to charge and remit goods and services tax on the fair partner general the partnership”, limited “investment of definition the general the by meets partnership the If partnership. limited investment an of partner provided services administrative and management investment limited partnerships. on These changes obligations impose goods and services tax tax on services and goods impose 2018 25, Amendments to the to Amendments their for Netherlands) Canadian investments. the and Luxembourg favourable as in (such entities jurisdictions intermediary of usage funds’ equity anti-treaty-shopping foreign-based private decreased significantly as has concerned, insofar are measures initiative, and BEPS Cooperation Economic Development’s for Organisation the above, noted As 0Legaland RegulatoryMatters 10 anticipated? investment intoanewacquisitionstructure? jurisdiction (e.g.onnationalsecurity grounds)? anticipated? teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities teams thataresellingand/orrolling-overpartoftheir subject toenhancedregulatoryscrutinyinyour private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting are likely to increase the number of private equity private of number the increase to likely are thresholds. As amended, the amended, As thresholds. Excise TaxAct Excise Competition Act (Canada), enacted as of October of as enacted (Canada), (Canada) have expanded have (Canada) www.iclg.com Competition Act Competition canada now

63 canada 64 canada estv idsre o wih nov a agt ih material with target a involve well as contracts in diligence specify typically contracts, which government especially or transactions, equity industries Private sensitive records. and books gaining an improper advantage and concealing bribery in an entity’s foreign official for the purpose of obtaining or retaining business or any equitable to value of anything or money and of giving or payment promise, efficient the prohibits CFPOA the resources. economic limited and of distribution accountability, and integrity was enacted in 1998 to ensure commercial fair dealing, government © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com Canada’s Hasanti-briberyoranti-corruptionlegislation 10.4 the and investor industry thetarget isin. equity private sale the the of of tolerance nature risk the the process, on dependent often is and greatly differs The length of the diligence review and materiality threshold applied counsel and other professionals, such as environmental consultants. registered other any and external by conducted is diligence due legal filings identify Most matters. similar bankruptcy to legislation, and order active in encumbrances, contracts conducted typically materials also are records, searches available publicly addition, In corporate records. employment entity’s the including target documents legal material all reviewing diligence, The majority of private equity investors conduct thorough legal due Howdetailedisthelegalduediligence (including 10.3 Canadian the of nature the business beingacquired. on depending Heritage Canadian of Minister the or Development Economic and Science Innovation, of Ministry federal the by approval to subject are investments Such implications. security national has or business, cultural a involves the under approval Act Canada require will business Canadian a of “control” of acquisition an constitute that investments Foreign mcmillan llp materiality, scopeetc.)? diligence, contractualprotection,etc.)? approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors Corruption of Foreign Public officials Act officials Public Foreign of Corruption if the investment exceeds certain monetary thresholds, monetary certain exceeds investment the if (“CFPOA”) Investment problematic. be can this interest, American an that by owned currently not is assurances target seek often investors Canadian target entities are complying with FCPA. If the Canadian equity private U.S. law, itself totheliabilitiesofadirectorentity. expose will shareholder that business, the manage to director a of conduct. Likewise, to the extent a shareholder usurps the companies. discretion improper or fraudulent for portfolio used and controlled is entity their corporate a where veil for corporate the pierce will liable courts Canadian However, shareholders hold and veil corporate the pierce to hesitant are Typically,courts Canadian the While this same. with compliance often obtained from the seller confirming the for entity’s are compliance with the warranties and policies representations addition, In and legislation. records corporate as potential liabilitiesonatarget corporation. and obligations from more significantly impose and laws American fairly differ laws employment Canadian that and 25% tax; withholding a to subject are non-resident length non-arm’s a to resident Canadian a by services, paid fees administration and financial management statutes; as foreign federal certain such by limited is telecommunications that and industries broadcasting specified include: in investors, ownership foreign especially equity investors, private for concerns raise commonly which factors Other 05Arethereanycircumstancesinwhich:(i)aprivate 10.5 11Whatotherfactorscommonlygiverisetoconcerns 11.1 1OtherUsefulFacts 11 the liabilitiesofanotherportfoliocompany? considering aninvestmentinyourjurisdiction? and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor ForeignPractices Act Corrupt iclg to: privateequity 2019 (“FCPA”) an is American canada mcmillan llp canada

Michael P. Whitcombe Brett Stewart McMillan LLP McMillan LLP 181 Bay Street, Suite 4400 181 Bay Street, Suite 4400 Toronto ON, M5J 2T3 Toronto ON, M5J 2T3 Canada Canada

Tel: +1 416 865 7126 Tel: +1 416 865 7115 Email: [email protected] Email: [email protected] URL: www.mcmillan.ca URL: www.mcmillan.ca canada Michael has been recognised as one of Canada’s leading business Brett is recognised in the IFLR1000 Financial and Corporate Guide lawyers in Lexpert’s Guide to the Leading 500 Lawyers in Canada. 2016 and 2018 as a rising star in the areas of Investment Funds and Banking, ranked in Lexpert’s Guide to the Leading U.S./Canada He principally practises in the areas of negotiated merger and Cross-Border Corporate Lawyers in Canada 2015 as a Corporate acquisition transactions (domestic and cross-border), private equity Lawyer to Watch in the area of Corporate Commercial Law, and was investments, strategic alliances, complex commercial arrangements selected as a Lexpert® Rising Star: Leading Lawyer Under 40 for 2014 and corporate governance. Michael regularly advises private equity by Lexpert® Magazine. firms along with other medium and large corporations (both domestic and international) and their boards of directors in connection with their Brett is Co-Chair of McMillan’s Private Equity Group. With a focus on operations throughout Canada. He has significant industry experience assisting domestic and foreign clients with negotiated transactions in the pharmaceutical, automotive, manufacturing, distribution, including mergers and acquisitions, private equity financings, venture service, entertainment, hospitality and tourism sectors. He is a capital financings and management buyouts, Brett has represented Director of a number of Canadian corporations including Porsche Cars clients in a number of sectors including agri-food, food manufacturing, Canada Ltd. Michael obtained a degree in Business Administration aerospace and defence, engineering, pharmaceuticals, tech and (BBA) in addition to his LL.B. and LL.M. and was called to the Ontario clean-tech, manufacturing and transportation. Bar in 1987. Brett is Co-Chair of Canadian Women in Private Equity and is on the leadership of the Private Equity and Venture Capital Committee of the American Bar Association. Brett obtained her J.D. from the University of Toronto and has held the position of Adjunct Faculty Member at Osgoode Hall, York University.

McMillan is a leading business law firm serving public, private and not-for-profit clients across key industries in Canada, the United States and internationally. With recognised expertise and acknowledged leadership in major business sectors, we provide solutions-oriented legal advice through our offices in Vancouver, Calgary, Toronto, Ottawa, Montréal and Hong Kong. Our firm values – respect, teamwork, commitment, client service and professional excellence – are at the heart of McMillan’s commitment to serve our clients, our local communities and the legal profession.

iclg to: private equity 2019 www.iclg.com 65 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 11 cayman islands Julian ashworth

maples group patrick rosenfeld

1 Overview legislation governing the most popular entity types; notably exempted companies, exempted limited partnerships and limited liability companies. The Cayman Islands has also enacted 1.1 What are the most common types of private equity legislation for a limited liability partnership vehicle. transactions in your jurisdiction? What is the current The global regulatory framework is evolving quickly and this is state of the market for these transactions? Have you likely to continue in the near-/mid-term future. The Cayman Islands seen any changes in the types of private equity continues to adopt and embrace international best practice transactions being implemented in the last two to approaches in multiple spheres which interact with private equity, three years? including, by way of example, the regime for anti-money laundering and combatting terrorist financing, economic substance initiatives The Cayman Islands is a popular jurisdiction in which to domicile and tax transparency reporting obligations. private equity funds in light of its legislative and regulatory framework, tax-neutral status, flexible structuring options and experienced service providers. 1.3 What trends do you anticipate seeing in (i) the next 12 months and (ii) the longer term for private equity While private equity fund establishment for acquisition purposes transactions in your jurisdiction? and co-investment opportunities are most common, Cayman Islands structures are becoming increasingly common in transactional Fund raising activity remains at strong levels and we expect this to contexts, particularly buy-out and secondary transactions. continue in the near term. Equally, dry powder levels are also high. The nature, scope and volume of matters being undertaken in the We expect deal activity to remain strong over the next 12 months as Cayman Islands across the entire funds market spectrum makes it capital is deployed. The legal, regulatory and tax environment in the difficult to identify one specific change or trend. Ultimately, there Cayman Islands remains favourable for structuring of both the are many but they are all linked together by a singular overarching raising of private equity funds and for downstream cross-border theme; the nature of offshore practice has become more complex, deal activity in the longer term. involved and multi-jurisdictional due to onshore and global

developments; including US tax reform, more complicated and, at times conflicting, regulatory frameworks, bespoke structures and a 2 Structuring Matters mature funds industry. This will be documented in an appropriate manner in the governing documents adopted for Cayman Islands- domiciled vehicles, which will reflect the nature and terms of the 2.1 What are the most common acquisition structures adopted for private equity transactions in your underlying private equity transaction. jurisdiction?

1.2 What are the most significant factors encouraging or While a Cayman Islands private equity fund can also be structured inhibiting private equity transactions in your as an exempted company, limited liability company or a trust, the jurisdiction? majority of Cayman Islands private equity funds are established as limited partnerships. The Cayman Islands continues to be the leading offshore domicile The Cayman Islands fund vehicle will generally invest via other for private equity funds due to the global distribution appeal of Cayman Islands vehicles, including aggregator, or entities Cayman Islands vehicles, their ease of use, speed to market and low domiciled outside the Cayman Islands, such as in Luxembourg or cost. The Cayman Islands’ tax-neutral status ensures the fund Ireland, depending on where the ultimate operating portfolio vehicle itself does not create an additional layer of tax, creating company or target entity is located. Ultimately, net returns from the efficiencies in raising funds from a potentially global investor base. underlying company or target will be distributed to the Cayman The Cayman Islands is a well-regulated, co-operative and Islands domiciled fund vehicle, which net returns will be in turn transparent jurisdiction and continues to refine its laws and distributed to investors and sponsors and be taxable in accordance regulatory standards to respond and adapt to international standards. with the regimes of the jurisdictions where such investors and This has been most recently demonstrated by the update to primary sponsors are tax resident.

66 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London of thefundmanager. are restraints considerations regulatory and legal onshore the and by driven typically equity management the to relating provisions regulated are and domiciled funds international other equity or US private a by Islands managed Cayman of majority vast commercial The their to reference with arrangements andtarget returns. appropriate most is what to the management team to determine with a sponsor and will reflect returns are shared among a management team. This is generally left There can be a broad range of approaches as to how profits and other by dictated are matters These commercial, ratherthanCaymanIslandslegal,considerations. vehicle. Islands Cayman any of documents or governing the in reflected be veto can structure a within anti-dilution, as such accommodate to agree parties transaction which rights, information protections, investor Minority a through or partner a as separate vehicle. directly either typically participant carry will a as sponsor/management Apartnership limited exempted the of performance the in participate interest. partnership limited a of form the in partnership limited exempted the in interest equity an for subscribe investors partnerships, limited exempted as Howistheequitycommonlystructuredinprivate 2.3 and streamlinedmanner. efficient an in considerations regulatory and tax onshore satisfies which structure, holding underlying an of advantages structuring and economic the with vehicles fund Islands Cayman of flexibility These structures combine the investor familiarity, sophistication and Whatarethemaindriversfortheseacquisition 2.2 maples group © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 legal Islands Cayman than rather considerations orrestrictions. agreement commercial by dictated are matters These parties. transaction the of intention more mechanics vesting and generally, are provisions, structured in a wide variety of ways depending on the leaver bad and Good Forwhatreasonsisamanagementequityholder 2.6 Inrelationtomanagementequity, whatisthetypical 2.5 Ifaprivateequityinvestoristakingminority 2.4 As the majority of Cayman Islands private equity funds a investment manager. Therefore, vesting and compulsory equity transactionsinyourjurisdiction(including acquisition provisions? considerations? institutional, managementandcarriedinterests)? structures? your jurisdiction? usually treatedasagoodleaverorbadin what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and position, aretheredifferentstructuring re structured acquisition and properrequest. lawful legitimate upon authorities tax and regulatory enforcement or law agencies with with circumstances disclosed limited be other in to or need consent only will information generally and arrangements commercial of privacy protects Islands Cayman The the in agreement, interests ofthepartnership. partnership limited the of provisions express The general partner has a duty to act in good faith and, subject to the partner.general its by managed is partnership limited exempted An express the by eliminated) not provisions ofthelimitedliabilitycompanyagreement. (but restricted or expanded be or manager a managing member is to for act in good faith. This care standard of care may of liability duty default The limited agreement. company a to respect liability limited the in parties the company,by agreed be can which with arrangements governance to as flexibility significant is There managers. of board separate a A limited liability company can be member-managed or can appoint publicly availableintheCaymanIslands. not is company exempted an of Officers and Directors of Register director owes a duty of care, diligence and skill to the company. The each duties, fiduciary the to addition In shareholders. individual to companies with which the company is associated, to the directors or other to owed not are they Specifically, whole. a as company the to owed are they and individually duties these owes director Every be broadly characterised as duties of loyalty, honesty and good faith. may which nature, fiduciary a of duties various owes and company director The of an exempted company is in a fiduciary relationship to the company. the to vary depending on the nature of the private equity transaction. A of control tends company portfolio a of directors of board the of and composition management overall the for responsible is directors of company,board exempted the an For partnership. limited a or company liability limited a company, exempted an as formed be can company portfolio equity private Islands ACayman enjoy anyvetorights. typically not would investor minority A manager. fund or partner and general the of transactions conflict indebtedness any approve to established be on often purpose, limitations will committee advisory partner business limited A etc.). guarantees, investment, to as on example, (for limitations fund the of partnership agreement limited the in agreed limitations any within partner act general must the partnerships, limited exempted as structured enjoy veto rights over major corporate actions. For funds structures typically not the do fund equity private Islands Cayman a on in Investors based consideration case-by-case commercial circumstancesofeachtransaction. a generally is This . Whatarethetypicalgovernance arrangementsfor 3.1 . Doprivateequityinvestorsand/ortheirdirector 3.2 GovernanceMatters 3 in yourjurisdiction? position, whatvetorightswouldtheytypicallyenjoy? arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor cayman islands www.iclg.com 67 cayman islands 68 cayman islands © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com owes director such any company, portfolio Islands Cayman a of board the to nominee a appointing from investor equity private a While there are no Cayman Islands statutory restrictions preventing Arethereanylegalrestrictionsorotherrequirements 3.6 geographical scope. relation to the public interest, particularly with reference to time and in and parties the between as both “reasonable”, is restraint the that Islands law. That presumption in can, however, be rebutted by proving provisions Cayman under unenforceable such be to presumed are trade of provisions, restraint non-solicit and generally non-compete to is Islands) policy). Withpublic or law Islands Cayman respect to contrary not Cayman the another is agreement the that (provided Islands Cayman of the in enforceable than laws (other the by jurisdiction governed agreement shareholders’ A Arethereanylimitationsorrestrictionsonthe 3.5 (or shareholders minority to duties other any or duties fiduciary owe generally not does investor equity private a law, Islands Cayman of matter a As Arethereanydutiesowedbyaprivateequityinvestor 3.4 a authorise may documents manager toactintheinterestsofhis/herappointingmember. governing the given ventures joint to well-suited particularly are example, of way by vehicles, Such employed. is company liability limited a where flexibility greater director to opposed as shareholders nominees in light of the fiduciary to duties owed by directors. There is afforded better be may arrangements veto certain company, exempted an as structured If in aspecificcontext. effectively most accommodated be should arrangements such how documents although it requires a case-by-case analysis to determine governing in arrangements veto reflecting on limitation no is There Arethereanylimitations ontheeffectivenessofveto 3.3 agreement. director enhanced shareholders’a include almost would which documents, governing require or approvals. protections, These arrangements would be reflected in the company’s minority or rights various veto include may which thresholds, requisite by acting shareholders to reserved be will matters certain that agree to parties transaction for common very is it level, company operating an At maples group otatal are bten h pris n/r r otherwise are and/or parties expressly setoutingoverningdocuments. the between agreed contractually typically addressed? portfolio companies? equity investorsthatnominate directors toboardsof investors toportfoliocompany boards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin non-compete andnon-solicitprovisions)? (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements typically addressed? shareholders (orviceversa)?Ifso,howarethese to minorityshareholderssuchasmanagement the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) vice versa vice ), unless duties of this nature have been have nature this of duties unless ), will oftenbeestablishedtoapproveanyconflicttransactions. limited partner advisory committee or other independent committee a partnerships, limited as structured are funds equity private Where proceed withavote. to meeting quorate otherwise an at directors of majority a enable to matter, then the articles of association should be sufficiently flexible a such on vote a from himself/herself recuse to wish may director a opportunity.earliest the If at board the to interest this of nature the a which he or she has an interest, provided that of in he or matter she has disclosed a on association vote to director of a permit company Islands articles Cayman relevant the the Typically, of association company. of portfolio articles interest the of in conflicts out the set with provisions comply to required are Directors rae eovn rgltr ted ad lbly dpe best adopted globally and practices. trends regulatory evolving broader as well as markets other and Europe, Asia US, the in developed or of experienced trends context the reflect transactions and the funds equity private in Islands Cayman the in develop that trends The are domiciledorwheretheprivateequityinvestorsresident. assets the where jurisdictions the in required approvals regulatory as such issues, onshore by driven is transactions for timetable The . Howdodirectorsnominatedby privateequity 3.7 appointment totheboard. her or his for responsible investor equity private the of instructions director is accustomed to acting in accordance with the directions or equity private nominee the if director shadow a a be to considered be may circumstances, investor these In Revision). (2018 Companies Law the under company Islands Cayman a of up winding with connection in offences certain of context the in circumstances limited in recognised only is director” “shadow a of concept The company isusedastheportfoliocompany. greater flexibility in this regard if a Cayman Islands limited liability it risks incurring personal liability. As noted previously, there can be company,the to owed duties other and fiduciary its of breach in act company.director the a of Should interests best the in act times all personal their at must and investor) equity private and the of interests the (or interests company the to duty their between conflict a board. the avoid to mindful be must director to Consequently,nominee such any director the nominated that investor equity private the to not and whole a as company the to duties other and fiduciary . Havetherebeenanydiscernibletrendsintransaction 4.2 Whatarethemajorissuesimpactingtimetablefor 4.1 Cayman Islands private equity structures notwithstanding tha notwithstanding structures equity private Islands Cayman There are no competition approvals or regulatory approvals required for or subsequentto,adeal’s completion. filings or notifications may need to be mad Transaction Terms: General 4 of otherportfoliocompanies? terms overrecentyears? disclosure obligationsandfinancingissues? party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust iclg to: privateequity 2019

cayman islands e contemporaneous t ly with, certain rights andapplytotheCourtsseekingfairvaluefortheirshares. shareholder dissenting of themselves avail to able be may investors such then the merger, a of and way by structured company were acquisition Islands-exempted public is Cayman deal a in the shareholders which in which manner of the were investors equity private the if example, of way By structured. nature on the depend will investors, protections to available protections other be may there law Islands Cayman of matter a as generally, More of thecouncilexecutive. and consideration; of rules against offering favourable conditions except with the consent level minimum a in resulting acquisitions offer rules; an obligation to offer a minimum level of consideration; mandatory include: These shareholders. minority for protections of number a contains Code the entity, CSX-listed a of case the In listed. are shares its which on exchange stock Islands non-Cayman the of the relevant jurisdiction(s) where the target is based and/or the rules instances, the considerations that would apply are driven by laws in public-to-private in companies transactions are target generally not based in the Cayman Islands. In the those noted, previously As Whatparticularfeaturesand/orchallengesapplyto 5.1 maples group © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 tax andregulatory considerations. onshore by driven typically considerations Islands non-Cayman are portfolio specific for terms investments are generally not governed by Cayman Islands law and deal and companies operating The Whatconsiderationstructuresare typicallypreferred 6.1 Whatdealprotectionsareavailabletoprivateequity 5.2 Substantial the Governing (the apply would Shares Rules of Acquisitions and Mergers and Takeovers ( Exchange Stock Islands Cayman the on listed were company target however,the If, stock exchangewouldapply. Islands non-Cayman such of rules listing The Islands. Cayman the outside exchange stock a on listed be certainly almost would target the company,then Islands Cayman a is company target the Where requirements. diitrd y cucl xctv apitd y h Stock the by appointed executive Exchange Authority, council theCSX’s regulator. a by administered elct o acmoae el em die b onsho by driven terms deal accommodate or replicate regulations ofthejurisdictionwheretarget companyisbased. take into account would be determined with reference to the laws and to considerations applicable The Islands. Cayman the in based not are transactions public-to-private in Generally,companies target the The flexibility of Cayman Islands law allows transacting allows law Islands Cayman of flexibility The Transaction Terms: Private Acquisitions 6 Transaction Terms: Public Acquisitions 5 transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private acquisitions? commonly dealtwith? on thebuy-side,inyourjurisdiction? by privateequityinvestors(i)on thesell-side,and(ii) investors inyourjurisdictionrelationtopublic “CSX” , hn h Cya Ilns oe on Code Islands Cayman the then ), “Code” ), which Code is Code which ), parties to parties

re tax andregulatoryconsiderations. onshore by driven typically considerations Islands non-Cayman are portfolio specific for terms investments are generally not governed by Cayman Islands law and deal and companies operating The tax andregulatoryconsiderations. onshore by driven typically considerations Islands non-Cayman are portfolio specific for terms investments are generally not governed by Cayman Islands law and deal and companies operating The tax andregulatoryconsiderations. onshore by driven typically considerations Islands non-Cayman are portfolio specific for terms investments are generally not governed by Cayman Islands law and deal and companies operating The by onshoredealcounsel. sellers’ and agreed and negotiated typically are provided and terms agreed commercially comfort reflect commitments financing the to respect with rights such, enforcement As considerations. Islands Cayman by driven nor law, Islands Cayman by governed not generally are investments portfolio specific for terms deal The tax andregulatoryconsiderations. onshore by driven typically considerations Islands non-Cayman are portfolio specific for terms investments are generally not governed by Cayman Islands law and deal and companies operating The tax andregulatoryconsiderations. onshore by driven typically considerations Islands non-Cayman are portfolio specific for terms investments are generally not governed by Cayman Islands law and deal and companies operating The . To whatextentisrepresentation&warrantyinsurance 6.4 Whatisthetypicalscope ofothercovenants, 6.3 Whatisthetypicalpackage ofwarranties/indemnities 6.2 . Howdoprivateequitybuyerstypicallyprovide 6.7 Do(i)privateequitysellersprovidesecurity(e.g. 6.6 Whatlimitationswilltypicallyapplytotheliabilityofa 6.5 the typicalcostofsuchinsurance? equity selleranditsmanagementteamtoabuyer? team toabuyer? under anequitycommitmentletter, damages,etc.)? the managementteam)? warranties, covenants,indemnitiesandundertakings? exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) undertakings andindemnitiesprovidedbyaprivate offered byaprivateequityselleranditsmanagement funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and private equitysellerandmanagementteamunder cayman islands www.iclg.com 69 cayman islands 70 cayman islands © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com security Islands non-Cayman and Islands Cayman both jurisdiction where “creditor-friendly” leading a is Islands Cayman The Pleaseoutlinethemostcommonsourcesofdebt 8.1 Doprivateequitysellersgenerallypursueadual-track 7.3 the IPO. Typically, these commercial terms are agreed by onshore counsel to listing forsuchtransactions. listed; usually the is Cayman Islands Stock Exchange will not be the primary IPO the exchange which on primarily depend will This Whatcustomarylock-upswouldbeimposedon 7.2 entity forlistingonanIPOexit. of type correct the have we ensure to acquisition on documents the company.in flexibility sufficient a include to taken into be should care partnership Therefore, limited Islands Cayman a convert cannot themselves be the subject of an IPO. It is also not possible to partnership and membership interests in a limited liability company Islands- Cayman a be limited a company.in ordinary interests or partner exempt Limited to need will vehicle listing any that Note listing forsuchtransactions. listed; usually, is the Cayman Islands IPO Stock Exchange will not the be the primary exchange which on primarily depend will This Whatparticularfeatures and/orchallengesshoulda 7.1 tax andregulatoryconsiderations. onshore by driven typically considerations Islands non-Cayman are portfolio specific for terms investments are generally not governed by Cayman Islands law and deal and companies operating The Arereversebreakfeesprevalent inprivateequity 6.8 maples group have seenmoredual-trackdealsultimatelyrealisedthroughsale. we times recent In process. the in late very run can track dual The We often see private equity sellers pursuing a dual-track exit process. listing forsuchtransactions. listed; is primary the be not will IPO Exchange Stock Islands Cayman the usually the exchange which on primarily depend will This Financing 8 Transaction Terms: IPOs 7 exit? If so,whattermsaretypical? bonds). for suchdebt(particularlythemarket forhighyield current stateofthefinancemarket inyourjurisdiction your jurisdictionandprovidean overviewofthe finance usedtofundprivateequitytransactionsin through asaleorIPO? and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare private equitysellersonanIPOexit? private equitysellerbeawareofinconsideringanIPO transactions tolimitprivateequitybuyers’ exposure?

nce i te amn sad ipsn ay a t b lve on levied be to tax is any which imposing Islands law Cayman limited the no in undertaking, enacted exempted the of an date or the from trust partnership) exempted an company, liability exempted company) or a period of 50 years (in the case of a limited an of case the (in years 20 of period a for that, effect the to Islands to receive, an undertaking from the Financial Secretary expect of the Cayman and for, apply may partnership limited exempted an or An exempted company, an exempted trust, limited liability company received freeofanyCaymanIslandsincomeorwithholdingtaxes. LLC units, shares, of interests holders or limited partnership interests (as the case may be) will be the to vehicles equity private the gains payable to such private equity vehicles and all distributions by case may be) in such private equity vehicles. Interest, dividends and the (as interests partnership limited or interests LLC units, shares, of holders the (ii) or vehicles, portfolio or funds equity private as liability operate to established limited partnerships limited exempted or companies trusts, exempted companies, Islands-exempted Cayman (i) upon tax withholding or tax gift tax, inheritance duty, legislation, impose any existing income, corporate or capital under gains tax, estate not, does Islands Cayman the of Government The . Whatrecenttrendshavetherebeeninthedebt 8.3 Arethereanyrelevantlegalrequirementsor 8.2 relevant target group’s assets. capital commitments, and leveraged finance facilities secured by the financing equity investors’ on secured private facilities line Common subscription include structures market. the in finance debt seen of options range full the access to able are which vehicles, Islands Cayman to, lending comfortable and with, familiar very are counterparties Financing recognised. and respected are packages . Whatarethekeytaxconsiderationsforprivateequity 9.1 sponsor andinvestorsonlaunchofthefund. the case of a partnership), the terms of which would be agreed by the in agreement partnership limited a as (such vehicle Islands Cayman the of documents constitutional the in contained be however, may, financing debt on Restrictions market. the in seen debt options of finance range full the access to able generally are vehicles Islands the type of debt financing activity that can be undertaken and Cayman There are no specific Cayman Islands statutory restrictions impacting including totalreturnswapsandrepurchasestructures. vanilla loans, note issuances and also various derivative transactions plain include financings These parties. secured the for protection satisfies the lender’s bankruptcy concerns and provides strong credit independent one least at director or manager, as the case with may be, appointed to the board. This bankruptcy-remote as structured are vehicles The Islands. Cayman the in incorporated companies marked a with market increase in financings involving the use equity of wholly owned investment private and the subscription across all facilities of bridge use the of continuation a been has There Tax Matters 9 financing marketinyourjurisdiction? financing) ofprivateequitytransactions? off-shore structurescommon? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof investors andtransactionsinyourjurisdiction? Are iclg to: privateequity 2019 cayman islands

a alw fr infcn soe n feiiiy o structure to flexibility and scope significant management equityprogrammesinawidevarietyofways. for allows these law jurisdiction, tax-neutral Islands However,Cayman located. is team management a the where is Islands arrangements are typically driven by the Cayman tax laws of the jurisdictions the As private equity vehicles. by or to made payments any to applicable is that country any with treaty tax double a to party not are Islands Cayman The limited partner(asthecasemaybe)therein. or duty or unitholder shareholder,member, a of interests estate the or vehicle the of nature the of in obligations the of respect in payable tax be not shall tax inheritance any or taxes such any that or unitholder shareholder, member, limited a partner (as the case may of be) therein; and may further provide interest the or the vehicle of assets or operations the of respect in thereof be) may case member,the any (as to partner shareholder,or limited or unitholder profits or income or gains or appreciations shall apply to the vehicle maples group © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 of demands ever-increasing the regulatory meets it that and ensure to laws framework its refine to continues Islands Cayman The Havetherebeenanysignificantlegaland/or 10.1 Havetherebeenanysignificantchangesintax 9.4 Whatarethekeytaxconsiderationsformanagement 9.3 Whatarethekeytax-efficientarrangementsthat 9.2 s h Cya Ilns s txnurl uidcin thes jurisdiction, tax-neutral a is Islands Cayman the As arrangements are typically driven by the tax laws of th where themanagementteamislocated. IGA and CRS (collectively, the “ (collectively,the CRS and IGA US the effectto give to issued been have regulations Islands Cayman Standard (“ Reporting Common – Information Account Financial of Exchange for Standard Automatic OECD the implement to agreement authority competent multilateral a countries, other 80 over with along signed, euain) r rqie t cml wt te eitain due registration, they areabletorelyonanexemption. the with comply diligence and reporting requirements of the to AEOI Regulations, unless AEOI required relevant are the in Regulations) defined (as Institutions” “Financial Islands with the United States (the “ improve international tax compliance and the exchange of information to agreement inter-governmental an signed has Islands Cayman The 0LegalandRegulatoryMatters 10 investment intoanewacquisitionstructure? shares, deferred/vestingarrangements)? anticipated? private equityinvestorsortransactions andareany regulatory developmentsover recent yearsimpacting anticipated? teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities teams thataresellingand/orrolling-overpartoftheir equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate CRS ” andtogetherwiththeUSIGA,“ US IGA AEOI ”). The Cayman Islands has also

Regulations

AEOI ”). All Cayman All ”). e jurisdictions ”). e h Cya Ilns niCruto Lw 21 Rvso) (the Revision) (2019 Law Anti-Corruption Islands’ Cayman The particular the on depends diligence sponsor andmayalsovaryonatransaction-by-transactionbasis. due legal to approach The 04Hasanti-briberyoranti-corruption legislation 10.4 Howdetailedisthelegalduediligence(including 10.3 Areprivateequityinvestorsorparticulartransactions 10.2 The published Islands Cayman the 2018, December 27 On ■ resulted inthefollowinglegaldevelopmentsoverrecentyears: has adapt and respond to ability This industry. equity private the cmrhnie eiw n udt t te Exempted the to update and review comprehensive A ■ in Law Companies Liability Limited the of enactment The ■ of introducer early an was Islands Cayman The ■ (“ not subject to regulation by the Cayman Islands Monetary Authority Islands investing in business located outside the Cayman Islands are Cayman the in established funds equity private speaking, Generally CIMA and the Cayman Islands Trade and Business Licensing Board. by scrutiny to subject insurance be may bank, provider services local utility or company a as or such in Islands located Cayman the business in a regulated acquire to transaction equity private A Revision). CIMA diligence, contractualprotection, etc.)? in-house? jurisdiction (e.g.onnationalsecuritygrounds)? approach toprivateequitytransactions (e.g. impacted privateequityinvestment and/orinvestors’ legal /complianceduediligenceorisanyconducted engage outsidecounsel/professionalstoconductall materiality, scopeetc.)?Doprivateequityinvestors prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors subject toenhancedregulatoryscrutinyinyour OECD- all by compliant “nooronlynominaltax”jurisdictions. basis field playing level a on implemented mobile activities. Requirements of this type are rapidly being (“ Shifting Profit and Erosion Base OECD global to response a as 2018 Law, Substance) (Economic Co-operation Tax International atesi Lw vn ute it ln wt Delaware with line Limited into Exempted further concepts. the even bring Law to Partnership industry the by made, suggestions and raised, concerns and issues with specifically promotes freedom of contract and nature, includes provisions to deal the to alterations it Partnerships, Limited Exempted of operation or formation fundamental make not did law new the While 2014. in place took Law Partnership Limited in companies/blockers portfolio acquisitionstructures. same holding the and in investment) investing portfolio are funds structures, related equity multiple private (where in vehicles used aggregator vehicles, governance GP as LLCs particularly seen have we vehicle: the limited liability company.Islands Since its Cayman introduction, new a of formation the for provided 2016 2017. October in international Revision) (2018 Regulations Anti- Laundering meet the money to to made was effort update comprehensive continuing a standards, a In international standards. with line in regulations and rules these to adapt continues and regulations and rules client” your and “know laws laundering anti-money strict and comprehensive ) ne te amn sad Mta Fns a (2019 Law Funds Mutual Islands Cayman the under ”) BEPS ) tnad rgrig geographically regarding standards ”) cayman islands www.iclg.com

71 cayman islands 72 cayman islands rnato dcmns o icue wrat rltn to relating warranty a include compliance withsuchlaws. now documents commonly more transaction although minimal, been has transactions, their the of quality and nature given the and involved parties Islands, the of sophistication Cayman the in transactions equity private on offences for failure to report an offence. The impact of the AC Law or Elected Office; and Secret Commissions. There are also ancillary Government; the Public on of Fraud Abuses foreign); and domestic provides and Code, (both Bribery offences: corruption of Penal categories four for generally the under existed previously which bribery and anti-corruption to relating provisions the replaced Law well as the United Nations Convention Against Corruption. The AC as Transactions, Business International in Officials Public Foreign of Bribery Combating on Convention OECD the to effect giving © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com company,Islands Cayman a of incorporation of date the from judicial a is it English regard will Court authorities as persuasive (but not Islands technically binding). Accordingly, Cayman a and under law, personality corporate English under established those to similar are law regarding Islands Cayman principles general The its of through toitsshareholders. that from pass generally not does Accordingly,company’sparties. liability a separate third to personality due debts own its for liable separately legal is and shareholders a has company time to time Islands ACayman holds. from she or he shares amount the of respect in the unpaid to limited is capital share a and with liability limited with incorporated been has which company Islands-exempt Cayman a of shareholder a of contrary,liability the As a general rule, in the absence of a contractual arrangement to the Arethereanycircumstancesinwhich:(i) aprivate 10.5 “ maples group AC Law AC the liabilitiesofanotherportfoliocompany? and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof ”) came into force on 1 January 2010 with the intent of intent the with 2010 January 1 on force into came ”) Islands’ Cayman challenges. the with and opportunities new to adapt and change implement to flexibility coupled standards, international and industry-specific laws, transparency commercial initiatives and compliance Islands’with Cayman the to part in attributed be can structures equity private Islands Cayman of popularity the in rise continued 2016. This in 19,937 and 2017 in 22,346 with compared the number of active exempted limited partnerships stood at 26,011, consistent a seen has increase in the number of annual partnership registrations. In 2018, Islands Cayman the the crisis, financial by 2008 issued Statistics the since years the in that confirmed Islands. have Partnerships of Registrar Cayman is the role in This registrations structures. fund partnership limited exempted of equity number growing the by evidenced private in role growing and well-established a play vehicles equity private Islands Cayman being is abused forthepurposeofsomerelevantwrongdoing. personality legal separate company’s a if veil corporate the piercing in justified be may Court the that law English under 11Whatotherfactorscommonlygiverisetoconcerns 11.1 in the “pierce will Court the corporate veil”. These that circumstances are true exceptions to the rule such ignored be can exceptional company in a only is it law of personality legal separate the of principle the common that circumstances English of matter a As Salomon &Co. ( shareholders its from distinct person legal separate a as name own its in obligations, perform and assets, own to ability the includes This capacity. full of person natural a of functions the all body corporate with separate legal personality capable of exercising Salomon v. Salomon 1Other UsefulFacts 11 considering aninvestmentinyourjurisdiction? should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor [1897] A.C. 22). , and there is now a well-established principle iclg to: privateequity 2019 cayman islands Salomon v.Salomon maples group cayman islands

Julian Ashworth Patrick Rosenfeld Maples Group Maples Group Ugland House, South Church Street Ugland House, South Church Street PO Box 309, George Town PO Box 309, George Town Grand Cayman, KY1-1104 Grand Cayman, KY1-1104 Cayman Islands Cayman Islands

Tel: +1 345 814 5413 Tel: +1 345 814 5505 Email: [email protected] Email: [email protected] URL: www.maples.com URL: www.maples.com

Julian is a partner in the Maples Group’s Funds & Investment Patrick is a partner in the Maples Group’s Funds & Investment Management team in the Cayman Islands. His practice focuses on Management team in the Cayman Islands. He specialises in the private equity, hybrid and hedge fund structures and downstream formation and restructuring of all types of investment funds and cayman islands transactions, including financing and security agreements, secondary advises clients in the asset management industry. He also has transactions and fund restructurings. He advises sponsors and extensive experience of international debt capital markets, structured management companies on profit sharing and funding arrangements finance and securitisation transactions. and Cayman Islands regulatory matters. Julian is also involved in corporate finance matters, including M&A transactions, joint ventures, co-investments and restructuring matters.

The Maples Group, through its leading international legal services firms, advises global financial, institutional, business and private clients on the laws of the British Virgin Islands, the Cayman Islands, Ireland, Jersey and Luxembourg. With offices in key jurisdictions around the world, the Maples Group has specific strengths in areas of corporate commercial, finance, investment funds, litigation and trusts. Maintaining relationships with leading legal counsel, the Group leverages this local expertise to deliver an integrated service offering for global business initiatives. For more information, please visit: maples.com/services/legal-services.

iclg to: private equity 2019 www.iclg.com 73 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 12 china lefan gong

Zhong lun law Firm David Xu (Xu Shiduo)

1 Overview debt financing, or those requiring certain special expertise or value offered by one or more of the “club members”, club deals can be appealing. Also, in the context of a buyout, investors also have to 1.1 What are the most common types of private equity consider factors such as who gets to have control of the target and transactions in your jurisdiction? What is the current may as well then rule against club deals as an option. state of the market for these transactions? Have you seen any changes in the types of private equity transactions being implemented in the last two to 1.2 What are the most significant factors encouraging or three years? inhibiting private equity transactions in your jurisdiction?

PE transactions in China include both growth capital investments Since the Ministry of Commerce (MOFCOM) promulgated the and buyout transactions. One unique aspect worth mentioning is the Provisions on Foreign Investors Acquiring Domestic Enterprises fact that transactions, depending on the future exit, may be (Circular 10) back in 2006 (as amended in 2009), it has become structured as an onshore transaction or offshore transaction. If the difficult to convert an onshore domestic PRC company structure future exit is likely to be an IPO in a non-PRC stock market (e.g., a into an offshore structure, making it difficult for the foreign PE stock exchange in the US or Hong Kong), then the listing vehicle investors to opt for the option of establishing an offshore structure will likely take the form of a company incorporated in an offshore for investment and future exit through an overseas IPO. Founders of jurisdiction such as the Cayman Islands (i.e., an offshore holding domestic companies will have to rely on experienced counsels to go company). With such plan in mind, the PE investors will invest into through sophisticated, and often costly, restructuring processes to such offshore holding company and exit after the IPO of such migrate the domestic structure into an offshore one. If this is not offshore vehicle. If the target company is a PRC domestic entity, successful, then the foreign investors will have to invest directly then the PE investors would often require that a company into the PRC domestic target, resulting in a Sino-foreign joint restructuring be completed as a closing condition, such that the PE venture, which, after converting into a joint stock company (a.k.a. a investors will become the shareholders of the offshore holding company limited by shares), may be considered for listing in one of company. the PRC stock exchanges (i.e., an “onshore IPO or listing” in In contrast, if the target company is to be listed within the PRC on China). It should be noted that IPOs in China are subject to review one of the domestic stock exchanges, then the listing vehicle must and approval by the China Securities Regulatory Commission be a PRC incorporated joint stock company. PE investors will (CSRC) and the process usually takes many months and even years, invest into such domestic company which is governed by the PRC and companies often have to wait in a long queue for such approval. law, including company law, securities rules and, if applicable, As a result, despite the fact that the PRC stock markets sometimes regulations on foreign investment in China. can offer higher PE ratios for companies listed on the A-share stock The market used to be dominated by growth capital-style exchanges, the longer waiting period does create more uncertainty investments where the PE investors tend to hold minority stakes; than those overseas stock exchanges. however, there has been an increase in the popularity and number of The issue of the long waiting period for domestic IPO approval may buyout transactions in China thanks to a variety of factors, including now be eased with the introduction of the new “Science and increased competition among investors who are chasing fewer Technology Innovation Board (STIB or Sci-tech innovation growth capital deals, the emergence of privatisation deals, the board)”, in March 2019 at the Shanghai Stock Exchange. With the government’s regulatory liberalisation allowing loans (subject to newly adopted registration-based listing system, the conventional conditions and limitations) to finance M&A and buyout CSRC approval-based IPO regime will be replaced with a filing and transactions, and the increasing willingness of founding registration regime for the purpose of listing at STIB, which would shareholders of companies, while reaching retirement age, to sell significantly speed up the process which could otherwise be months controlling stakes to third-party buyers, such as buyout funds. and years for going through the approval and review process. STIB For regular transactions, club deals may not be as prevalent; will especially give priority to companies in high-tech and especially when each of the PE investors faces deal-sourcing strategically emerging sectors such as new generation information pressure and intends to keep the deals to themselves as long as the technology, advanced equipment, new energy, new materials and investment size is within their own pricing range. While for larger biomedicine. The new policies and regulations reflect the transactions, including privatisation deals, those funded partly by government’s intent to fuel growth and development for tech

74 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London uue vres P ad de o h ntr ta i hls assets often referredtoasa“redchip”company. holds is company it holding offshore that such China, nature in indirectly the or directly to due and, holding IPO overseas offshore future Such the in vehicle listing a become to intended often most (WFOE). is company enterprise” owned foreign “wholly a of form the in PRC, the in subsidiary a in interests 100% holds then which company, intermediary HK a in interests 100% the target company, and such offshore holding company often holds of company holding offshore the of shares acquires or into invests SPV its or investor PE the model, investment offshore the Under a becomes and shareholder oftheonshorecompany. directly entity corporate domestic PRC onshore PE for the into invests available (SPV), vehicle purpose special offshore an through fund, PE structures the model, investment offshore onshore the Under and transactions. onshore are There five-year transitionperiod. a after superseded be will ventures joint co-operative sino-foreign foreign equity joint ventures, wholly foreign-owned enterprises and sino- on laws specific existing three the 2020), 1, January on effect into come will (which Law”) Investment “Foreign (the PRC the of In March 2019, with the introduction of the Foreign Investment Law Whattrendsdoyouanticipateseeingin(i)thenext12 1.3 such addednewexitchannel. for investors VC and PE for encouraging also is which companies, Zhong lunlawFirm © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 still while approval, HK achieving thesameresultofexiting. onshore the the transfer bypassing buyer or a sell to simply company can investor PE the company), HK the as (such company intermediary offshore an is there if So, approval. the grant then and process to authority approval the for has largely become a formality, it does usually take 20 working days of and involvement get to hard not is any approval such Although investment. foreign is there if required is approval government equity the If company, PRC a of shares transfer.or interests equity share the involves transfer such of case for in drivers approval PRC The onshore company. target acquisition structure can be the related to tax planning and avoidance of in interests hold to SPVs the use and SPVs more or one up set often investors PE Whatarethemaindriversfortheseacquisition 2.2 Whatarethemostcommonacquisitionstructures 2.1 established without approval but with a filing procedur akn, a sain osrcin n oeain ar craf aero operation, and construction station gas banking, manufacturing andnewenergy automaking. be can FIEs normal MOFCOM, by where required investment still are foreign approvals for List” “Negative the in specified sectors those for except that provides law new the Furthermore, foreign ownership restrictions in more industrial sectors, such as such sectors, industrial more in restrictions ownership foreign removed has 2018 in list updated the List, Negative 2017 the with StructuringMatters 2 months and(ii)thelongertermforprivateequity jurisdiction? transactions inyourjurisdiction? structures? adopted forprivateequitytransactionsinyour

e. Compared t xt ih trs sc a da-ln, eepin ec t esr a proper exit. ensure to etc. redemption, drag-along, as such terms, right exit special on insist also might investor the Meanwhile, target. the of of Association and Articles agreement shareholders the e.g., target, the of documents governance the in provisions will protective it require shareholder, minority a as acts investor PE a if Normally, management’s the for consideration subscription ofadditionalshares. the of part a be as also can structured interest carried deals, certain In adjustment. ratchet or earn-out the an as investor. structured such often for is with arrangement rights interest incentive Carried share of class extra same the provide with investor to price PE the as price same the at or lower restrictions, to subject management, a at teams the into the sweet equity shares, they are normally issued to reinvestment the management For China. management in transactions PE in seen been have and strip institutional equity “sweet” Both and terms contract the to subject negotiation betweentheparties. are often those But leaver”. “bad a as deemed be may he activities, unethical other in engages or misconduct, wilful fraud, contract, of breach commits manager a If terms. good on retirement or resignation sometimes manager,or following the circumstances, i.e., the include death or would incapacity of the leaver” owner or “good of definition typical The price. may agreed an company at interests equity her the or his over option call arrangement, a exercise contractual the on company, depending a leaves holder equity management a that event the In a commits default. shareholder management the if repurchase company to subject be also can Vestedshares company. the with service or or nominal price if the management shareholder ceases employment the value par at repurchase company to subject of be will shares unvested term the with links employment, IPO timeline and other exit schedules. In usual cases, usually schedule vesting typical A . Ifaprivateequityinvestoristakingminority 2.4 Howistheequitycommonly structuredinprivate 2.3 . Forwhatreasonsisamanagementequityholder 2.6 Inrelationtomanagementequity, whatisthetypical 2.5 as intermediarycompanieshavenowbecomelimited. this of light In onshore. development, the PRC tax benefits transfer of setting up such offshore SPVs or sale such onshore made parties the the transfer or sell indirectly company could be subject to PRC tax filing and potential taxes as if that shares or interests equity of changing-hands offshore Tax7, (SAT)Bulletin including As to tax, in light of the rules issued by PRC State Administration of considerations? institutional, managementandcarriedinterests)? your jurisdiction? acquisition provisions? position, aretheredifferentstructuring equity transactionsinyourjurisdiction(including usually treatedasagoodleaverorbadin what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and www.iclg.com china 75 china 76 china © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com to merger, split, IPO, change of legal form, liquidation or dissolution value in excess of certain specified threshold(s); with any matters relating contracts material any signing capitalisation; company’s the of change any company; the of name the or scope, business the of controlling the include: any amendments to the typically Articles of Association; any which change investor(s), PE and the of right veto the to subject investors be matters reserved PE of will matters company.reserved portfolio The the the of shareholder(s) list extensive between an usually negotiated is There Yes. Doprivateequityinvestorsand/ortheirdirector 3.2 government the with filed be authority, suchgovernancearrangementswillbepubliclyavailable. to required always are is document companies portfolio constitutional that given Association, of of Articles their in reflected arrangements governance such If otherwise or chop company formulate achop-useprotocolfortheportfoliocompanies. the jointly-control to the proper mechanism from a designing funds suggests caution releasing Thus, for accounts. company’s signatory authorised the change to bank the to go can anyone chop, company the the With of company. representative authorised other or representative legal the from signatures any have not do documents such if even company the on binding are chop company the bear that law,documents any founding the PRC the Under chop/stamp. company the holds also representative usually board, the legal such convenience, company.For portfolio of the of shareholder chairman the by assumed operating company.the on binding onshore normally is role representative legal Such documents sign the to power the of has that WFOE) representative the (e.g., company legal the is it usually practice, and law PRC the under that mentioning worth is it Third, and agreed amount. operations any of the excess in spending monitor any control and can expenditures company it that so company, operating founder-controlledthe in controller financial a VPoperation and/or the an in install to investor stake PE the minority for advisable a is it company, portfolio invests only investor PE the if Second, board members. mirrored with place in put be normally will structures board dual the then WFOE), (i.e., subsidiary operating onshore the of owns 100% which level, company holding offshore the in invests fund will director PE-appointed appear on the board of each such of the entities. In other words, if the PE then entities, corporate of tiers company. If there is a holding company structure involving multiple of material matters relating to the management and operations of the would company, request a portfolio director seat on the the board, which has in veto rights over stake a host minority its of regardless investor, PE investments. the governance usually directors, PE of board the proper of in respect in First, companies ensure portfolio to the with mechanisms arrangements several are There Whatarethetypicalgovernance arrangementsfor 3.1 Zhong lunlawFirm GovernanceMatters 3 in yourjurisdiction? position, whatvetorightswouldtheytypicallyenjoy? etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such particular reservedmatterofitsconcern. the of respect in level meeting shareholder and level board the both the bypassing resolution, reach at power veto the has it sure make must investor PE the then board, can meeting shareholder the If hrhle areet rltn t nncmee n non- and non-compete to of relating solicitation. enforceability or agreements contents the shareholder on restrictions or limitations the of respect in law PRC the under provision express no is There Kong, Singapore,andLondon. PE foreign the investors tend to select international arbitration in venues like Hong while tribunal, arbitration China-based court a choose over to request agreements. commonly China selected from sellers those or shareholders Founding in clauses commonly resolution dispute for is adjudication arbitration International agreement maybegovernedbyadifferent law. company (such as the offshore Cayman Islands), while the the share subscription of jurisdiction the of law the to subject normally are agreements offshore,shareholder place then takes transaction the If be must contract) governed bythePRClaw. venture joint (or agreement shareholders’ the share The with along the agreement) subscription equity (or approval. then agreement purchase government company, to PRC subject a be in will transaction interests equity acquires or into invests investor PE foreign the where transaction onshore an is it If duties specifying owed byamajorityshareholdertominorityshareholder. provision express no is there but requirement, voting majority super a including rights, shareholder’s minority on transaction, under the PRC law there are certain statutory provisions as majority shareholder after a buyout transaction. If it is an onshore This question seems to suggest the context where a PE investor acts . Arethereanydutiesowedbyaprivateequityinvestor 3.4 Arethereanylimitations ontheeffectivenessofveto 3.3 shareholder(s) oftheportfoliocompany. controlling the with negotiation their on based matters reserved of company.list longer much a the request usually would investor PE However, of the division or merger and and company; the of termination capital Association; of registered the of reduction or increase company; the of Articles dissolution the to amendments all the directors present at the board meeting under the PRC law: any minority of consent unanimous a to subject be must decisions these as vetorights a four following the taking statute, by enjoy, investor least at PE will it position, a or to operations As management, performance. company’sfinancial the any on have may impact that material matters any and parties; any to guarantee or of the company; making loans to any parties; providing any security . Arethereanylimitationsorrestrictionsonthe 3.5 typically addressed? non-compete andnon-solicitprovisions)? typically addressed? shareholders (or to minorityshareholderssuchasmanagement the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements iclg to: privateequity 2019 vice versa )? Ifso,howarethese china competing withthebusinessofsuchcompany. be may that firms any for work or at positions take for, activities shareholders’ meeting or shareholders’ assembly, may not engage in that a director of a company, without prior consent of the company’s drcosi psto i aohr opn, h lw os not does law the company, act such restrict or another prohibit in position directorship a act as proxy of any other directors either. As regards to the taking of and shall not cast herself a vote on or resolutions over this himself matter, and recuse shall not must member board such then meeting, board proposed the in voted be to matter subject the with) interest of conflicts or in interest having (i.e., to” “related is board the of the impair interests to of the latter. company Specifically for listed companies, the if a member with relationships her or his use may supervisors and management senior the of members shareholders, controlling directors, the of none Law, Company PRC the Under someone thatthePEinvestorcannotfullytrust. the or when shareholder another by particular control under in are operations company’s of, aware be should representative legal country.the leaving as acting person a risks practical the are Those from representative legal such restrict to relief an injunctive issue or order to court the to apply can plaintiff the court, by required as debt pay to unable is company the extent the to and company, the to relating authorities government the by undertaken activities investigations accommodating company, the of behalf on court in appearing as such default, by obligations certain has representative the and investor appointed person the should be aware that, under company,the PRC law, the legal the of representative legal the as acts also chairman such and directors, of board the of chairman the If the PE investor has a controlling stake or otherwise gets to appoint Arethereanylegalrestrictionsorotherrequirements 3.6 Zhong lunlawFirm © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 regulatory These required. be SAFE will residents, registrations PRC 37) are (Circular “ListCo.”) future the (i.e., company an into structure domestic offshore structure, if any of the shareholders of the offshore PRC holding a converting when addition, In antitrust reasonsandtax(Bulletin 7) filings. not normally be required, with exceptions such as merger filings for will approvals such transactions, and offshore For Industry (AIC). for Commerce Administration local the with registration then counterparts’and local approval its or MOFCOM require investors As mentioned above, all onshore transactions involving any foreign Whatarethemajorissuesimpactingtimetablefor 4.1 How dodirectorsnominatedbyprivateequity 3.7 Transaction Terms: General 4 equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin of otherportfoliocompanies? portfolio companies? disclosure obligationsandfinancingissues? and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof per se per , but it should be cautiously noted cautiously be should it but , and insurance indemnity and stapled financingareconsideredrareinthemarket. warranty are while arrangement seen, ratchet commonly and volume, sales targeted indemnity, founder clauses, and terms specific developed For the markets. stock in countries’ available those than higher much be can ratios the recent boom in the Chinese stock market, and the price/earnings and Quotations (NEEQ) are becoming increasingly appealing given Exchange Equities National the on listing through and IPOs market, stock Chinese trend. emerging an becoming also are China in company listed a by acquisition or China in listing through Exits transaction terms. other and valuation the negotiating in power bargaining more have increased the given Also, competition among PE investors chasing for deals, founders tend to China. for in factor situation market primary dynamic a be can they determining the success of a particular portfolio company given the as them incentivise to how and management and founders the of responsibilities and roles the on focus to have often investors PE terms, deal the crafting When or acertaintriggerevent,e.g.,acquisitionbyindustrialplayers). terms of founders (i.e., founders are committed not to exit until IPOs management to incentives are increasingly and popular in PE transactions, with binding addition mechanisms earn-out In business diligence, due unique China. extensive in the infrastructure of legal light and in environment formulated carefully be must terms transaction foolproof and structures deal sound that realise For both onshore and offshore transactions, PE firms have started to oetc opn sial frAsae itn i te R, f the if PRC, the in listing A-share for suitable company domestic in, role significant among others, restructuring the privatised company into an onshore a plays also counsel PRC The shareholders. public the from arising uncertainty the and exchange stock the of liquidity.and/or valuation requirements the include challenges The better for future, the in exchange stock another at again public go that are taken private with the help of PE investors with the intent Singapore) to and Kong, Hong US, the in exchanges stock on listed companies Chinese those as (such companies listed overseas those The commonly seen public-to-private transactions in the market are . Havetherebeenanydiscernible trendsintransaction 4.2 . Whatparticularfeaturesand/orchallengesapplyto 5.1 in lost meanings having translation mayalsocreatemisunderstandingsandtwists. and terms of understanding Different and exchangeofnegotiationpointsviaemail. mark-ups document back-and-forth more expect and paper, on out while westerners tend to have nitty-gritty,the detailed terms and conditions laid the than rather principles on deals striking and terms the of discussions real-time and meetings face-to-face more prefer sometimes parties Chinese example, For purposes. management important an be also project and planning deal for into factored be can to needs that element negotiations parties foreign and and Chinese communications between during differences Cultural advance. in properly managed not are they if closing over uncertainty create could and process transaction the delay normally will procedures Transaction Terms: Public Acquisitions 5 terms overrecentyears? commonly dealtwith? transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private www.iclg.com china 77 china 78 china © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com of thefoundingshareholders forindemnity-relatedclaims. liability joint or guarantee personal request sometimes investors PE holdback arrangements can be seen more often in buyout deals, and and contingent liabilities that may pop up in the future. Escrow and hidden any including downsides, the against protect to transactions PE in seen commonly are indemnities and warranties Seller-side Whatisthetypicalpackageofwarranties/indemnities 6.2 Whatconsiderationstructuresaretypicallypreferred 6.1 to theeffect. clause exclusivity an grant(s) often which shareholder(s), principal takes the form of a negotiated agreement between the bidder and the usually China in companies listed of buyer.takeover potential The current the with (LOI) intent of offer/letter after indicative time the signing of period specified a for buyer potential another from offer an pursuing from seller the prevents clause exclusivity The level. appropriate an to damages liquidated such adjust to court the petition to party paying the allows law PRC the incurred, actually liquidated damages far exceed the amount of the losses and damages the if However, value. equity the of 1%–1.5% about at set be can due legal e.g., target, the diligence and or financial due diligence-related costs, and sometimes it investor the by incurred expenses actual the be normally would fees public break-up usual of The companies. acquisition including deals, PE in seen be can and law Break-up fees and exclusivity clauses are acceptable under the PRC Whatdealprotectionsare availabletoprivateequity 5.2 stock exchangesandregulatoryauthoritiesoutsideChina. challenge in terms big of managing the a timing and coordination is with the which procedure, approval exchange foreign the through go to need will it China, outside exchanges stock other or US, the or Kong Hong in listed shares the acquire to RMB uses and China from is investor PE a If future. the the in China in public go have company to intend investors PE the and shareholders controlling Zhong lunlawFirm will tendtodrivehardbargains onallthosetermsofthetransaction. period. If the buyer and seller are both PE investors, then both sides survival no ideally,with again and, breach any of case in guarantee or liability personal a ideally, and, warranties and representations of list extensive an have to shareholder controlling the require will any holdback to the minimum. If a PE investor is on the buy-side, it and warranties to a very short list and the survival period thereof and If a PE investor is on the sell-side, it will tend to limit representations structuring theconsiderations. in popular also are mechanisms earn-out and Ratchet investor. PE the by consent prior without activities certain conduct not may side company the which during period interim an be will closing the and date statement financial the between period time The investors. PE the to with favourable clauses along indemnity and agreements, adjustments consideration transaction the in company target the of statements financial latest the reference usually would investors PE Transaction Terms: Private Acquisitions 6 acquisitions? team toabuyer? offered byaprivateequityselleranditsmanagement on thebuy-side,inyourjurisdiction? by privateequityinvestors(i)onthesell-side,and(ii) investors inyourjurisdictionrelationtopublic

the transaction. depends largely upon the jurisdiction, industry type and structure of premium of such typical insurance is 1%–3% of the insured amount, which the Usually, transactions. M&A and PE cross-border for but we have started seeing insurers offering such insurance products China, in seen often not is insurance warranty and Representation performance certain reach targets. and term agreed an for company the provide to with stay to requested commitment the with business the are to support ongoing management and/or sellers that often more and more seen being is It transactions. PE in are seen typically and crucial absolutely are non-solicitation and Non-compete f h cmimns r poie b SV, h sle sd will side seller the SPVs, usually requesta guarantee oftheactualinvestor(s) orbuyer(s). by provided are commitments the If any indemnificationobligationsandauthorisedclaims.”) the to seller in annual released instalments, subject to adjustments are and fulfilment of and accounts, bearing interest in years two to by managed third-party firms. accounts These funds are generally escrow held for a period of one in price purchase total the of 15% the to 10 approximately placing on insist buyers loss, financial closing in contained provisions definitive agreement. indemnification Escrow Coverage: To guard escrow against any post- satisfy financial “Contain to seller’s the 1: ability over concerns Part buyer address Transactions, to provisions M&A in Provisions (Escrow damages. and losses any for recourse as place in put be may arise therefrom, a PE buyer may insist on an escrow amount to that damages potential or defects material or serious any of case In . Whatlimitationswilltypicallyapplytotheliabilityofa 6.5 To whatextentisrepresentation&warrantyinsurance 6.4 Whatisthetypicalscope ofothercovenants, 6.3 . Howdoprivateequitybuyerstypicallyprovide 6.7 Do(i)privateequitysellersprovidesecurity(e.g. 6.6 nenfcto, hc cn e e a a ecnae f h share warranties, suchassixmonthsoroneyearfollowingtheclosing. the of percentage a at transfer price, along with a survival period of set the for representations and amount be the can on which cap indemnification, a request often will counsel seller’s The the typicalcostofsuchinsurance? equity selleranditsmanagementteamtoabuyer? under anequitycommitmentletter, damages,etc.)? the managementteam)? warranties, covenants,indemnitiesandundertakings? private equitysellerandmanagementteamunder exclusions fromsuchinsurancepolicies,andwhatis (i) excesses/policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical undertakings andindemnitiesprovidedbyaprivate funding, righttospecificperformance ofobligations by thebuyingentity(e.g.equity underwriteofdebt sellers typicallyobtainintheabsence ofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and iclg to: privateequity 2019 china P tks lc oesa. hs eed o te ifrn stock different the on depends exchanges. This overseas. place takes IPO the if shorter be can and year one take normally will IPO, onshore China a of result a as sellers, PE on imposed lock-ups Customary subject toscrutinybytheCSRC. is and time take will company the Restructuring markets. capital offshorecan offer significantly higher multiples as compared to the overseas an unwind to decide structure to go for sometimes the Chinese domestic A-share listing and if that option listing, and IPO the for place suitable most the find to company the with together struggle often investors PE IPO. the of approval and preparation the and the for required time the with along exchange, stock particular a on issues compliance-related perspective, minimum requirements for an IPO in a given jurisdiction and listing legal and a size from performance, ultimately, and potential, financial growth and company’s sector industrial scalability, the as such exit, IPO an for considered be to need that factors of variety a are There incurred suchasthefeesforlegalandfinancialduediligence. assert claims for damages amounting to the fees and expenses it has then the can investor of or buyer selling the exclusivity, the of breach shareholders’ of case the In agreement. purchase the in and sheet term the in clause exclusivity an request usually investors PE Arereversebreakfeesprevalentinprivateequity 6.8 and/or bank referenceletter. guarantee, parent a provide to buyers request may Sellers Zhong lunlawFirm © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 strong enough towarrantthegreaterreturns. not is market capital the when popularity in increase may idea the Equally period. waiting and procedure regulatory lengthy the to due place take to IPO an for time of period long a takes it as as listed companies and industrial giants may be willing to pay more the beginning through the end. This may gain increasing popularity from process exit dual-track a pursue strictly necessarily not may Savvy PE investors always keep all the options open, although they Do privateequitysellersgenerallypursueadual-track 7.3 What customarylock-upswouldbeimposedon 7.2 Whatparticularfeaturesand/orchallengesshoulda 7.1 Transaction Terms: IPOs 7 transactions tolimitprivateequitybuyers’ exposure? private equitysellersonanIPOexit? exit? If so,whattermsaretypical? through asaleorIPO? and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare private equitysellerbeawareofinconsideringanIPO source ofdebtfinancingforPEtransactions. common a as considered not and are they result, entry a as and for costs, higher barriers high have still China in bonds High-yield fully developed. be to yet and emerging still is PE for market debt the PRC, the In management arm of an insurance company) to loan to PE investors. asset the (e.g., funds own their use or funds raise also can China in Also, asset management companies with a proper regulatory licence investors. PE to sums the loan will company investment trust such then and company, investment be trust can Chinese-licensed a plan by trust raised unit Chinese a e.g., finance, debt for other channels are there loans, syndicated bank to addition in PRC, the In further discussedbelow). be (to investors PE to open not are loans acquisition such general, rating in credit but, Abank above, as or such qualifications, certain banks to make loans to finance acquisitions by companies that meet allowing started and Banks Commercial of Loans Acquisition on Provisions issued Administrative (CBRC) Commission Regulatory Bank China the that 2008 until not was it transactions, onshore For PRC. the within located are company offshoretarget such of assets another offshore company’s equity interests and 50% or more of the acquire to used is finance debt or loan the where entity offshore an lender’s or to guarantee onshore an prohibits SAFE the instance, lender For affiliate. offshore any to security or guarantee provide are there transactions, offshore to entity PRC onshore an for required conditions regulatory of certain context the In transactions. PE China-related for structure or obtain to difficult more finance debt making restrictions are there transaction, the finance to banks privatisation deals, PE investors are more likely to obtain loans from helping for generate higher IRR, and in particular for large offshore buyout desirable and financing debt find investors PE Although refine itspolicytoallowmoredebt financingforPEfunds. likely will CBRC the future foreseeable the in expect we and Zone, Trade Free Pilot Shanghai the in registered funds PE to financing provide to banks allow that developments recent some are acquisitions. There make to conglomerates or companies industrial for provided usually are loans the funds, PE for made being from loans on Provisions prohibit Administrative expressly not do Banks Commercial the of Loans Acquisition Although law. by permitted otherwise unless investments” “equity of purposes for used be not General Rules for Loans promulgated by CBRC in 1996, loans shall not consider debt financing for such investment anyway. Under the company,portfolio will the reasons, in commercial stake for banks, For growth capital deals, if the investment only results in a minority . Pleaseoutlinethemost common sourcesofdebt 8.1 . Arethereanyrelevantlegalrequirementsor 8.2 Financing 8 bonds). financing) ofprivateequitytransactions? for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof www.iclg.com china 79 china 80 china © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com onshore entity, itwillbesubjecttoacapitalgainstaxof10%. the in interests its of sale investor’s PE foreign such of transfer the or treaty tax a unless from arising gains capital the For rate. tax lower a provides equivalent withholding 10% a to subject be will to be repatriated from such onshore company to the foreign investor dividend any then China, in company onshore an in interests equity acquires investor PE non-PRC a where transaction, onshore an For China subsidiaryorsubsidiaries. the to attributable value the to corresponding gains capital the on the of one tax charge only will authority represents tax theory,the in then, jurisdictions, only China and jurisdictions, multiple in the rate of 10%). If the offshore holding company owns subsidiaries (at tax gains capital to subject likely and 2015, SATin of issued 7 authority,Bulletin tax to PRC pursuant the with filing to subject be will thus and PRC, the in subsidiary onshore the of in interests equity transfer indirect an as deemed be will transfer such company, offshorethe holding in shares its of any sells investor PE the extent To the rate. tax withholding lower a providing equivalent or treaty tax a is there unless 10%, of rate the at tax withholding to subject entity onshore such repatriates dividends up to when its offshore parent, such dividend will be assets, operating with entity onshore an in interests owns which company holding offshore an of shares acquires investor PE non-PRC a where offshoretransaction, an For Whatarethekeytaxconsiderationsforprivateequity 9.1 debt financing. or leverage use rarely and investments for capital own their on rely PRC the in funds PE the of most knowledge, our To Such investment. date. same the equity on loans entrustment of use the prohibit expressly on Measures effect into came (the Banks which Commercial “Measures”), of Loans Administration Entrustment the the on issued Measures CBRC 2018, 5, January on recently, allowed to provide loans to companies for equity investment. More not normally are restrictions, regulatory to due PRC, the in Banks Whatrecenttrendshavetherebeen inthedebt 8.3 the to loan the forward borrower. to bank the requesting trustee account, the bank’sinto sums loan the deposit to lender the i.e., loan, the PRC- a law,bridge to trustee as act the to have will company trust or bank with licensed compliance full in be to China, in needed financial or individuals is by loan inter-company an if law.Therefore, PRC under institutions offered be only can financing Debt operating onshore and entities, addingrisktothebanksincaseofdefault. offshore the in interests equity or shares persons. This would make the lenders heavily rely on the pledge of onshore restricts non-PRC to interests security or SAFE guarantees providing from entities the particular, In again. play into come onshore entities within the PRC, the PRC regulatory restriction will any by provided be to security or collateral require banks the when but jurisdiction; or law PRC the to subject not therefore are terms usually are the and involved PRC, the of jurisdiction the of outside institutions financial banks the financing, debt offshore the For Zhong lunlawFirm Tax Matters 9 off-shore structurescommon? investors andtransactionsinyourjurisdiction? Are financing marketinyourjurisdiction? gains taxof10%. sale of its interests in the onshore entity, it will be subject to a capital the For investor’sPE foreign such of transfer the from above. arising gains capital mentioned as 10%) rate the (at tax gains capital authority,tax PRC the with filing to subject be to subject likely and will thus and PRC, the in subsidiary onshore the of in interests equity transfer indirect an as deemed holding be offshore will the transfer in such company, shares its of any sells investor PE the If a plan, option restricted stockplan,orsomethingelse. stock a considered is plan the whether on depend will treatment tax the company, portfolio a of team management the for incentives to as and China, to apply not does largely This structure canbeeasilyputunderanoffshore trust. red-chip a while trust, family offshore an into companies onshore transfer to reasons) tax for (often costly prohibitively or difficult it find may they as an reasons, planning prefer estate for may structure offshore which entrepreneurs, some and companies TMT the dominated for appeal its gradually has still structure offshore and said, being That size market. in bigger grown have or funds listing A-share through exit of to sale through otherwise RMB Onshore companies. listed A-share hope the with entities PRC into investments direct making they to Meanwhile, receptive increasingly become transactions. privatisation to such tend in funds participate PE investors; domestic by offered valuations and ratios PE higher and turf home on recognition brand better much then seek to get listed on a domestic and A-share stock market, in light of the private go to decided have exchanges stock overseas in listed companies red-chip those Recently,of some structure. chip” “red a the as known commonly listing, and financing for vehicle future as company offshore an form to shareholders controlling the an IPO in a non-PRC stock market, investors usually would request As mentioned above, at question 1.1, if the future exit is likely to be payment ofsuchremuneration. any VATto 6% applicable plus as rates progressive deemed 5%–35% the to be or rate, tax income remuneration (i.e., compensation for services) and therefore subject 20% a to subject therefore and dividend a as deemed be should it whether – interests carried “RMB (a.k.a. fund PE fund”), onshore the law is not clear an as to the tax of treatment or tax nature of context the the in contrast, In if heorsheisaPRCtaxresident. the individual level, a GP member may need to pay PRC income tax at where except tax PRC to subject be not will GPoffshore the by received interests carried the resident, tax PRC a become not does an by paid being are they offshore if PE fund to an interests, offshore GP, carried provided that such offshore the fund of respect In to PRCcorporateincometax. tax PRC a as treated resident. being If not, all its global income of the fund(s) could be subject from entities such prevent to taken be must steps and actions China, in active funds PE offshore For . Whatarethekeytaxconsiderationsformanagement 9.3 Whatarethekeytax-efficientarrangementsthat 9.2 investment intoanewacquisitionstructure? shares, deferred/vestingarrangements)? teams thataresellingand/orrolling-overpartoftheir equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate iclg to: privateequity 2019 china tax the ease to intended burden of the sellers and reduce the liquidity is pressure on both sides. This transferred. corresponding so the interests of equity base cost the exceeded has price purchase new those a to noting worth addition is change that allows In such withholding tax it to be deferred until the paid procedures, filing 2017. tax 1, on amendments December on force into came 37 Announcement The 698. Circular superseding interpretations, official with along income, PRC-originated on tax withholding on 37”) “Announcement the No.37, [2017] (Announcement guidance new a SATissued the 2017, 17, October On penalties. even and adjustment tax in result could transaction test such meet to a Failure structure. for purposes” what for commercial tests detailed “reasonable adds constitutes and clarifies also It well. as buyer to the failure on reporting of burden adds and payment tax required the make for penalties increases but voluntary, into compulsory from filing 698 Circular the making change a made has 7 698. Bulletin Circular the to amendment an as 7 Bulletin issued has SAT level being offshorewould trigger the PRC indirect transfer tax issue. In early 2015, at the sale trade is investors’ PE a above, that mentioned As (GAAR) rules avoidance implemented inChina. general-anti the yet not of is company one foreign is rules CFC of introduction The the individual. the to distributed from received dividend the if even apply immediately may tax dividend 20% a is, PRC. That the of that than lower obviously rate tax effective an with jurisdiction reasonable without kept profits a in incorporated company foreign controlled a by reasons business undeclared on tax to subject is (the rules “CFC rules”). Under Corporation the CFC rules, a PRC tax resident shareholder Foreign Controlled the Law”), Tax introduces Income which “Individual (the 2018 in China of Republic People’s the of Law TaxIncome Individual the to amendment the The most recent change made by the tax authority is the issuance of Havetherebeenanysignificantchangesintax 9.4 Zhong lunlawFirm © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 due past repay fund in involvement players’ to foreign of respect failure In indebtedness. as such of problems list creditworthiness a out sets as a fund manager or a principal shareholder or partner thereof, also e.g., It act to forbidden be would individual/entity an where circumstances activities. investment and raising fund in rights investor of Funds, protection the up Investment beef to intends Private which of Administration Interim the the of comments, Regulation public seeking regulation draft a issued Council State the of Office AffairsLegal the 2017, 30, August On Association ofChina(AMAC),whichisaffiliated withCSRC. Management Asset the with made be shall registration and filing Such China. in formed funds investment PE of forms all and any of registration and filing require Measures Interim Such 2014. 21, and Supervision August on the CSRC by Funds, Investment of Private of Administration Measures Interim the the is of investors promulgation PE impacting development regulatory major A Havetherebeenanysignificant legaland/or 10.1 0LegalandRegulatoryMatters 10 teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities anticipated? anticipated? private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting the existingnationalsecurityreviewregimeinplace. implementation rules. It is also unclear how this shall reconcile with future the for details more leaving principles, general provides only Review cases shall be final”. Security However, the National Foreign Investment Law those on made “decisions that specifies further “a that and established” be will system provides review security investment foreign also 2019 in Law Investment Foreign new The central level toregulateforeigninvestment. at law security national unified such no is there However, currently review. security national trigger also may investment greenfield a M&Atransactions, to addition In areas. other as well involve or security sensitive investors, national acquisition targets, industries and technology, as affect of may reviews that security investment conducting foreign were for standards Fujian, clarifies and Circular The Guangdong 20. April on office of general Council’s State the by provinces published the and Shanghai, Tianjin, in zones trade free all in investment foreign of security review national a for procedures interim 2015, In triggered. be and heavy equipment manufacturing, a resources, national security review will technology energy, key services, products, transportation significant infrastructure, agricultural services, or defence-related products national services, or products military-related or circumstances. If the invested domestic enterprises involve military certain under investors foreign and companies Chinese involving acquisitions and mergers to only applies review security national Under China’s current regulatory regime on foreign investment, the iiec poes ht a icue nure it te following the into matters: inquiries include may that process diligence due larger a of aspect one generally is diligence due Legal reports. diligence due legal more or one of form the in client its to findings its of summary a provide then will and sources other from obtained due by the target as well as publicly available information and materials legal conduct to provided documents review firms generally will firm law The diligence. law engage normally Requireotherspecialtreatment. investors PE Requireconditionstoclosing. ■ Impact post-closing operationsorintegration. ■ Bearonpurchasepriceor riskallocation. ■ Affect thedecisionofwhethertododealorabandonit. ■ ■ help things, other identify issuesthat: among to, diligence due use may investor the company,Chinese domestic a of acquisition an In purposes. many serves it and transaction, a of part critical a often is diligence Due 02Areprivateequityinvestorsorparticulartransactions 10.2 03Howdetailedisthelegalduediligence(including 10.3 foreign capitalintoRMBforonshoreinvestments. of onshore limited partnership and can convert an approved quota of in jurisdictions. local QFLPtheir Those form the take normally (QFLPs) funds partnership(s)” limited [invested] foreign “qualified up set to players grant PE foreign qualified equity to certain to measures approvals special “QFLP” onshore issued have for Shenzhen) and RMB Beijing, into capital Shanghai, Tianjin,as (such municipalities select some investments, exchange foreign of conversion on restrictions SAFE the of light in China, in formation jurisdiction (e.g.onnationalsecuritygrounds)? materiality, scopeetc.)? subject toenhancedregulatoryscrutinyinyour prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors www.iclg.com china 81 china 82 china © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com a tortiousorcontractualbasisotherwiseinviolationofthelaw. on party third a to caused has it damages or losses for liability civil to subject be only can in it otherwise Law, activities Criminal the criminal of violation in engaged has itself, in it, if only liability also applies to a portfolio company which can be subject to criminal This entity”. an by “crime a constitutes which activities criminal except shareholder) any in engaged has entity a such where Law Criminal PRC the under as only (acting entity an on liabilities any imposes that provision express no is there company, portfolio a of the or company. But for entities such as a PE fund acting as a shareholder regulation the for law, duties performing the when association against of articles acted company’s the she to or caused he has she if or company he damages and losses for liable held be could employees, or officers directors, are that persons Natural Arethereanycircumstancesinwhich:(i)aprivate 10.5 due diligencebeforesigningthedeal. related anti-corruption require often and documents, transaction the in clauses indemnity and covenants anti-bribery include often will UK and Singapore, US, the as such countries from members with funds laws, related anti-corruption home-country their by Dictated Hasanti-briberyoranti-corruptionlegislation 10.4 Other. Environmental. ■ Supplier. ■ Customer. ■ Product. ■ Labour. ■ Operations. ■ IP. ■ Technical. ■ Tax. ■ Internalcontrols. ■ Financial. ■ Accounting. ■ ■ Zhong lunlawFirm the liabilitiesofanotherportfoliocompany? and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof diligence, contractualprotection,etc.)? approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ nte patcl i fr oeg P ivsos o aae PE manage to investors PE foreign t for tip practical Another PE investors. any including shareholders offshore to profits repatriate to failure even and penalties in result will registration 37 Circular the complete with filing the a if to failure the residents, PRC are shareholder(s) controlling ultimate above, make mentioned As counterparts. must local its investor or MOFCOM foreign the of person In a recent regulation of MOFCOM in 2018, the ultimate controlling damages. and losses become its for recover to plaintiff the even for little leaving bankrupt, or elsewhere funds hidden or moved already have could defendant the time, such By proceeding. arbitration the of proceed with the enforcement; this process could take months on top then and award arbitration foreign the review to court local the for wait to have will parties the tribunals, arbitration foreign for Thus, available forarbitrationcommitteesortribunalswithinthePRC. only is enough privilege Such has any. if award it the for pay ensure to funds secured to account bank defendant’s as the such relief freezing pre-judgment for apply to able being not to is which longer much take disadvantage, major can a has and proceeding, arbitration the complete tribunal arbitration In foreign shareholders. a Chinese reality, its of any or company portfolio PRC the with disputes any of case in tribunals arbitration and court PRC the is investors use to not and law governing as law PE PRC choose to not inclination foreign some of misconception common A 11Whatotherfactorscommonlygiverisetoconcerns 11.1 (Jiang and overallresearcheditingwork. Jiang sections, Joanna tax-related on support providing in thank help invaluable their to like for Rufeng), (Gao Gao also Mark and Jiayan) Lulu),Yancy(Chen Chen would authors The Acknowledgments h fudr n te aaeet em n isal proper a install the company. and of growth the team with founder/management the management ties that mechanism the and founder the with interests the align fully must structure investment PE sound that a company.Therefore, a of success role the for it” breaks or it “makes essential an play often team management and founder the relationships, values that culture Chinese unique a with market management/founder’s roles in the target company. In the dynamic ascin i Cia s o ou atnin n the on attention focus to is China in ransactions 1Other UsefulFacts 11 considering aninvestmentinyourjurisdiction? should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor

iclg to: privateequity 2019 china

Zhong lun law Firm china

Lefan Gong David Xu (Xu Shiduo) Zhong Lun Law Firm Zhong Lun Law Firm 10–11/F, Two IFC, 8 Century Avenue 36–37/F, SK Tower Pudong New Area 6A Jianguomenwai Avenue Shanghai 200120 Chaoyang District, Beijing 100022 China China

Tel: +86 21 6061 3608 Tel: +86 10 5957 2288 Email: [email protected] Email: [email protected] URL: www.zhonglun.com URL: www.zhonglun.com china Dr. Lefan Gong is a partner in Zhong Lun’s Shanghai office. He has David Xu focuses on PE and venture capital practice. He has done been recognised by Chambers Asia and The Legal 500 as a “Leading numerous PE/VC transactions during his 10 years of experience. Individual Lawyer” for many years. David is particularly knowledgeable with respect to those aspects of deals that require additional experience and know-how on financial, Dr. Gong is qualified to practise law in both China and New York. He accounting, business and management. He is particularly interested has represented PE clients, family offices, Fortune 500 companies, and profoundly established in structuring the equity holding structure investment banks and major state-owned enterprises in PE as well as ESOP structures for company clients, ranging from seed transactions, corporate financing, cross-border mergers and stage up until pre-IPO stage. acquisitions, overseas IPO, joint ventures, and other complex international investment and commercial transactions. He also advises clients on fund formation, establishing red-chip structures, VIE, corporate restructuring, and wealth management-related matters.

Zhong Lun has been ranked as one of the leading law firms in China by Chambers Asia, IFLR, ALB and others in many practice areas. With more than 200 partners and 1,000 legal professionals, our strategically positioned offices enable our lawyers to work together on a fully integrated cross- office, cross-disciplinary basis to provide commercially-oriented advice and effective real-world legal solutions. The firm’s pre-eminence in the field of PE and VC investments and capital markets means it regularly handles the largest, most complex and demanding transactions in China and works with clients and other law firms all over the world. We have represented numerous domestic and foreign GPs and institutional investors in the formation of all types of PE funds, including buyout funds, real estate funds, mezzanine funds, VC funds and FOF. For PE investment and PE financing, our services run the full spectrum of stages from start-ups to IPOs and post-IPO mergers and acquisitions. Zhong Lun is also renowned for handling the most complex and challenging dispute resolution matters for PE clients.

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avance attorneys ltd erkki-antti Sadinmaa

1 Overview availability of cheap debt, the perceived stability and transparency of the market and the broadly attractive technology sector. There is a large number of small- and mid-sized companies in Finland that 1.1 What are the most common types of private equity are a good fit with private equity. We have seen several domestic transactions in your jurisdiction? What is the current and international private equity sponsors raise separate funds that state of the market for these transactions? Have you cover the full spectrum of deal size and sector categories in our seen any changes in the types of private equity market, which further drives demand for deals. In order to avoid the transactions being implemented in the last two to intense competition surrounding coordinated sales processes for the three years? best assets, funds are also tapping into attractive assets through a smaller initial investment, followed by multiple add-on transactions. Finland provides a very stable and predictable regulatory and cultural environment for private equity activity and the local custom and process for private equity deals is broadly similar to, for example, the 1.3 What trends do you anticipate seeing in (i) the next 12 months and (ii) the longer term for private equity US or the UK with relevant transaction documentation being (almost transactions in your jurisdiction? without exception) in English.

A leveraged buyout of a majority interest in the target company We expect continued high deal volumes in certain industries, remains the most common type of private equity transaction in our including technology (particularly B2B technology services and jurisdiction, although there are some early indications that sponsors fintech) and health and social care. The developments in the latter with broad investment mandates and/or the ability to invest from sector are closely tied to the overall health care reform in Finland, different funds (depending on deal size) may be adopting more expected to be a top agenda point for the new government to be diverse investment strategies. It is common that key members of appointed following the general elections in April 2019. management invest alongside the fund. Depending on whether Private equity is expected to remain active, with a record amount of management holds shares in the target prior to the transaction, the dry powder in new funds with broad mandates (including both management investment will often take the form of a post-tax roll- majority and minority investments) aimed at tapping into all market over or a new investment. segments (venture, small-, mid- and large-cap). We expect private We are continuing to see a healthy flow of private equity deals and are equity sponsors to continue to leverage on the increased sector experiencing activity across sectors and deal sizes. Examples of knowledge gathered by them and focusing increasingly on certain active sectors include B2B services (particularly IT services and the sectors and industries. technology space generally), health and social care and energy. In

terms of private equity transactions, recent examples include, e.g. the acquisition by Adelis Equity Partners of invoice lifecycle services 2 Structuring Matters company Ropo Capital and the acquisition by Providence Equity Partners of OpusCapita Solutions. 2.1 What are the most common acquisition structures We have not seen significant changes in the structures of private adopted for private equity transactions in your equity transactions (also see question 4.2 below). The main changes jurisdiction? relate to ongoing industry-specific regulation and reorganisations that affect the commercial dynamic of the relevant industries, including, Transactions involving private equity investors are typically as examples, the health and social care and transportation industries. structured through one or more Finnish special purpose vehicles organised as limited liability companies. The number of vehicles in 1.2 What are the most significant factors encouraging or the acquisition structure depends on the requirements of the inhibiting private equity transactions in your contemplated financing providers for the transaction. Unless jurisdiction? mezzanine or other junior loan arrangements are contemplated, the acquisition structures have traditionally been relatively simple with The current reasonably high volume of deals is driven in part by the one or two holding companies. Due to existing and contemplated stable overall outlook in the Finnish economy. Moreover, factors interest deductibility limitations and other tax and publicity reasons, that drive private equity transactions include the unprecedented shareholder loan financing arrangements have, in certain recent amount of capital available to funds focusing on the market, the transactions, been replaced by other preferred equity instruments.

84 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London along andtag-alongrightstransferrestrictions. drag- investments, governance equity new and in participate to participation rights provisions, board rights, information rights, similar the position, include to protect the investment case and exit opportunities, including veto minority customarily a provisions would as takes in majority investments. Such provisions are designed investor agreement equity shareholders’ private a If sufficientascertain to ways other exit. an for possibility and control require or positions majority take investors equity Usually,private shares usually calculatedonthebasisoffund’s aggregatereturns. 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Alternatively, or is price purchase original and leavers good The of case in value market to equal typically event. leaver a of case in investor equity private the by nominated person a or investor equity private the to as remain shares their sell may to need typically management The higher. be also sellers may management them to allocated equity of amounts the the investors, significant the where to deals compared ordinary equity investor and equity preferred private of management (amount of sweet equity). In small- or mid-cap proportion the private the of and instruments size deal the on much very also depends allocation the but equity, ordinary the In typical cases, management are allocated between 5% and 15% of Inrelationtomanagementequity, whatisthetypical 2.5 Ifaprivateequityinvestoristakingminority 2.4 equity transactionsinyourjurisdiction(including considerations? institutional, managementandcarriedinterests)? structures? acquisition provisions? what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and position, aretheredifferentstructuring companies (includingcorporategovernancereporting). generally board have independent investors invested in the corporate governance arrangements of equity their portfolio appoint private recently, to and, companies, members portfolio larger in non-listed a be to body.decision-making any in represented especially common, is It right in statutory a other have not arrangements do employees e.g. and and company, governance investor corporate to requirement equity no publish is There private management. as such the shareholders, shareholders’ among on based agreements typically are arrangements Governance on based (e.g. grounds personal without redundancy). company the by service disability,permanent death, age, retirement statutory termination or upon retirement or as such reasons, other employment for ended has whose relationship members management usually are leavers Good group. target the from resigned voluntarily have or legislation) employment applicable on (based grounds personal a material breach of the shareholders’ agreement, been dismissed on Bad leavers are usually management members who have committed ersnaie o ay oiaig hrhle. h directors’ The shareholder. nominating any of representatives as acting not are and collective shareholder the and company the to nominee level, it director should be noted that the directors owe their fiduciary duties the At agreement. shareholders’ the of breach potential a to due solely invalid considered rights be necessarily not may veto contractual of the violation in at level made board resolution or shareholder corporate a However, parties. the upon binding obligations contractual as enforceable generally such, as Veto rights are typically based on shareholders’ agreements and are, as well as plan, business related partytransactions. the to the changes of in approval disposals, secure typically significant and acquisitions restructurings, would corporate all as such events, corporate to it relation in rights position, veto agreement minority shareholders’ a in is rendering veto rights of less importance. actions, If a private equity investor corporate significant all over control enable to sufficient Yes. Typically, the ownership share of the private equity investor is . Whatarethetypicalgovernance arrangementsfor 3.1 Forwhatreasonsisamanagement equityholder 2.6 . Arethereanylimitationsontheeffectivenessofveto 3.3 Doprivateequityinvestorsand/ortheirdirector 3.2 GovernanceMatters 3 in yourjurisdiction? your jurisdiction? typically addressed? position, whatvetorightswouldtheytypicallyenjoy? arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such usually treatedasagoodleaverorbadin the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor www.iclg.com Finland 85 Finland 86 Finland © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com may company, portfolio another in Such interest. of conflicts indirect potential to rise director give sometimes a as director’s position Aher or his or investor, equity shareholder. private nominating the with as nominating relationship acting any not are of and representatives collective shareholder the and company the of interest best the in act to duty fiduciary a have directors The Howdodirectorsnominatedbyprivateequity 3.7 the benefitofportfoliocompanydirectors. for insurance liability officers’ and directors’ out take to common defined in Finnish corporate law (also see question 3.3 above). It is are personally liable for breaches of their fiduciary or other duties as the private equity investor appointing directors. Individual directors There are no specific risks, requirements or restrictions applicable to Arethereanylegalrestrictionsorotherrequirements 3.6 the positionofpartytowhichrestrictionapplies. factors, other among on, depending assessment the unenforceable, law corporate generally are provisions non-compete Extensive Finnish otherwise). agree with interplay the applicable to the company (while there are no specific limitations to given by law governed typically Finnish are unreasonable agreements an Shareholders’ in result outcome. assessment, case-by-case a on based they, should aside, set or mitigated be may obligations contractual Finland. individual principles, law in contract Finnish general However,under enforceable generally are agreements Shareholders’ Arethereanylimitationsorrestrictions onthe 3.5 to certaincorporateresolutions). of shareholders (such as majority and consent requirements applicable treatment equal securing at aimed are and beforehand waived be cannot that provisions the legal statutory certain to adhere in to need waived typically are will investor shareholders’equity However,private the agreement. mechanisms Such protection squeeze-out. minority demand to right at the and aimed dividend minimum mechanisms a of demand to right number the including shareholders, a minority protecting for provides law Finnish Arethereanydutiesowedbya private equityinvestor 3.4 (e.g. ininsolvencysituations). the force rights veto contractual despite cases, manner certain a exceptional in act to directors in may, duties fiduciary statutory avance attorneysltd typically addressed? of otherportfoliocompanies? party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof portfolio companies? equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin non-compete andnon-solicitprovisions)? (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements shareholders (or to minorityshareholderssuchasmanagement vice versa )? Ifso,howarethese osnswies eadn te ae a tu hv timing have thus may same implications. obtaining the and provisions regarding of consents/waivers types control of change and to subject institutions financial (e.g. be further may licences and targetpermits infrastructure), company industries regulated certain In government, asfurtherdescribedintheanswertoquestion10.2. sector the by confirmation separate a require civil may and regime, monitoring or products, defence dual-use in industries deemed critical to society, of are further subject engaged to a separate production assets or or industries entities of acquisitions Foreign further called forlawfirms’ in-houseexpertiseineconomics. to subject analyses market scrutiny. and processes antitrust complex more in resulted has This related and filings making approach economist-driven increasingly an with process, approval authorities’competition in shift discernible a been has there years, recent During approvals. regulatory other require generally not do transactions corporate required), (if approvals antitrust from Apart private of closure/liquidation tail the equity funds. cover with that connection products in insurance liabilities separate tax as and well environmental as to matters, relating products insurance separate new including insurance, indemnity and introduce warranty the with combination to seeking actively insurance products that can are be deployed in the transaction context in brokers and providers Moreover, insurance process. diligence the in matters GDPR) (e.g. compliance to attention increased the include trends recent and Other presence a establishing brokers increasing theirfocusontheregion. and providers insurance new with products, insurance the related and for indemnity market and warranty attractive an be to proved has region Nordic The been signed. the where transactions have documents transaction the after of only finalised is underwriting number a seen also underwriting have the we with process, familiar more become have investors has As insurance transactions. equity indemnity private of feature and standard almost an warranty become years, recent the Over . Whatarethemajorissuesimpacting thetimetablefor 4.1 be length commercialtransactionbetweenthetwocompanies. typically would it company to participate in the decision-making concerning an arm’s- benefit, personal portfolio another of board the on serving director a for permissible any Absent duties. therefore not are directors’fiduciary the and of are light in basis case-by-case law a on assessed interest) corporate of Finnish in conflicts regulated direct expressly to opposed (as situations . Havetherebeenanydiscernibletrendsintransaction 4.2 required consentsfromkeycontractualcounterparties,etc. potentially obtaining as such considerations, jurisdiction-specific) Other issues possibly impacting timing include more general (i.e. less Transaction Terms: General 4 disclosure obligationsandfinancingissues? terms overrecentyears? and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust iclg to: privateequity 2019 Finland

are are There they but generally limitedtothetransactioncostsincurredbybidder. offers, company. tender public target in fees the break-up by of precedents payable fee break-up a to There are also legal restrictions on the target board’s ability to agree bidder shouldacompetingbidbelaunched. the to rights matching provide to company target the on obligation an and bidders competing with negotiate to the ability board’s on target limitations transactions, competing solicit actively to not deal protection features, such the as an obligation on the target company However, bidder and the target the company in example. a friendly between deal often includes into some entered for typically is that agreement shareholders, combination its the and towards duties company fiduciary board’s the to due protections deal provide to ability board’s target the on restrictions legal are There key a feature fordealcertainty. typically is this and shareholders, major company’s target Typically, bidders seek to obtain irrevocable commitments from the be guidance ontheprincipleofequaltreatmentshareholders. to arrangements the with keeping such in structured carefully be for must target they permissible, order selected In to instruments shareholders. equity company or shares offer to ability treated be must shareholders equally. company’sThere are therefore restrictions on the acquiring target company’s the that is offer its including company, tender public a in requirements targetlegal key the of One management. the of shareholders key selected to company acquiring the in stake equity an or shares offer to want often they that is investors equity private for feature particular One irrevocable obtaining key featurefordealcertainty. its that of means majority typically commitments from the main a shareholders of the target company is a This of ownership companies. concentrated the is major Helsinki the from Nasdaq of commitments feature particular One shares. their by sell to shareholders backed-up and board target the by recommended deals negotiated typically are offers) tender Private equity investor-led public-to-private transactions (i.e. public Whatparticularfeaturesand/orchallengesapplyto 5.1 Avance AttorneysLtd © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London ICLG TO: PRIVATEEQUITY 2019 completion accounts are often the preferred choice, but are seen buy-side, less the On period). this during the flow cash for expected target’s seller the compensate to (designed completion until date choice price is subject to an interest element calculated prevalent from the locked box the box locked the always, remained not but Often, sell-side. the on particularly have mechanisms box Locked Whatconsiderationstructuresaretypicallypreferred 6.1 What dealprotectionsareavailabletoprivateequity 5.2 Transaction Terms: Private Acquisitions 6 Transaction Terms: Public Acquisitions 5 transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private acquisitions? commonly dealtwith? on thebuy-side,inyourjurisdiction? by privateequityinvestors(i)onthesell-side,and(ii) investors inyourjurisdictionrelationtopublic purchase agreement. aaeet ol nt rvd a eaae sadaoe e of set stand-alone separate, warranties asiscustomaryincertainjurisdictions. a seller. provide equity not private the would as Management warranties of set equal an offering of management to leads treatment which situations drag-along equal in shareholders require typically agreements Shareholders’ standardised. rather become has which of scope the warranties, of however, has, product set comprehensive more a insurance provide to sellers equity private allowed indemnity and warranty The the capitalisation. and title capacity, cover regarding warranties fundamental only typically would catalogue warranty the solution, the insurance an of absence the in exit”, “clean a for look sellers equity changed extent some to landscape regarding the scope of warranties/indemnities. has As private product insurance indemnity As noted in question 6.4 below, the introduction of the warranty and related limitations in the due diligence process. The slate of general typically scope- or findings specific or sector-relatedmatters with are associated coverage to carve-outs Deal-specific negotiations. extensive to subject rarely are for and limitations indemnity practice monetary market general the follow broadly limits policy The fund and indemnities environmental closure situations. and tax for e.g. products, terms of local team presence and marketing of specialised insurance in both brokers, insurance by market Nordic the on focus increased an seen have we years, recent During obtain. to able be otherwise would they than coverage indemnity-related and warranty broader obtain to buyer the for allows solution insurance the of existence be to insurance the indemnity and processes sales sponsor-led in solution staple a as and provided warranty for common very is It . Whatisthetypicalpackage ofwarranties/indemnities 6.2 . To what extent isrepresentation&warrantyinsurance 6.4 Whatisthetypicalscopeofothercovenants, 6.3 than rather consideration fixed pursuing anextendednegotiationonearn-outstructure. a around compromise a find to seek often quite parties disputes, to prone are earn-outs that fact the controls to Due and period, earn-out the during particular.target’soperations the on imposed in sector tech the small-cap and in transactions particularly seen sometimes are elements Earn-out in common deals thatdonotinvolveprivateequityplayers. more are accounts Completion practice. in less and buyer’s shareholders’ agreement and may the in included typically If are provisions competition/non-solicitation management. from non- scheme, incentive equity buyer’s the to over required rolls management commonly more are covenants such whereas undertakings, non-competition/non-solicitation give to willing seldom are competition sellers equity Private confidentiality. in and filings assistance completion, and signing between run is The typical scope of covenants includes restrictions on how the target team toabuyer? the typicalcostofsuchinsurance? equity selleranditsmanagementteamtoabuyer? offered byaprivateequityselleranditsmanagement exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) undertakings andindemnitiesprovidedbyaprivate thus not be as critical in the WWW.ICLG.COM Finland 87 Finland 88 Finland © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com equity private a with deals mid-cap and small- in varies, financing of availability the regards as sellers by required comfort the While Howdoprivateequitybuyerstypicallyprovide 6.7 against theseller’s interestsintheplan. private the equity buyer often becomes comfortable plan, with the recourse available incentive equity buyer’s the to roll-over such sellers where but individuals, private are that sellers from security Private equity buyers sometimes require an escrow or other form of situations emerging inthemarket. above, we are also seeing insurance solutions aimed at fund closure 6.4 question in noted As arrangements. these for need the reduced but rare are of its term. The rise of sellers warranty and indemnity insurance has further equity private sometimes seen, e.g. in situations where a fund is coming to the end for arrangements Escrow Do(i)privateequitysellersprovidesecurity(e.g. 6.6 enterprise at value andnobasketor capped usually is liability warranties, fundamental a (ii) value, enterprise the of non- cap 10–30% of liability basket/deductible (typically of around 1% range of enterprise a value), and (iii) the (i) breaches in include typically regarding warranties (business) limitations fundamental liability Standard Whatlimitationswilltypicallyapply totheliabilityofa 6.5 and warranty the of pricing the affect indemnity insuranceproduct. extent, some to may, This arbitration. to proceeding than rather transaction M&A an of context the in arising disputes settle to way a find often parties and litigation to prone particularly not is that jurisdiction a is Finland cover”). breach “new (so-called events such cover to obtained occur is sometimes coverage insurance that separate and events closing, and to or signing between given developments often adverse is against focus protection Particular broadly. general the overly formulate exclusions to trend be a should against safeguarding practitioners in but careful established relatively is exclusions avance attorneysltd limited. Liability for breaches of covenants and undertakings is typically not for thepurposesofqualifyingseller’s operationalwarranties. material disclosure constitute to letter/memorandum, disclosure the a in defined concept a disclosed”, purchase agreement), rather than just the specific details set forth in “fairly is (that room data In Finland, it is established market practice for all information in the where thelimitationperiodislonger. warranties, environmental and tax fundamental, for save months, The limitation period for warranties typically varies between 12–24 e minimis de warranties, covenants,indemnitiesandundertakings? under anequitycommitmentletter, damages,etc.)? funding, righttospecificperformance ofobligations by thebuyingentity(e.g.equity underwriteofdebt sellers typicallyobtainintheabsence ofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and the managementteam)? warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and private equitysellerandmanagementteamunder tpcly rud .% nepie au) For value). enterprise 0.1% around (typically de minimis applies. ocrig h cmay ihn i/e on raiain Such restrictions can sometimes be challenging organisation.for private equity owners. own his/her within company the concerning information non-public sensitive share to a ability such company member’s on board restrictions public legal certain the their are There of IPO. from directors an following of representatives board have the on often organisation owners equity and Private planning of should company degree The ensure thatsufficient resourcesareavailablefortheIPOproject. high process. streamlined a a and requires preparedness IPO successful A IPO. company be able to exit its entire stake the in the company in connection with the in stake significant a following the IPO. The private equity seller will therefore often retain not to required be often Due to institutional investor expectations, a private equity seller will Reverse breakfeesareveryuncommonintheFinnishmarket. of dual-trackprocesseshaveresulted intradesales. majority the years, recent in our IPOs equity private there several been have While in rule. but the than process, exception the whole more is that the experience throughout parallel in run been have tracks both cases, some In case. to case from varies parallel The extent to which the IPO and M&A processes are actually run in markets. equity public the in available valuations attractive the to Dual-track processes have become more popular in recent years due The customarylock-upperiodforprivateequityfundsis180days. . Whatparticularfeaturesand/orchallengesshoulda 7.1 Arereversebreakfeesprevalent inprivateequity 6.8 the seller. and SPV buyer the both to addressed often are letters commitment Equity seller. or buyer deals equity private foreign a involving ones and in required increasingly transactions larger in particular buyer,in equity private a involving are letters commitment Equity financing executed increases naturally fully which transaction costsforunsuccessfulbidders. signing, at require available be to may documents sellers transactions, larger especially and competitive highly In agreement. purchase under an executed term sheet and commitment letter attached to the financing construed condition that is narrowly tied to the bank a not refusing to fund its accept commitment often quite sellers buyer, . Doprivateequitysellersgenerallypursueadual-track 7.3 Whatcustomarylock-upswouldbeimposedon 7.2 Transaction Terms: IPOs 7 exit? If so,whattermsaretypical? through asaleorIPO? private equitysellersonanIPOexit? private equitysellerbeawareofinconsideringanIPO transactions tolimitprivateequitybuyers’ exposure? and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare iclg to: privateequity 2019 Finland and evenrequiredbycertainseniorbanks. used also is subordination structural but arrangements, contractual The priority of debt financing is in most cases implemented through upstream extent, certain a to security and,forexample,upstreamguaranteearrangements. assistance restrict, financial rules These the and prohibition. requirement benefit corporate the tax be must For that law considered in relation to corporate acquisition finance structures, in particular, under restrictions law. certain are corporate There Finnish as considerations, pleaseseesection9below. well as transactions, legislation, tax by affected including interest deduction mostly rules and requirements for arm’s-length are structures finance Debt private or bonds listed transactions. of form transactions refinancing for common more is funding the of market type This placements. capital in debt either some implemented seen have we estate real sectors, and infrastructure the In low. quite been has Finland in materialised transactions of number the although deals, private equity in considered regularly is funding of markets-based Capital volumes aggregate the medium-sized and financing providedbycreditfundshavebeenquitelow. financing and bank small by for dominated region Nordic however,is, deals equity still private in financing Debt companies. the in lending direct- on focusing companies insurance and funds credit Finnish financing alternative for interest and Nordic some are there and Nordics the and Finland in channels increasing an been has There has alsobeenusedinsomedeals. financing Mezzanine deals. larger in common more are syndicates bank international whereas banks, Nordic by financed mostly are deals equity private medium-sized and Small- Finland. in funding debt of source common most the remains debt bank secured Senior Pleaseoutlinethemostcommonsourcesofdebt 8.1 avance attorneysltd © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 digital servicesandproducts. providing companies from competition increased face traditional also will that banks is expected is transformation it and digital industry The banking the changing level. national and EU the on to continue to subject expected is trend remains this and sector developments regulatory banking are The sources Finland. financing in also alternative offered of number growing a though acquisition of source common finance in most Finland and the Nordic banks are the the biggest lenders even still is financing Bank Whatrecenttrendshavetherebeeninthedebt 8.3 Arethereanyrelevantlegalrequirementsor 8.2 Financing 8 for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin financing) ofprivateequitytransactions? bonds). financing marketinyourjurisdiction? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof otold oeg croain (Fs ad s hs ujc to subject on thus applicable is rules and Finnish taxation. the (CFCs) under corporations foreign fall controlled likely would entity shore off- the to a attributed income any case, such as In partnership. limited organised fund or company top Finnish the below structure the in not least at common, not is structures off-shore of use The net assets). (i.e. purchase price exceeding the fair value of the target company’s the targetcompany’sthe on shares paid goodwill the on deductions tax vehicle, acquisition the into acquisition vehicle could, under certain circumstances, benefit from liquidated is company target acquisition an as the and partnership used limited a as organised fund a by owned vehicle is company liability limited Finnish a If other relatedpartyfinancing. or investor new a by refinanced is financing loan pre-acquisition interest the of if non-deductible as regarded be may company target the increase in burden An 2019. from as Directive Avoidance TaxAnti EU the with line in be deducted). to adjusted been be have rules These can EBITDA adjusted of 25% to up costs interest income) within the limits of interest deduction restriction rules (only targetcompany’sthe from also contribution taxable group (through costs tax-deductible as accepted been have vehicle a such by expenses borne interest the and accepted been traditionally acquisition has an vehicle as company liability limited Finnish a of use The the investorsorthroughafundorganised asalimitedpartnership. The rules are the same whether the capital gain is derived directly by tax. Finnish from free are gains capital investors, non-resident For investors. resident for taxable are gains capital situation, exit an In Parent- EU the the and on Finland between treaty tax investor’s country of relevant residence. The dividend may be exempt based the on based tax withholding to subject is partnership, limited a as organised fund a of through or directly company distributing the by dividend a Finland, non-residents to paid When shareholders). management (e.g. and partly taxable income when paid to Finnish resident individuals tax-free are companies limited resident Finnish to paid Dividends to paid interest to applies also This investors throughafundorganised asalimitedpartnership. not is Finland. in non-residents tax to to paid subject income to Interest subject is taxation. investors Finnish resident Finnish to paid income Interest cases whereneitherthesellernorbuyerareFinnishresidents. rare in avoided be only can tax transfer The situations. certain in target. Also, debt financing may be included in the transfer tax base company liability limited Finnish a for price purchase the of 1.6% The acquiring entity is generally liable to pay a share transfer tax of tax implicationsforthetarget companyareofimportance. Further,the investors. the of hands the in treated is investment the from derived income any tax how and investment any the at payable are costs there whether investment, the of structuring include transactions and investors equity private for considerations tax Key . Whatarethekeytaxconsiderations forprivateequity 9.1 rules. Tax Matters 9

off-shore structurescommon? investors andtransactionsinyourjurisdiction? Are usday ietv o E non-discrimination EU or Directive Subsidiary www.iclg.com Finland 89 Finland 90 Finland © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com administration has since taken a stricter approach to interest accrual. tax the and 2015 in issued was loans shareholder PIK on ruling A Havetherebeenanysignificantchangesintax 9.4 for thereceiver. income salary constitutes it claiming cases some in authorities tax as rules normally the i.e. by the challenged been has interest, this although dividends, or to gain carried capital such according of taxed form the been to far applicable so has interest Carried calculative the for except interest notbeingtax-deductible. effect similar with shares into preference converted recently been have loans management Therefore, shareholders. management to impacts granted This typically loans tightened. shareholder has loans PIK on practice taxation the as individuals, to basis accrual an on paid be to deemed is Interest case lawcouldbeexpectedin2020. for cash. This all-or-nothing approach has been challenged and new share against consideration whereby other shareholders sell their entity ownership acquiring the to neutrally tax shares their roll-over shareholders the of part that possible not law case current under is it limitation, consideration cash the of interpretation strict a to Due a as organised fund a limited partnershiporasubsidiaryofsuchfund. to transferred are shares when company available is target relief roll-over No years. five subsequent the during Area Economic European the outside shareholders residence their such move if taxable becomes only relief roll-over the to due taxable not was that gain relief. capital roll-over The the under consideration. The possibility for cash consideration is very limited share against company liability limited a to company target the of from roll-over relief, if they transfer the shares with controlling vote benefit to company target the of shareholders the for possible is It Whatarethekeytaxconsiderationsformanagement 9.3 entitled toshareswithinthearrangement. purposes, if the beneficiary carries very limited financial risk and is tax for options stock as regarded be also can companies) holding management (e.g. arrangements contractual Different increased. has share the of value the when stage later a at used normally are earned income upon the exercise of the stock option. Stock options Stock options are sometimes used, but the option benefit is taxed as input, thedividendcanbetaxedasearnedincome. work shareholder’sindirectly, the or on directly based, is shares on dividend the if but differentways, in tailored be such as can Shares management income, earned the acquisitionatoriginalvaluation. as with connection in deemed directly implemented typically is shareholding are value market fair the than lower prices subscription As company. target the of management incentivise to used typically is ownership share Direct Whatarethekeytax-efficient arrangementsthatare 9.2 avance attorneysltd shares, deferred/vestingarrangements)? anticipated? teams orprivateequitytransactions andareany impacting privateequityinvestors, management (including inrelationtotaxrulings orclearances) legislation orthepracticesoftaxauthorities investment intoanewacquisitionstructure? teams thataresellingand/orrolling-overpartoftheir equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate Please alsoseeouranswerstosection9asregardstaxmatters. and reporting. and depository securities risk marketing, regarding valuation, management, rules liquidity e.g. with, comply to required is AIFM an the the AIFM Act, Under Supervisory Authority. with Financial Finnish registered or by authorised be to required be either will AIFM an management, under assets of amount the on Depending regulation. to subject funds equity private unregulated previously several made the which through Act, Managers 2014 Fund in Investment Alternative Finland in implemented was AIFMD The functions of society”. In the latter case, investors are not required to vital securing for “critical considered enterprises Finnish concerns monitoring the sector, non-defence the In authorities. Finnish the the by approval concerning advance require acquisitions always sectors dual-use corporate and defence All influence. actual to a Finnish company, or otherwise secures a holding that corresponds one-half of the aggregate number of votes conferred by all shares in foreign a when owner gains control of occurs at least one-tenth, at least one-third acquisition” or at least “corporate a Act, the Under society. to national defence, security of supply and functions fundamental to refers mainly interest national Key foundations. and organisations so interests national foreign to and foreigners to key influence of transfer restrict to require, if the and, monitor Finland, on to is in Act which of the Acquisitions purpose Corporate of ownership aware Foreign be of foreign to Monitoring need views investors government foreign positively, Finnish the their Although and players industrial and transactions aswell. investors be not other would to that scrutiny applicable regulatory enhanced any to not subject are transactions their and investors equity private general, In 01Havetherebeenanysignificantlegaland/or 10.1 funds old to whichthenewrulesapplyasfrom2024. Regarding apply. according provision transitional a to is there 2019, before established rules the for fund investment alternative an as qualify shall partnership limited the that requires when invested directly in the Finnish target company. The law now income such for taxed for been have would taxed they when gain only and profit are fund the in partners limited are that investors Finnish limited partnership has been a changed in 2019. as Non-resident organised been has fund a where structures of treatment The (e.g. capitalgainordividend)underscrutiny. income capital taxed lower into income earned transform to aiming arrangements of kinds different put may which law case recent by extent some to widened been has taxation income earned of scope by interest the generally, More carried taxation. income earned of of risk treatment the lowering the clarified 2016 from ruling Another payment. monetary actual the of deferral of basis the on income interest of taxation the postpone to possible longer no is It 02Areprivateequityinvestorsorparticulartransactions 10.2 0LegalandRegulatoryMatters 10 anticipated? jurisdiction (e.g.onnationalsecuritygrounds)? private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting subject toenhancedregulatoryscrutinyinyour iclg to: privateequity 2019 Finland standard nowadays. relatively is practice) international to (similar liabilities and risks scrutinised being more thoroughly in matters due diligence and contractual protection to limit such to led has corruption and bribery significant as viewed issues in Finland. been However, increased public and media attention to historically not have corruption and Often rated as one of the least corrupt countries in the world, bribery flag” basis. the “red a and on being typically reporting legal of with diligence, due for compliance engaged requirements customarily the is counsel satisfy External to insurer). need (which very diligence become due has the of insurance materiality and scope the on effect an indemnity had has and common and Warranty target. the of regulated/unregulated) (e.g. business of type and size the on depending vary scope and materiality Timeframes, diligence. due legal thorough a conduct to tend typically investors equity Private government plenary session. a at consideration for matter the refer must ministry the interest, national key a with conflict may acquisition corporate corporate the approve acquisition unless it may conflict with a key national must interest. If the Ministry The necessary. extent the Employment, which corporate also requests opinions from other authorities to of approval and acquisitions are considered by the Ministry monitoring of Economic Affairs and the concerning Matters owners residingordomiciledoutsidetheEUEFTA. foreign owners. In other sectors, monitoring only applies to foreign all covers monitoring sectors, dual-use and defence the regards As to prior submitted invariably completion. almost in are but transaction, applications a practice completing to prior application an submit avance attorneysltd © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 “piercing of the corporate veil” by courts has, in practice, been very a as are, any and company the of obligations the for liable not point, starting Finland in companies liability limited of Shareholders Arethereanycircumstances inwhich:(i)aprivate 10.5 Hasanti-briberyoranti-corruption legislation 10.4 Howdetailedisthelegalduediligence(including 10.3 diligence, contractualprotection,etc.)? materiality, scopeetc.)? the liabilitiesofanotherportfoliocompany? and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors Floman; andRasmusSundström. Wallgren;Sari Lindqvist; Mathias Anders Nordblad; Robin Kellas; the Sebastian of chapter: this of drafting the following contributions to Avancelawyers the acknowledge to like would authors The Acknowledgments being investment both assets Oy, Vake non-strategic and vehicles oftheFinnishstate. Oy certain Solidium by with many administered in stakes industries substantial hold Finnish to continues state Finnish the that fact the is environment M&A the of feature Another English. in documented and negotiated are deals significant all exceptions, any without generally that, fact the country by mitigated is the This of it. speak outside people few that given Finland in making deal- of feature distinguishing one clearly is language Finnish The side, whichisknownforhighethicalstandardsandsophistication. adviser the on reflected also is culture This word. their of worthy being of tradition strong a have Finns Finland. in deals doing of transparency that parties will expect from one another in the context of what is terms distinct, one thing that is noteworthy is the level that of trust In and practices. manner and traditions a US and UK in disputes. reflects closely documented post-closing and of negotiated risk are low Transactions a traditionally and security deal significant offering deal-making, successful for cultural environment and legal predictable and stable very a provides Finland 11Whatotherfactorscommonlygiverisetoconcerns 11.1 portfolio company. another of liabilities the for company portfolio a for liability trigger would that law Finnish under portfolio base specific no is between there companies, arrangements contractual or ownership) fund equity private ultimate same than (other ties no are there Assuming the pierce to claims corporate veilmaybecomemorecommon. that expect we rulings, precedent recent of light However,in circumstances. special very to due only and rare 1OtherUsefulFacts 11 considering aninvestmentinyourjurisdiction? should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor www.iclg.com Finland 91 Finland avance attorneys ltd Finland

Ilkka Perheentupa Erkki-Antti Sadinmaa Avance Attorneys Ltd Avance Attorneys Ltd Mannerheimintie 20 A Mannerheimintie 20 A 00100 Helsinki 00100 Helsinki Finland Finland

Tel: +358 40 559 9912 Tel: +358 40 847 4223 Email: [email protected] Email [email protected] URL: www.avance.com URL: www.avance.com Finland Ilkka Perheentupa represents fund and industrial clients in mergers Erkki-Antti advises clients in a variety of mergers and acquisitions, and acquisitions, investment and capital markets transactions, as well investments, restructurings, management incentive arrangements, as shareholder, contractual and corporate matters. He has spent the and corporate matters. He has broad experience in transactions majority of his almost 20-year career with a corporate, capital markets involving both fund and industrial clients. Erkki-Antti has advised in and private equity practice in New York and London. Industries that numerous transactions in the area of private healthcare and social Ilkka has recently served include private equity and venture capital, care, and also advised both investors and targets in private equity and energy and infrastructure, gaming, media and entertainment, and venture capital investments and related shareholder structures. Erkki- technology. Antti has an MBA from ESADE Business School.

Avance is an independent business law firm built on an open culture and a vision for providing legal services of the highest quality. We serve clients in a range of industries in their most challenging corporate transactions, disputes and projects. We combine high-end advisory work with a unique breadth of international experience, focusing on regulated industries that are relevant for Finland, such as Energy and Infrastructure, Financial Services, Healthcare, Entertainment, Media and Telecommunications, and Real Estate and Construction. Evidencing the success of our strategy, we can showcase a broad selection of transactional advisory in key industrial arrangements in Finland. The work has, in most cases, also included advice on complex regulatory, competition law and financing issues. Please visit https://www.avance.com/ references/deals for further details.

92 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 14 France arnaud langlais

DS avocats gacia Kazandjian

1 Overview Moreover, Bpifrance, the public investment bank, and the European Investment Fund (“EIF”) provide support and facilitate access to funding (loans, guarantees equity) for enterprises, small- or mid- 1.1 What are the most common types of private equity size, in any sector of activity from their early stages to a public transactions in your jurisdiction? What is the current listing. state of the market for these transactions? Have you A new alternative investment fund, the Société de libre partenariat seen any changes in the types of private equity (“SLP”) was created. It possesses legal personality and is transactions being implemented in the last two to comparable to the English limited partnership. Designed to address three years? key demands of investors, it allows greater flexibility and provides for legal certainty. The French private equity sector is well-developed and growing. In order to further promote investment in French companies, the In the past couple of years, this sector has been subject to several Pacte (PACTE – Action Plan for Business Growth and favourable factors: (i) availability of financing sources; (ii) Transformation) legislation simplified the use of certain instruments association with tax and labour law reforms; and (iii) a positive global that are typically used in private equity operations (i.e. the outlook. Together, these have contributed to the improvement of this conditions of allocation of preferential right shares (“actions avec sector in France. des droits de préférence”), BSPCE, advantages in relation to the Funds provided by the transaction to the investee company can be French PEA, etc.). used for a variety of entrepreneurial purposes. Private equity is used to: finance growth for start-ups but also established companies as replacement capital when the ownership structure changes; to realise 1.3 What trends do you anticipate seeing in (i) the next 12 months and (ii) the longer term for private equity succession plans; or as distressed investment for turnaround financing. transactions in your jurisdiction? A great variety of businesses in different industry sectors benefit from private equity, including those in high technology, industrial, In 2018, there were over 5,100 private equity backed buy-out deals, healthcare, consumer, services, financial and other sectors, and in the larger number of deals registered in the last 10 years. With the different development stages from start-ups to large established continuing low interest rates, we expect private equity to remain companies. active during 2019, though perhaps not at the record levels of 2018. In the last three years, we have seen a rising cooperation of investors Two major trends may have an impact on private equity with other strategic investors in private equity transactions. These transactions. Firstly, reforms, under the liberal government, will new alliances are considered as the most common change in the continue to incentivise private equity investment. In addition to the private equity firms’ business models, ahead of using leverage or measures mentioned previously, corporate tax in France is expected financial engineering or focusing on active portfolio management. to be reduced from 33% to 25% by 2020. Furthermore, geopolitical factors may also shift some European 1.2 What are the most significant factors encouraging or private equity initiatives to the French market. Recently, in the inhibiting private equity transactions in your context of Brexit, British investments have been made in France in jurisdiction? order to gain a foothold in Europe and certain projects that would have naturally been developed in the UK previously are being The growing attractiveness of the French market may partially be relocated to France. explained by the recent reforms intended to enhance the investment environment and to stimulate economic growth. 2 Structuring Matters For instance, the wealth tax in France, called l’Impôt de solidarité sur la fortune (“ISF”) which used to assess the total wealth owned by a tax payer has been replaced by the Impôt sur la Fortune 2.1 What are the most common acquisition structures Immobilière (“IFI”) which only assesses property assets (please adopted for private equity transactions in your refer to question 9.4). Furthermore, there were significant changes jurisdiction? with respect to capital gains, dividends, and interest, which are now taxed at a 30% flat tax rate. When a target is identified, a special purpose vehicle (“SPV”) is iclg to: private equity 2019 www.iclg.com 93 © Published and reproduced with kind permission by Global Legal Group Ltd, London 94 France © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com In etc. company, the of assets the over security a build-up, a as such investment its of value the on impact direct a have may which decision strategic any on right veto a get may shareholder minority offer higher protection to the minority shareholders. For instance, a may a agreement shareholders’ offer a or law by-laws the the protection, of certain dispositions the although the However, on contributions capital. its on depend positions investor’s the Yes, Ifaprivateequityinvestoristakingminority 2.4 paid consideration. the of remainder the fund to financing, of sources non-equity other or debt i.e. leverage, use and equity of amount equity small a invest funds private case, this In company. target the acquire to funds the raised which (“NewCo”) company often new are a through investments channelled equity private buy-out, a in Furthermore, carried interest. as known generally fund, the fees of profits the with in share rewarded a and income generally are managers fund equity Private the in target company. funds the invest funds equity private above, explained As Howistheequitycommonlystructuredinprivate 2.3 on exemption tax a capital ongain. use may they (“FPCR”), funds investment when French tax residents make investments through private equity instance, For contributions. deferred or gains capital on exemption cut, tax income an including system tax favourable, even lenient, tax increased government French a from benefit investors The investors. private attract to incentives the equity year, private Last promote to investments. driver second the are rationales Tax equities, stocksorbonds. are by investors and which provide attractive returns, which higher than public used traditionally classes portfolios bond and stock asset the to complimentary and strategies techniques, investment categorised as an “alternative investment” which entails a variety of fund and experienced distribute the profits amongst its members. This an activity is often have fund the to of guidelines the to according money their invest manager opportunity the investors offers It considerations. financial by encouraged mainly is equity Private Whatarethemaindriversforthese acquisition 2.2 (“ManagementCo”). a create to prefer of part are managers usually all which under structure unique they and separate managers, of number large a to When the private equity fund wishes to offer management packages (please refertoquestion9.1forfurtherinformation). purposes and to offset the interests on debt against the target’s profit certain tax for consolidation the to facilitate to allows vehicle this conditions, Subject company. target the acquire to order in funds special purpose vehicle referred to as “NewCo”, established to raise a note also should we above, mentioned vehicles the to addition In entity. a of form simplifiée the under cases most in created DS avocats structures? considerations? position, aretheredifferentstructuring institutional, managementandcarriedinterests)? equity transactionsinyourjurisdiction(including (“SAS”) to gather all the investors under one corporate one under investors the all gather to (“SAS”) oit pr actions par société h mi ie bhn te A i t ofr vhce hs main whose vehicle a offer to is SAS the behind idea main The SAS. an as registered are companies portfolio equity private Most any type of misconduct, subject to negotiations between the parties. for or transaction equity private the after shortly leave to initiative penalised be the take they may where circumstances in holder clause, leaver bad a equity through management a cases, other In without misconduct. removal or dismissal their or involvement; their them continuing preventing from incapacity physical or mental a death; reasons: following the for period, contractual negotiated a after leave they if A management equity holder can usually be treated as a good leaver or value market the of lesser nominal value(althoughothermeansmayalsobenegotiated). the receive will leaver bad a and usual The position is that a good leaver departs. will receive market value for its shares manager shareholding the case in shares the good and bad leavers are often introduced to determine the price for of concepts the involvement, management’s reinforce to order In . Inrelationtomanagement equity, what is thetypical 2.5 to theshareholders’ needs. by-laws the tailor to flexibility great offers which SAS, an of form the under France in incorporated if especially vehicle, shareholders’acquisition the of by-laws a the in in extent certain a out to reiterated set and agreement generally are transfers, security and matters governance corporate to relate mainly which rules, These the of audit an conduct to company. right the cases, some in and, rights, voting multiple with shares preferential clauses, reporting through information to right reinforced a director, a of appointment the as such rights specific other request may investors minority addition, . What arethetypicalgovernancearrangementsfor 3.1 Forwhatreasonsisamanagementequityholder 2.6 equity investors(“ return, global of level measured through the certain return on investment ratio established a by private in on contingent invest but shares managers ordinary have on than to higher are which of practice return the instruments, equity market preferred common also is It – package management offered tothemanagersoftarget company. a with associated usually are investments equity private Thus, conditions. preferential under target a in stake a acquire to seek generally will investors transactions, equity private In “rgaog cas gvs h piae qiy im a a majority a as firm, shareholder, therighttocompelothershareholderssell. equity private the gives clause “drag-along” a issue by requiring cooperation from the target company. For instance, this anticipate can agreement shareholders’ The shareholders. other Moreover, the terms of the exit itself can be a matter of consensus with GovernanceMatters 3 acquisition provisions? in yourjurisdiction? your jurisdiction? what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and arrangements requiredtobemade publiclyavailable private equityportfoliocompanies? Are such usually treatedasagoodleaverorbadin le TRI,tauxderendement interne iclg to: privateequity 2019 ”). France

oprt gvrac mtes n scrt tases o dilution or issues. transfers, security and matters governance corporate position minority their against the majority protect shareholders. These veto rights mainly to relate to order in provisions the protective on impact an Minority private equity investors also have veto rights which confer have may which company,investment. the of assets may include any commercial or financial matters related to the main rights veto of list The investment. their of essence very the against goes which decision any oppose to investors such allow rights veto not rights, These agreement. shareholders’ veto a in out enjoy set but law by generally conferred investors equity Private Yes. to ensureprofitbutnotparticipatefullyinthemanagement. role supervisory a underlies rationale The rights. voting no has but observations its present and directors of board the of meetings all “ observer an of role the preferred have investors minority trends, recent Following be should information confidential further setoutintheshareholders’ agreement. any Thus, public. are acquisition laws the of by- whilst confidential by-laws are arrangements such the France, In in vehicle. extent certain a to reiterated and agreement shareholders’ a in out set generally are rules investors’ any Such in the partake to to not tailored wish management role,preferringasupervisoryrole. some be cases, may most in by-laws expectations: vehicle, of type structure to be adapted to a wide range of investors’ profiles. In this governance of up setting the allows flexibility Such prescriptions. statutory light very with parties the by set be can rules operational DS avocats © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 also may which proven its consequently result indismissal. is and damage company the that towards provided liable shareholders found be may such they In cases, parties. third with bound legally company the have and decisions such ignore may company the of representation legal the In other words, despite a veto right of the board or general meeting, acts such that exceeded thecorporatepurposeof thecompany. knew latter the that demonstrating by party, third the of faith bad the proving of burden the bears company the Thus, the third party was aware that such an act exceeded the said purpose. under the corporate purpose of the company, unless it is proven that fall not do acts the when even engaged be also may company The of thecompany. purpose corporate the of limits the within represent, they the company of behalf on act to powers broad have managers the principle, in with balanced be to company.the of and purpose parties corporate Withthird to regard need rights veto representatives’ The parties. third to opposable not but parties between agreement. effectiveVeto are rights shareholders’ a in forth set provisions contractual by but law by provided not are arrangements veto the above, stated As Are thereanylimitationsontheeffectivenessofveto 3.3 Doprivateequityinvestorsand/ortheirdirector 3.2 position, whatvetorightswouldtheytypicallyenjoy? typically addressed? the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor censeur ”. attend ”. to entitled is investor the such, As iuto, n (i rqet h promne f lgl ui o the of company beforethecourts. audit legal a of performance the request (ii) and situation, financial its and matters company the of course the about question to and information request (i) to minority right to the including law shareholders, by granted also are rights specific etc.), capital, share the of increase any in participate to right dividends, receive to right rights, voting meetings, general the in participate to right rights common the from granted by each share to their respective shareholders (for example, Apart form. company limited incorporated a is under company the if owed be also may duties Certain to actagainsttheinterestofcompany. geographical locationandduration. its to limited as well as company the of interest business legitimate its scope of application shall only be limited to the protection of the provision, non-solicit or non-compete a of enforceability the for As French publicorderdispositions. respect still shall contract the jurisdiction, foreign a by governed is fraudulent intent. It is important to note that even when the contract no is there that provided France, than other jurisdictions and laws to contract the submit may parties the common, very not Although enforceability. to laws), theshareholders’ agreementonlybindstheinvolvedparties. regards with other as well (as company law French under below, mentioned as However, French a to respect with apply would that restrictions or limitations such no are There and shareholder) minority a of (oppression shareholders minority the prejudice unfairly that actions any take not shall investors Majority acted unlawfullyandagainsttheinterest ofthecompany. incurred based on the fact that it has appointed the director who has As a principle, the liability of the private equity investor will not be and (iii) where they have not designated circumstances, an auditor fraudulent requested by (ii) law. trust, of breach (i) as such offences criminal of cases the in liability Moreover,incur also may directors its revoke may fund equity private mandate toactasadirector. The fault. management a by a breach of the law or of its contractual obligations, as well as by committed has incur liability. Liability may be incurred in the case of harm caused who may director company the of interest a the in acted not damage, and mismanagement proven of case the In disqualified orprohibitedfromactingasdirectors. not are directors nominee that ensure must investors equity Private . Arethereanylimitationsorrestrictionsonthe 3.5 Arethereanydutiesowed byaprivateequityinvestor 3.4 . Arethereanylegalrestrictionsorotherrequirements 3.6 vice versa vice non-compete andnon-solicitprovisions)? typically addressed? portfolio companies? (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements shareholders (or to minorityshareholderssuchasmanagement equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin a minority shareholder cannot use its minority right minority its use cannot shareholder minority a vice versa )? Ifso,howarethese www.iclg.com France 95 France 96 France © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com as such factors favourable several from benefitted recently has and years two past the over recovering been has equity private French Have therebeenanydiscernibletrendsintransaction 4.2 Whatarethemajorissuesimpactingtimetablefor 4.1 companies management higher degreeofloyaltyandtransparency. portfolio at involved in the investment. In particular, these directed rules aim to ensure a practices good of range a includes which conduct of code a established also has The French association for private equity investors in France Invest for adirectortoobtainloanorcreditfromthecompany. to forbidden is it addition, In measures directors. its and company the between control arising agreement any of efficientapproval prior a of form the imposes in directors this with law compliance French ensure to principle, order In potential interests. avoid of must conflicts directors duties, general key their Among Howdodirectorsnominatedby privateequity 3.7 a directorshallalsoapply. basis, then the investor will be treated as a director and the duties of daily a on company the of management the in participates actively a as considered be may investors equity private circumstances, certain However,in DS avocats opne ol) ut e nomd niiuly eoe the before individually informed an offer toacquirethesaidshares. be make to them entitles it that way a such in must transaction, contemplated only) companies medium-sized and small- (in employees all capital, share the of more the of application the Hamon mention to important also is it Finally, employee representationsbodydoesnothaveavetoright. such However, company. the the in to investing regards or acquiring with of company decision prior the the of Council of Work the requirement of opinion the underlies aspect important Another Economy andFinanceortheEuropeanUnion-basedCommission. to the turnovers) is also subject to the prior approval of the Ministry of and anti-trust issues (subject to the fulfilment of conditions pertaining In addition, any transaction which may have an impact on competition the may increaseinthecomingmonths. Code, sectors mentioned Defence the of scope the news, latest the on French Based sector. the of healthcare the and ammunitions, and weapons of trade or meaning production the within critical and transportation communication services, facilities and water,infrastructures that are deemed and energy relevant of The supply the Finance. include and sectors Economy of compulsory Minister prior the the of to approval subject be defence, national and security public order, public of terms in interests national France’s to crucial deemed sectors sensitive in investment any that provides law French the France, in investments foreign oversee better to mind in Bearing Transaction Terms: General 4 of otherportfoliocompanies? terms overrecentyears? disclosure obligationsandfinancingissues? and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof where, if the contemplated share transfer represents 50% or 50% represents transfer share contemplated the if where, e facto de ietr Fr ntne i te investor the if instance, For director.

Loi virtue oflawbutthroughcontractualprovisions. by not transactions, public-to-private in allowed are fees Break-up ensure (iv) and bids, alternative fairness intransactionsandcompetitionamongbidders. for field playing the level (iii) holders securities by concerning the offer, information (ii) promote market transparency and integrity, to access and treatment equal establish (i) to aim They acquisitions. public in investors of private protection the ensure to order in takeovers, (“ public concerning Authority Markets financiers Financial The and team management the from information gather to as well as purposes the diligence due to for information adds collecting of which difficulty market financial the towards of several level confidentiality higher a is There is involves transaction. offer cumbersome a tender as a defined involving generally process acquisition The transaction challenges. public-to-private A rvdn wrate ad nente. oee, n re to order in However, avoids usually indemnities. seller and equity warranties private providing the above, mentioned As . Whatdealprotectionsareavailabletoprivateequity 5.2 offering partyhasashareholdingofatleast95%. Whatparticularfeaturesand/or challenges applyto 5.1 which banks SMEs; andmid-caps. from financings of altogether foster a level of trust to increase investments in start-ups; availability positive reforms; outlook; tax global chapter: this throughout mentioned those . Whatisthetypicalpackageofwarranties/indemnities 6.2 Whatconsiderationstructuresaretypicallypreferred 6.1 target group intheperiodfromlocked-boxdatetocompletion. cash, assets or other benefits, together defined as “leakage”) from the of form the (in value extract to not undertakes seller price the protection, the for return In information. and financial over activity control normal greater the from independent price firm a particular Moreover, the “locked-box” structure is fairly common as it offers in and thusrequestaseriesofguarantees. the On reassured be to need investors equity however,private warranties. side, buyer’s capacity or shares their of ownership of the title on offer warranties such to provide not only prefer consequently and investors warranties equity private side, seller’s the On s lo calne Te qez-u cn ny b only can squeeze-out The challenge. a also is targetthe of shareholders company. shareholders minority Excluding rnato em:Pbi custos Transaction Terms: Public Acquisitions 5 Transaction Terms: Private Acquisitions 6 acquisitions? commonly dealtwith? team toabuyer? on thebuy-side,inyourjurisdiction? investors inyourjurisdictionrelationtopublic transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private offered byaprivateequityseller anditsmanagement by privateequityinvestors(i)onthesell-side,and(ii) ) “M” pbihs st f ue ad regulations and rules of set a publishes (“AMF”) ”) iclg to: privateequity 2019 uoié e marches des Autorité efce i the if effected e France

orpin eilto; n (i i sm css mre specific market cases, anti- some (v) exclusions (medicalmalpractice,productliability, etc.). in penalties; (vi) and criminal legislation; and corruption fines (iv) adjustments; price the purchase (iii) insured; the by known breaches (ii) coverage losses; operating their net from of non-availability the (i) uninsurable: exclude deemed risks following to choose typically Insurers but varyaccordingtothescopeofcoveragepolicy. deal, the of value transaction the of 20% to 10% between typically are limits average policy The on Europe. Western costs in 1.6% and contractual premium 1% between The negotiate to warranty. prefer and representations acquisitions smaller and scale middle lower in investors insurance, this to inherent cost the Given private equitybuyertobenefitfromstrengthenedinsurance. the enables it time, same the At commitments. consequent the and grant, must it that guarantee the of level the reduce to seller equity private the allows It insurer. the to seller equity private the from risks the transferring by breaches for consequences the covers tool passif Representation and warranties insurance, “ compete and/orsolicittheemployees. other some undertake may restrictive covenants or a period of time after the sale such as not to seller equity private the Moreover, no or terms arm’s-length on waiver towardsthirdparties). than other transaction no returns, or payments dividends, on distributions (no course ordinary its in from the company. The business shall also continue to be conducted extracted been the has value no that ensuring undertakings pre-closing of completion and provide usually will seller date equity private a Therefore, transaction. sheet balance the between the period during company target the from occur value of “leakage” no that essential is it structure, locked-box the in above, mentioned As Whatisthetypicalscopeofothercovenants, 6.3 on asmallerscaleandfortheshortestdurationperiodpossible. but warranties, offer to accepts seller the situation, a such mitigate DS avocats © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 as However, transactions. some in used are accounts Escrow Do(i)privateequitysellersprovide security(e.g. 6.6 and globaldeductibles. individual with associated be can as low as cap guarantee a obtain capacity. As mentioned above, private equity sellers usually seek to and title to confined scope certain a with and time of period relatively short a to limited be will liability seller’s equity private The Whatlimitationswilltypicallyapplytotheliabilityofa 6.5 To whatextentisrepresentation&warrantyinsurance 6.4 ” is more and more used to “bridge the gap”. This flexible This gap”. the “bridge to used more and more is ” undertakings andindemnitiesprovidedbyaprivate the typicalcostofsuchinsurance? equity selleranditsmanagementteamtoabuyer? the managementteam)? warranties /liabilities(including anyobtainedfrom (ii) privateequitybuyersinsist on anysecurityfor escrow accounts)foranywarranties /liabilities,and warranties, covenants,indemnitiesandundertakings? private equitysellerandmanagementteamunder exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) assurance de garantie de exposure inFrance. Break-up fees are not commonly used to limit private equity buyer’s specific of instead performance. damages their for compensation obtain may or seller a cases, most In precedents. conditions to subject themselves performance specific a are commitments such since difficultobtain be to may enforcement breached, are commitments equity Where provide to bound is fund equity financing tofundanacquisition. private the which by conditions and terms the forth sets agreement seller.letter the This Private equity funds usually provide an equity commitment letter to agreements mayvary. to lock-up of terms exposed the above, mentioned As be out. carried is IPO the will exit an perform fluctuations and other market risks for to a certain amount of time after seeking investor The period. holding the to related information further for 7.2 question to refer Please vary. may agreements lock-up of terms The exit. IPO the a that ensure agreements significant lock-up number of shares are not sold shortly after completion such, of As time). of period set a for shares their selling from shareholders, major investors, equity lock-up agreements (they prohibit company insiders such as private of the IPO markets (to mitigate the market risk); and (ii) to enter into conditions, the perception of valuations in the markets, the vibrancy economic prevailing the of analysis the performing underlies which for exit, such timing are the (i) who including: sellers exit equity IPO an private considering by considered be to need which issues key of number a are There investment. its on return highest the realise to investor the enable to likely is method are this available, conditions market proper the when that fact the to due deals, larger for providers equity private by used strategy exit an is This . Arereversebreakfeesprevalentinprivateequity 6.8 Howdoprivateequitybuyerstypically provide 6.7 . Whatcustomarylock-upswouldbeimposedon 7.2 Whatparticularfeaturesand/orchallengesshoulda 7.1 such resist to attempt sellers covenants, preferringtoavoidanywarranty. equity private above, indicated Transaction Terms: IPOs 7 If so,whattermsaretypical? under anequitycommitmentletter, damages,etc.)? private equitysellersonanIPOexit? exit? transactions tolimitprivateequitybuyers’ exposure? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and private equitysellerbeawareofinconsideringanIPO www.iclg.com France 97 France 98 France © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com First of all, private equity investors can benefit from an attractive tax incentives. tax several by influenced is target French a in Investing Whatarethekeytaxconsiderationsforprivateequity 9.1 limiting thenumberofparticipationsinunitrancheloan. and required documentation the simplifying of benefit the provides alternative This debt. mezzanine and senior both of instead terms, same the to subject instrument, debt one through financing debt as financing through “unitranche” loans. Unitranche loans are defined of trend growing a However,seen have we acquisitions, mid-cap in through was (senior, secondlien)andjuniordebt. transactions of financing mezzanine financing, composed of senior the debt divided into tranches years, previous In Whatrecenttrendshavetherebeeninthedebt 8.3 as aguaranteetowardstheobligationsofholdingcompany. assets its over security grant cannot company target a instance, For the sharesofitsholdingcompanies. assistance given by a company for the purchase of its own shares or to refers It permitted. not is law French under assistance Financial Arethereanyrelevantlegalrequirementsor 8.2 some provided company, the in interest conditions aremetsuchaseventsofdefault. equity an to convert lower but debt senior than returns than equity. returns It may also give, as the higher case may be, the right to lender the gives that pool, banking a equity financing, such as convertible bonds or exchangeable bonds) by provided financing combined with mezzanine financing (i.e. a hybrid between debt and debt essentially is It Pleaseoutlinethemost common sourcesofdebt 8.1 IPOs. market, French transactions are most commonly conducted through sale rather than the in possible is strategy dual-track a Although Doprivateequitysellers generallypursueadual-track 7.3 DS avocats Tax Matters 9 Financing 8 through asaleorIPO? off-shore structurescommon? investors andtransactionsinyour jurisdiction? Are financing marketinyourjurisdiction? financing) ofprivateequitytransactions? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof bonds). for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare h bnfcays ult o ivso, n nt s rsl o his of result a as not performances inordertoavoidbeingre-qualifiedassalary. and investor, of quality beneficiary’s the package management a in granted to the manager, must be gains in relation with the risk allocated in capital the that underlined has Recently, France’s highest administrative court, the Recently,court, administrative France’shighest to subscribe fiscal should French manager significant investmentstoprovetherisktaken. the The requalification, such avoid capital. to not and salary administration is very strict on the tax use of such as mechanisms. In order the manager However, the gains. by realised capital gain the re-qualify to on right the reserves regimes administration tax flat a the (with use tax income personal to preferable thus is It charges. of social plus 49%) of rate maximum rates progressive the currently are at salaries taxed whereas (“PFU”) tax flat different. 30% a are taxed are wages and gains shares) on gains capital dividends, (interests, capital capital from Incomes on taxation France, In h “hrse mnmn” a la t te a consolidation tax the to regime beingrenounced. lead may Amendment” “Charasse the tax the majority,the of for case the contrary,in the opt On regime. consolidation to decision the influence not does it transaction, However,the following shareholders minority become sellers the if joins thetaxgroup. company acquired the (2) and company; acquiring the with control common under is or company acquiring the controls that but group tax French the of part not is that of entity an shares from company acquires another company tax-consolidated a recapture (1) The when: arises group. tax French a of by borne recapture expenses partial financial a for provides Amendment” “Charasse The . Whatarethekeytax-efficientarrangementsthat 9.2 “ mechanism French Moreover,a the acquisition-relateddebtontarget’s profit. and on interest of charge the for allows regime this investments, equity members, private In corporation group. group same the group from company a a of the profits the of against losses of of offset earnings the allow taxable consequently, the on based tax single a pay will group result. The aggregate the on tax income to order in group combine their profits and losses and, consequently, consolidated to pay corporate a form to elect may subsidiaries 95%-owned their and corporations French regime. consolidation . Whatarethekeytaxconsiderationsformanagement 9.3 oiid y h the by modified significantly limited. its in tax income to subject is off-shorestructures of use residence. the tax such, of As country is entity the if deductible only are vehicle foreign the to paid interests the Moreover, (“EEA”). Area Economic European the of country a in or EU, the in established France, in established company a by or or itself control company acquiring effective that and made influence is exercised are over the acquired entities either by the French shares acquired the to a French company not able to demonstrate that the decisions related on debt subscribed for the acquisition of qualifying participations by limits under certain conditions the deductibility of interest expenses shares, deferred/vestingarrangements)? investment intoanewacquisitionstructure? equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate teams thataresellingand/orrolling-overpartoftheir o Fnne or 2018 pour Finance Loi iclg to: privateequity 2019 the CarrezAmendment the FnneAt o 2018), for Act (Finance Conseil d’Etat Conseil France ”, recently ”, , foreign investments,applicablesinceJanuary1 1 December of decree a by widened been artificial communication, transport, recently health. has public list and This security cyber supply,intelligence, water and to pertaining energy those example, for include, public activities and These interests order. security national and military of protection Economy and Finance, on the grounds that they are in relation to the business activities are subject to the prior approval of the Minister of acquisition of a French company that have strategic and/or sensitive the to relation in investors foreign non-EU by transactions Certain and “AIFMD”). IV” (“OPCVM regulations European the to addition in (“AMF”) the regulation and control of the French Financial Market Authority the as such French Monetary and Financial regulations Code, ethical rules, and is subject of to series a by regulated is equity Private gradually will it 33.33%, at set decrease to25%in2022. Currently rate. the of tax decrease corporate a provided 2018 for Act Finance the Moreover, on financialassets. IFI, is a property tax, payable only on property assets – there is none suppression of the wealth tax in France, the ISF. Its replacement, the the seen have residents year,tax this French of beginning the Since Havetherebeenanysignificantchangesintax 9.4 DS avocats © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 company, the in investment continued participation inthedevelopmentofFrenchecosystem,etc. efforts, R&D sites, active taking the of development investor employment, of favour the in measures industrial to authorisation their condition also In some cases, in activity.significative transactions, the his French government can through collected data and information sensitive the of protection the and activity, sensitive the of management the company, the active of governance take corporate the to involving commitments asked be may investor foreign the context, this In Areprivateequityinvestors orparticulartransactions 10.2 Havetherebeenanysignificantlegaland/or 10.1 0LegalandRegulatoryMatters 10 teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities jurisdiction (e.g.onnationalsecuritygrounds)? anticipated? anticipated? subject toenhancedregulatoryscrutinyinyour private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting st 21, n eain to relation in 2018, , st , 2019. liae eeiil wes f l nnlse croae entities corporate non-listed all registered inFrance. of owners France beneficial the financing, declare ultimate to duty terrorist new a for or providing legislation laundering implemented money of purposes

20 May dated 20158/849 Directive EU transpose to Recently,order in Law (LawNo.2016-1691). II Sapin the as known legislation anti-corruption an adopted also has France UKBA, FCPAthe the or of footsteps the on Following a to stricter regulatoryframeworkandincreasedpenalties. due particular in new equity, of private These set impact inevitably extensive corruption. measures and an bribery built against has fight to France regulations years, few last the Over having toreceivethird-partyapprovals. target’sthe ascertain without resale possible and status autonomous to risks standalone on more focus to tend investors equity the Private of timeframe the common, transaction andscoperemainsimilartoanyothertransaction. are reports red-flag Although diligence. due perform to order in counsel outside an by conducted Private equity is a technical and fairly long process that is generally eeal, h prflo opne ae iie Liability Limited are the shareholders’ liabilitywillbestrengthened. companies portfolio preferred, is company contrary,unlimited the an On if Companies. the Generally, 04Hasanti-briberyoranti-corruptionlegislation 10.4 Howdetailedisthelegalduediligence(including 10.3 05Arethereanycircumstancesinwhich:(i)aprivate 10.5 investment concerningshipownership. and sector; transport air the sector; audiovisual the to people; young dedicated publications materials; war of manufacturing the in is activities companies; business financial institutions; press companies; entities involved certain control insurance investors: European and to French for reserved exclusively right the addition, In imngmn. oee, otoi cmais a not own may its portfolio of another companies of result liabilities company. the the portfolio for liable is held However, be damage theoretically the if liable mismanagement. held be investor may equity private a 3.6, question in explained as addition, In th , 2015 on the prevention of the use of the financial system for the diligence, contractualprotection,etc.)? materiality, scopeetc.)? the liabilitiesofanotherportfoliocompany? approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof

www.iclg.com France 99 France 100 France © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com the in player private equitymarket. important an will becoming in (Brexit), France events favour certain certainly of occurrence and healthier the trend and economic France in taken recently measures Legislative Whatotherfactorscommonlygiverisetoconcerns 11.1 DS avocats and litigationservicesinallareasofbusinesslaw. Founded in 1972 in Paris, DS Avocats has 25 offices on four continents. Today, the firm consists of 400 legal professionals who provide legal advice 1998. HeworksbothinEnglishandFrench. in School Bar Paris the of “Lauréat” was He 1995. in law business of Sorbonne and obtained a in Master’s business law in 1994 and a DEAPanthéon Paris of University the at degree law his received Arnaud investors andfundsinvestinginFrance. equity private by advice legal for upon called is and investments and He has developed a particular knowledge of private equity acquisitions including: and wine food, investors entertainment, spirits, logistics,etc. media, energy, professional IT, as such or sectors various in entities equity private and investment; ventures joint private acquisitions; or public for both transactions many completed has he 2014, since partner A Chance. the joined then Paris, Clifford of office Paris later,the and in Leighton Berwin of office London Associés & Jeantet at 1998 in career his began Langlais Arnaud 2007, January in Avocats DS joining to Prior 1OtherUsefulFacts 11 considering aninvestmentinyourjurisdiction? should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor R:www.dsavocats.com URL: [email protected] +33153675000 Email: Tel: France 75116 Paris 6 rueDuret DS Avocats Arnaud Langlais

assistance inthepreparationofthischapter. invaluable their for Sereshki, Avaand Avocats,DS of Department The authors would like to thank Christophe Billet, Partner in the Tax Acknowledgments and Canada. Gacia has published many articles and is a regular speaker in Europe contracts, value forourclients. international M&A, and knowledge of both the civil and common law systems are cross-border of added in corporate, IT and business law in general. Her bijural skills, languages intervenes She in business on and carry to Canada France orEurope. wish in who business companies Canadian doing inversely companies European or French Head of the Europe-Canada Desk at DS Avocats, she regularly assists Law SocietyofOntario(2007)andtheParisBar(2012). the (2005), Québec du Barreau the of member a is Kazandjian Gacia iclg to: privateequity 2019 R:www.dsavocats.com URL: [email protected] +33153675000 Email: Tel: France 75116 Paris 6 rueDuret DS Avocats Gacia Kazandjian

France chapter 15 germany

Bub memminger & partner Dr. peter memminger

1 Overview 1.3 What trends do you anticipate seeing in (i) the next 12 months and (ii) the longer term for private equity transactions in your jurisdiction? 1.1 What are the most common types of private equity transactions in your jurisdiction? What is the current state of the market for these transactions? Have you 2019 will continue to again be a very good year for private equity seen any changes in the types of private equity transactions; probably not as good as 2018, but still a very good transactions being implemented in the last two to year. Some caution is, however, justified due to the uncertain three years? political landscape and the increasing worldwide trade tension. We have already seen in the last 12 months that this has resulted in a As Germany is a well-developed and sophisticated private equity small uptick in insolvencies, which we expect to continue over the market, one sees all kinds of transaction types that are typically next 12–24 months. While this uptick in insolvencies need not found in other mature markets. While the straightforward sale or mean that the number of private equity transactions as a whole will acquisition of all, or the majority of, share capital or assets of a significantly decrease, it does and will have an impact on valuations company is the predominant transaction type, minority investments and on the attractiveness of cyclical businesses for potential buyers. in (publicly listed) companies, private equity-backed takeovers of publicly listed companies, joint ventures, distressed acquisitions as 2 Structuring Matters well as debt-to-equity swaps, often in some part debt-financed, can also be regularly seen in the market place. Market conditions are outstanding and are at pre-2008 levels. We 2.1 What are the most common acquisition structures saw in the last 12 months again a very strong deal-flow across all adopted for private equity transactions in your market segments. More and more, the transactions are covered by jurisdiction? Warranty & Indemnity insurances (“W&I insurance”), which has developed into a mainstream product in the German market. While The acquisition structure is influenced by tax considerations of the it took a long way for this product to finally succeed (the first W&I investor(s), financing requirements, the potential exit scenario, insurance was provided in the German market in 2002, advised by liability considerations and other aspects. Most typically, one sees a the author), it is now accessible at terms that make it attractive not non-German TopCo (often Luxembourg-based), which holds a only for private equity players, but rather for all kinds of buyers and German AcquiCo, which, in turn, then acquires the German target, sellers. mostly being a German HoldCo. These structures are well-developed and can mostly be seen in the 1.2 What are the most significant factors encouraging or market. Minority or joint investments are rather exceptional inhibiting private equity transactions in your structures and are mostly contingent on the characteristics of the jurisdiction? respective target.

Germany has a large pool of mature, medium-sized companies that 2.2 What are the main drivers for these acquisition are often (worldwide) market leaders in their area (the “German structures? Mittelstand”), plus a vivid start-up scene, i.e., the number of potential targets for private equity is larger than in any other See the answer to question 2.1 above. European market. Combine this with a reliable and educated legal system, the availability of debt for leverage buy-outs and a capital market that may build the bridge for an exit scenario and you have 2.3 How is the equity commonly structured in private what makes Germany an attractive market place. The general equity transactions in your jurisdiction (including institutional, management and carried interests)? perception towards private equity, especially among the owners of medium-sized companies, is what held the market back in comparison to, e.g., the UK market. But this has also improved in The structuring of the equity depends on the chosen acquisition recent years and nowadays even the shareholders of medium-sized structure. In a typical scenario with a non-German HoldCo and a (family) companies have set aside their reservations. German AcquiCo, the equity of the German AcquiCo consists of ordinary equity, sometimes coupled with a shareholder loan given iclg to: private equity 2019 www.iclg.com 101 © Published and reproduced with kind permission by Global Legal Group Ltd, London 102 germany © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com the and AcquiCo German a of case typical most the Assuming structure. acquisition the in companies other the of and target the of form legal the on part in depend arrangements governance The Whatarethetypicalgovernancearrangementsfor 3.1 tax treatmentofcertainfeaturesMEPs. tax beneficial the the on of certainty some stance provided thus has rigid and authorities more the against ruled in has Germany) in features particular is, thing however, some good that the German Federal Fiscal The Court (the highest tax court concerning (“MEPs”). programmes equity management stance rigid more in managers, the of a taken had authorities tax German the that fact the given particular taxation actual the with conflict may result desired economically the that however, mind, in keep to has One power oftheparties)qualifyasbadleaverevents. bargaining the on (depending typically then would reasons other manager,the to terms equivalent least manager.a of illness and All a of expiration at on the extension offeringan company the without agreement service cause, without company the service by the relationship of termination the usually are scenarios leaver Good Forwhatreasonsisamanagementequityholder 2.6 is agoodorbadleaver. the departure at a certain price, which depends on whether the manager for option an with of case in and manager the of equity the time purchase to company/investor of period certain a over vests most equity the of provisions part certain a vesting that way a and such in structured leaver typically bad leaver, good sees One the in 10% of 20%. share a acquisition structure, allocated in smaller (VC type of) transactions also up to is management Generally, Inrelationtomanagementequity, whatisthetypical 2.5 aside fromtheexitconsiderationsofmainshareholder. structured, and achieved be can exit an how to as consideration due the simplify may This pay then must investor the side, equity.other the On structure. acquisition pure by external rather by but financed debt, not (bank) usually are positions minority as Yes, Ifaprivateequityinvestoristaking aminority 2.4 scenarios. certain in rights distribution preferred as well as loans, shareholder or shares preferred as such instruments hybrid shares, ordinary find non-German the at instruments level. HoldCo Typically,then will you HoldCo, non-German the at equivalent German mirror the to in shares AcquiCo preferred or HoldCo non-German the by Bub memminger &partner GovernanceMatters 3 considerations? in yourjurisdiction? arrangements requiredtobemade publiclyavailable private equityportfoliocompanies? Are such your jurisdiction? usually treatedasagoodleaverorbadin acquisition provisions? what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and position, aretheredifferentstructuring eea trs ol rlvn a te cnen h relationship the the manager may take concern they which actions invalidate not as do investor,but and manager in between relevant are, only arrangements veto terms, above, general to referred risks the Besides eed o hw hy ae en mlmne (.. atce of articles (e.g., implemented association been have disclosed they be how to on need structures depends such extent what to and Where mitigate theseconcerns. be and address to ways are there to and investor non-German a to may sound first it need as issue an of less employees much is this practice In are of observed. thresholds rights employee co-determination certain surpassed, where cases in Furthermore, decisions operating which and boards, ultimately requireinvestor(orshareholder/board)consent. relevant the into fund which the of appointee as concerns sent be shall who it granted, ultimately are rights as particular in observed, be to need investor specific the of ERISA) (e.g., considerations other and tax Again, the the for rights appoint governance and relevant remove investor toexercise“control”alsoontheoperatinglevel. most to the right are the of management, and stipulation rights the consent and and procedure, of rules (voluntary) advisory boards in the structure, which have information These (group)). by-case basis and largely depends on the characteristics of the target concerned (the list of important measures is implemented on a case- shareholders or of the advisory board in case important measures are typically require that the management seeks the prior consent of the which procedure, of rules of set pre-defined a follow to need would The management of the target company (and any company below it) some casestheCEOoftarget. German a the of by AcquiCo then usually consisting of management appointees of overseen the investor and in the and with advised board, advisory target, voluntary the of director managing a liability limited find that some or all a of the top target management assume the of role of typically form will one employees, 500 than legal less and (GmbH) company the have both target German . Arethereanylimitationsontheeffectivenessofveto 3.3 related and increases, party transactions. capital specific), scenarios very exit usually whole, are a (details as group target the affect that measures only provide protection as it concerns key aspects such as structural In case of a minority position, the veto rights are weaker and usually Doprivateequityinvestorsand/ortheirdirector 3.2 rule, itisachievablethatnodetaileddisclosureneedstooccur. qualifying veto arrangements between the investor and managers as for hurdle the Hence, exceptions). certain for (save arrangements iblt i islec seais, o cet a a peec in presence tax a create nor Germany byvirtueofitstoonarrowlydefinedconsentrights. scenarios), insolvency in liability to regard with (e.g., factual-manager a of role the assume to wants neither investor the that mind in keep to has one but detailed, rather is rights veto of list the Usually above. described as measures the of Yes, they do; however, not by virtue of law but by the implementation typically addressed? position, whatvetorightswouldtheytypicallyenjoy? the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor versus by-laws) and on some target specific facts. a facts. As specific target some on and by-laws) vis-à-vis iclg to: privateequity 2019 third parties in violation of such veto germany

ey aeu i ter rfig a a oe-xesv poiin can make theentireprovisioninvalid. provision over-excessive an as drafting, their in careful very be to has one enforceable, and permissible generally are provisions non-solicit and non-compete While provision. law of choice and one has to observe certain formalities in order to have a valid venue high threshold. The same applies to the applicable venue. However, on thelegalforminquestion. them – a rather high standard. articles But again, variances exist depending the to show that the respective in decision was taken to intentionally harm stipulated differentlyable be would shareholders minority/management the or unless minority/ the to shareholders, duties further management no owes investor the then own, its on thresholds these achieves investor the If votes. the of 75% structural that requires measures such as mergers law and capital increases require a German majority of thumb, of rule general a As the caseofapubliclylistedcompany. long as these do not conflict with the parties are governed by laws of jurisdictions other than Germany as more or two between agreements contractual that accepts Germany more small, a has company base target investor personalised the whether and in form question legal the on depend nuances The documents. corporate the on agree rights and obligations that to govern their relationship in the free respective are shareholders that i.e., law, by is expressed that concept the followed generally have courts and extensive The rights and obligations of shareholders among each other are not Arethereanydutiesowedbyaprivateequityinvestor 3.4 any potentialnegativetaxconsequences. in order to avoid the risk of being treated as a “factual manager” and usually ask for fewer veto rights than what will would be investors legally possible as discussion, theoretical rather a however, is, This of generalprincipleslaw). which circumstances invalidate any to other contractual arrangements as relates well (e.g., violation mostly and high rather is invalid Bub memminger &partner © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Arethereanylegalrestrictionsorotherrequirements 3.6 Are thereanylimitationsorrestrictionsonthe 3.5 te atr s upsd o vre ad oto te management that exerciseacontrolfunctionover management. the control and oversee board). The same principle applies to voluntarily established boards to supposed is latter (the board supervisory the of as well as board management the of part have a two-tier board system and one and the same person cannot be German stock corporation. Furthermore, German stock corporations a in hold can someone positions board of number maximum the on Besides the tax considerations referred to above, there are limitations shareholders (or to minorityshareholderssuchasmanagement non-compete andnon-solicitprovisions)? typically addressed? portfolio companies? equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements vice versa versus a diverse, large investor base in base investor large diverse, a )? Ifso,howarethese ordre public , which is a pretty such and company burden ofproofisusuallyhardtomeetinpractice. the with lies member board the of duties the is private equity investor. Lastly, he the burden of proof of a violation of board whose on the of company that with aligned usually are interests the the hence and serving, of interest best the in acts from a member of an advisory board or supervisory board is that he demands it) about say documents corporate the what that and question all in Secondly, form legal the on again depend risks. (variances usually law liability German to exposed less much hence a of are and control negative member only exercise and obligation non-compete a a become under not usually are they where rather board, advisory or supervisory but above, described reasons the for managers) for obligation non-compete statutory a of issue the has one (where position manager a investors assume not equity usually would private of nominees because Firstly, expected. than issue an of less much practice, in is, and problem theoretical a rather is this that shows reality surprising, sound may it Although market with experienced players and hence these topics can usually sophisticated a however, is, Germany process, financing. diligence of arrangement due the i.e., well, negotiation of appropriate transaction documents and, if needed, the as jurisdictions other in More time-consuming are certain aspects which diligent buyers find signing andclosing. process approval usually only takes regulatory around one month and can be conducted between the cases, required). extraordinary is for clearance Except antitrust to addition in clearance special case which (in defence or media as such Germany, particular to of importance industries certain in operates target the or required, is clearance antitrust that so size certain a of the are parties and involved transaction the if required be may approvals Regulatory . Howdodirectorsnominatedby privateequity 3.7 . Whatarethemajorissuesimpactingtimetablefor 4.1 manager positions,butrathertakeonadvisoryboardfunctions. assume nominees that avoid to try investors equity Further,private are insurances D&O risks, potential nominees. (other) and members board managers, for sought usually these mitigate to order In the company. caused by it. However, the (often difficult) burden of proof lies with manager and board member is then personally liable for all damages business decision to personal entrenchment) is found, the respective If an instance of misbehaviour (which can vary from an uninformed members andmanagersforallegedmisbehaviour. ead ht opne, n at pru former pursue fact, in companies, that and critically demand more protecting and more actions concept board review to tend a courts rule, judgment business German duties, their exercising while members board and managers a enacted also has Germany while and position, a such with along come that duties fiduciary the violating of risks the entails member board advisory supervisory/ importantly,or More manager a as position a assuming Transaction Terms: General 4 of otherportfoliocompanies? disclosure obligationsandfinancingissues? party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust www.iclg.com r urn board current or germany 103 germany 104 germany agreements. and indemnities regularly given by the sellers as part of the purchase warranties the with associated risks (certain) over takes facing insurance W&I A are transactions. many in and seen been has insurance cash W&I that on is trend rich increasing an that, Beyond very invest. to pressure substantial currently are funds many addition, In investors. equity private by on focused increasingly is © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com fees andothercommonly knownprovisions. break-up bids, competing concerning provisions find then would one agreements, combination business the In shareholders. major by undertakings irrevocable and target the and bidder the between agreements combination business include protections deal Typical Whatdealprotectionsareavailabletoprivateequity 5.2 educate themselves andarepatient. to willing are investors if possible are public-to-privates Germany,in setting legal peculiar the despite remark: general more intend to do a public-to-private transaction. Finally, there is just one legal guidance (before the first share in the target is acquired) if they early seek to advised better are investors interested and here harm cause do statements general and broad Germany, in regime legal minority of As each of these squeeze-out steps requires an in-depth analysis of the applicable a conducting shareholders totheextentrequirementsaremet. (6) and agreements; pooling profit-and-loss and domination via target the of flow cash the to access and control of exercise stock the ensuring German (5) corporation; a to applies that system assistance financial strict the of light certain in the particular in financing, the ensuring including (4) offer; tender and shares of target process the acquisition the of (3) shareholders; management the following by (2) the support diligence; due seeking into for information classified of availability broadly (1) categories: be can challenges The Whatparticularfeaturesand/orchallengesapplyto 5.1 “German conditions. (the segment market favourable very mid-cap German at the the in transactions buy-out many saw Further,we and financings market bank the in of targets availability of increase an by driven mainly equity private the is development overall. This strongly risen has Germany year,in market this of time the and year last the Within Havetherebeenanydiscernible trendsintransaction 4.2 only, weeks two within completed although thisisratherexceptional). are that transactions sees be dealt with in a timeframe of two to four months (and one also still Bub memminger &partner in Germany is for investors, particular for Anglo-American investors. transaction of kind this for set-up legal the surprising how observed first-hand and years few last the in market German the in occurred than that public-to-privates few very the tool-set of Weone that. on advised have of aware different be to need investors and a transactions negotiated privately require transactions Public-to-private rnato em:Pbi custos Transaction Terms: Public Acquisitions 5 terms overrecentyears? acquisitions? investors inyourjurisdictionrelationtopublic commonly dealtwith? transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private Mittelstand ”) – this market segment market this – ”)

ae f pbil lse tre, h cnieain s sal a usually an exchangeoffer isratherexceptional. is consideration the target, of form the in consideration a price; purchase cash straight-forward listed publicly a of case regularly.In seen are sellers by reinvestments Also, loans. and vendor provisions earn-out with coupled sometimes accounts-based price, closing purchase a is or it locked-box-based company, a privately-held either a typically of acquisition an of case the In e, & isrne s o a omny sd ntuet n the also (see context equity in private the in particular in market, German instrument used commonly a now is insurance W&I Yes, and ataxindemnityforpastperiods. employment, litigation, compliance with law, real estate and finance ordinary detailed with business approach, conduct covenants, standard guarantees for matters such as standard more a sees also one then account, similar or escrow an to limited being claims potential is seller the of liability capped at a the small portion of the purchase and price and with recourse for happen absolutely deal a is make it to case required In a and guarantee. guarantee statement German financial authority standard and the title are a and warranties), guaranties covenants to terms, equivalent leakage general no very of (in guaranties consists package standard The into anewstructuresetupbythebuyer. greater extent, in particular in cases where they re-invest their funds either they that selling private equity investor, or give warranties and indemnity to sees a one the by granted package warranty/indemnity same the concerned, in participate is management Where Whatisthetypicalpackageofwarranties/indemnities 6.2 Whatconsiderationstructuresare typicallypreferred 6.1 in boards) dealings withpotentialcompetingbids. its (and target the restrict that agreements challenged more and more have courts as drafted, is agreement business combination the how on however, given, be must consideration Due . To whatextentisrepresentation&warranty insurance 6.4 Whatisthetypicalscopeofothercovenants, 6.3 is fundedbyarelativelysmallportionofthepurchaseprice. greater a grant to claims can potential only be sought for by raising accept claims recourse to an escrow if account that sellers buyer the to equity package warranty/indemnity private or buyers, of offeredthe between gap the bridges insurance protection sought and warranty a either where structures sees one nowadays and contested no almost their investors. This offergeneral rule has, however, been more and more sellers equity private warranties/indemnities, as that they otherwise cannot show a clear exit to is rule general The Transaction Terms: Private Acquisitions 6 team toabuyer? on thebuy-side,inyourjurisdiction? the typicalcostofsuchinsurance? equity selleranditsmanagementteamtoabuyer? offered byaprivateequityselleranditsmanagement by privateequityinvestors(i)onthesell-side,and(ii) exclusions fromsuchinsurance policies,andwhatis excesses /policylimits,and(ii) carve-outs/ used inyourjurisdiction?Ifso, whatarethetypical(i) undertakings andindemnitiesprovidedbyaprivate iclg to: privateequity 2019 germany

only assumeswarrantiesastotitle,noauthorityandleakage. then seller equity private the liability whereas solutions, W&I or defined limitation clearly to subject team, management investing) (re- the by given only are warranties that market the in see can One well. often repeated (while not necessary) in the transaction documents as is this and seller, the by misconduct intentional an of case in void and null becomes concept liability entire the law, of operation By usually capped atthepurchaseprice. then are covenant, or guarantee leakage no or title the of breach a for claims as such claims, fundamental More thresholds). liability and limitations of statute the match usually which of terms the (and price purchase the of out funded account similar or escrow certain a to available being only often recourse with further), seller with (often price purchase minimis the of percentage low relatively that the liability of the seller for these standard claims is capped at a no provided also then is or It limitation. of statute title longer a have leakage for claims whereas closing, after time of period short relatively a for raised be only can claims indemnity or guaranty or money. The parties usually foresee that standard breach of covenant and time of terms in both narrowed usually is concept liability The Whatlimitationswilltypicallyapplytotheliabilityofa 6.5 Bub memminger &partner © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 the by commitment debt hard financing banks. a for provide may which letters, commitment debt of form some seller the to buyer show to has the typically concerned, is financing debt of availability the Where a right to claim funding from the fund into the acquisition structure. and demands what the standard practice seller of the fund the is. Usually, what sellers are on granted depending basis, case-by-case a fund itself or a similar entity. The details of such letters then vary the on by issued letter commitment equity so-called the is instrument It depends on what is demanded by the seller, but the most common Howdoprivateequitybuyerstypicallyprovide 6.7 no if especially warranty insurancehasbeenconcluded. for, provided usually are accounts escrow Yes, Do (i)privateequitysellersprovidesecurity(e.g. 6.6 with aminimuminsurancepremiumofusuallyEUR100,000. 1%, to 0.5 around somewhere is it thumb, of rule a as but sought, is coverage insurance which for amount the (ii) and deductible, the are being offered. The typical costs for such a product depend on (i) so high that even insurance packages with no or very low deductibles weak. The competition among W&I insurance providers is currently known risks or statements where the due diligence exercise has are been package insurance W&I “typical” the from Excluded above). private equitysellerandmanagementteamunder warranties, covenants,indemnitiesandundertakings? under anequitycommitmentletter, damages,etc.)? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and the managementteam)? warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and and threshold/basket concepts reducing the exposure of the

de of sixtoninemonthsarenotuncommon. period a for lock-ups but hand, at case respective the on depends It prospectus). the via communicated is strategy such e.g., (unless, company the of negatively may shares prospects the about questions (remaining) raise may and price share the impact of amount substantial a of by given be existing shareholders. to Even after lapse need of these commitments, a may sale commitments lock-up as seller, equity private the by exit immediate full, a for allow not do usually IPOs result inweakenedtransactionsecurityfortheseller. buyer, the of right walk-away the with coupled fees, break reverse such and sellers, for parameter high very a is security transaction as market, German the in uncommon rather are clauses these No, up toalarge extent. dried has financings bond for market the and limited very currently debt of availability easy financing by financial institutions, the need for the mezzanine capital is to due However, market. German the in healthy currently is financing acquisition-related for appetite capital mezzanine debt fund financing, but usually then governed by English law. The special and financing by bond sees also one transactions, larger In with providers. provided combined sometimes financing finance, acquisition mezzanine of form the in institutions financial by provided predominantly is financing Debt pressure onthebuyersintermsofpricing. road is abolished rather late in the process in order to continue to put IPO the and sale a via however, exited, frequently are Companies large-cap for transactions and when the IPO environment is favourable. particularly Germany, in seen be can proceedings Dual-track . Whatcustomarylock-upswouldbeimposedon 7.2 Whatparticularfeatures and/orchallengesshoulda 7.1 Arereversebreakfeesprevalent inprivateequity 6.8 . Pleaseoutlinethemostcommonsourcesofdebt 8.1 Doprivateequitysellersgenerallypursueadual-track 7.3 Transaction Terms: IPOs 7 Financing 8 private equitysellersonanIPOexit? exit? If so,whattermsaretypical? bonds). through asaleorIPO? private equitysellerbeawareofinconsideringanIPO transactions tolimitprivateequitybuyers’ exposure? for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare www.iclg.com germany 105 germany 106 germany © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com What arethekeytaxconsiderationsformanagement 9.3 Whatarethekeytax-efficientarrangementsthat 9.2 German privateequitymarket. are the of feature a not therefore are and these HoldCo or AcquiCo German however, a above uncommon; way fund equity private a of structure the not in implemented are structures Off-shore the wayconsentrightsarestructuredorboardexercised. and its personnel do not become tax resident in Germany, simply by to structure the transaction in such a way that the private equity fund purposes. tax for statement profit-and-loss the is topic key Another interest countries, European offsetin be can that many interest of amount the limit which rules barrier like enacted, has Germany Whatarethekeytaxconsiderationsforprivateequity 9.1 Whatrecenttrendshavetherebeen inthedebt 8.3 Arethereanyrelevantlegal requirementsor 8.2 Bub memminger &partner smaller transactions, where the debt funding ticket is only EUR 10 10 EUR only is million andthedocumentation(andgoverninglaw)isinGerman. ticket funding debt the has where transactions, funds smaller debt by provided financing significantly grown in recent years. Nowadays, debt funds even look at debt indicated, already As en ta te aae hs n at curd cnmc n legal and economic acquired fact ownership of shares in in the acquisition structure at arm’s length terms. has manager the that being one with considered, be must factors various gain, capital as qualify To services. work respective his for consideration as received gain gain that is received by a manager in return for his invested equity between greatly differentiate laws tax German as onwards, start the from equity “real” granted being is management that is Aaspect key gains receivedfrom thesaleofsuchsharesqualifyas cap any that sure make to is aspect key the before, stressed already As impact onthestructureofdebtfinancing. financial assistance by a German stock corporation have a significant on restrictions legal the above, 5.1 question in addressed already As upstream loansandguaranteesmaybecomearealchallenge. of granting the agreement, Withoutan such involved. are 25% than become very challenging if outside shareholders with a stake of more in case of an the acquisition of all shares outstanding of in the target, it may agreements such of get to easy and agreement standard chain rather a is this While structure). a (or OpCos the and the borrower between agreement domination and pooling profit-and-loss a In order to provide for a debt-push down, one typically needs to seek Tax Matters 9 financing) ofprivateequitytransactions? investment intoanewacquisition structure? teams thataresellingand/orrolling-over partoftheir shares, deferred/vestingarrangements)? equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate off-shore structurescommon? investors andtransactionsinyourjurisdiction? Are financing marketinyourjurisdiction? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof

ital gains. vs .

and eventually evenasnon-taxablecapitalgains.Seealsoabove. gains capital as qualified be to to met, being subject conditions are, certain participation management a that from ruled resulting structures Court gains Fiscal Federal German participation the above, 9.3 management question in of described As past. recent the in changes significant treatment underwent tax The in a four to six-week timeframe, depending on how well prepared well how on depending timeframe, six-week to four a in law, with compliance contracts, corporate measures, real estate, employment, etc. It is usually done including target the of aspects legal relevant all covering detailed, rather usually is diligence Due above, inthedentalmarket. e.g., in case of investments into relevant industries or, as mentioned buyer/investor,the of identity the on depending restrictions impose interest or concern public of areas Wecertain however,that see, do these kindsoftransactions. for system legal safe rather a offers Germany why reasons the of specifically that laws no are one is this and transactions, equity private discriminate, there or address, that say can one general, In respective reportingandmonitoring. companies, as institutional investors push for the implementation of more and more important for private equity funds and their portfolio While not being a regulatory initiative yet, ESG topics are becoming public arenathanhadbeenpreviously. the and politicians by monitored closely more are segment health have feared, it clearly shows might that private equity investments some into the as bad as not be to out turned law such of details the While it have. can groups as investor-owned share market space, the restricts clinics/practice medical dental the in investor every for relevance of is that enacted been has law new a recently, Just 01Havetherebeenanysignificantlegaland/or 10.1 Havetherebeenanysignificant changesintax 9.4 03Howdetailedisthelegalduediligence(including 10.3 Areprivateequityinvestorsorparticulartransactions 10.2 conditions areobserved. new into structure equity of old the new structure. the This can be in achieved if certain steps equity and existing of roll-over neutral tax- a as rather but paid), be must taxes which (on event realisation should be done in such a way that the roll-over does not qualify as a If the management considers rolling over part of their investment, it 0Legaland RegulatoryMatters 10 anticipated? materiality, scopeetc.)? jurisdiction (e.g.onnationalsecuritygrounds)? anticipated? private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities prior toanyacquisitions(e.g.typical timeframes, compliance) conductedbyprivateequityinvestors subject toenhancedregulatoryscrutinyinyour iclg to: privateequity 2019 germany ot f h rlvn fcos ae led be adesd n the in addressed above. been already have factors relevant the of Most among cross-liability for applies portfolio companies. same The transaction. the of structuring correct the by avoided be can it as issue, an become not While such a liability may in theory be possible, in practice this does diligence due usual the of exercise ofaprivateequityinvestor. part is compliance nowadays Yes, Hasanti-briberyoranti-corruptionlegislation 10.4 or veryhighmaterialitythresholdsareapplied. out carved usually are areas certain then but frame, time two-week a within done be also buyer can it the cases, urgent highly resources In it. many to devotes how and is seller the committed and Bub memminger &partner © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Whatotherfactorscommonlygiverisetoconcerns 11.1 Arethereanycircumstancesinwhich:(i)aprivate 10.5 members, family offices and high-net-worth individuals in all legal matters. Our founding partners have more than 20–40 years of professional of years 20–40 than more have partners founding experience intheirspecialistdisciplinesandarehighlyrecommendedawarded byallrelevantspecialistmedia. Our matters. legal all in individuals high-net-worth and offices family members, board for advisors” “trusted valued are and M&Aequity on private focus and special a with transactions corporate on avoidance, their and disputes We are a nationally and internationally recognised team of highly renowned litigation, M&A and corporate lawyers. We advise on complex corporate expert knowledgefromthefieldsoflitigation,transactionsandtrustedadvisory. Together,combine Memminger.we Peter Dr. by founded Memminger, boutique transaction the and Partner & Gauweiler Bub firm law renowned Dr.Prof. by headed division business the of merger the of result a as 2019 March in founded was firm law commercial Our Wolf-Rüdiger the of Bub 1OtherUsefulFacts 11 approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ considering aninvestmentinyourjurisdiction? the liabilitiesofanotherportfoliocompany? diligence, contractualprotection,etc.)? should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof for manyyearstoaccompanythemontheirway. him trusted have who personalities, business renowned various with work to continues Memminger Peter department. M&A the in Co. & as an assistant to the board at the investment bank JP Morgan Chase worked Memminger Peter lawyer, a as working Before transactions. am Main at the beginning of 2017, focusing on M&A and private equity name the Under Frankfurt 2016. in boutique corporate own of his LLP,founded Memminger he end the until Main am Frankfurt in LLP McCloy & Hadley Tweed Milbank firm law renowned internationally the of division corporate the expanded and established successfully Memminger Peter worldwide, partners equity youngest the of one As well ason(arbitration)courtproceedings. as officers’liability and directors’ and governance corporate of issues He focuses on corporate, M&A and private equity. He also advises on Peter Memminger is a founding partner of Bub Memminger & Partner. R:www.bubmemmingerpartner.de URL: p.memminger@ +4969870047800 Email: Tel: Germany 60322 FrankfurtamMain Eschersheimer Landstrasse14 Bub Memminger&Partner Dr. PeterMemminger bubmemmingerpartner.de www.iclg.com germany 107 germany chapter 16 Hong Kong chin yeoh

ashurst Hong Kong Joshua cole

1 Overview 2 Structuring Matters

1.1 What are the most common types of private equity 2.1 What are the most common acquisition structures transactions in your jurisdiction? What is the current adopted for private equity transactions in your state of the market for these transactions? Have you jurisdiction? seen any changes in the types of private equity transactions being implemented in the last two to Private equity investors typically utilise an off-shore holding three years? company whose shares are held by the private equity investor and management, or an off-shore limited liability partnership. The focus of a large proportion of private equity transactions involving Hong Kong are investments relating to Mainland China Investments in Mainland China which are anticipating an IPO exit businesses. There is a particular, but not exclusive, focus on tech will often use an off-shore (e.g. Cayman) bid vehicle which can then (including FinTech). Private equity houses in Hong Kong also use be listed in Hong Kong or another financial centre. Hong Kong as a base for transactions throughout the Asia Pacific region (including South East Asia and Australia). 2.2 What are the main drivers for these acquisition structures?

1.2 What are the most significant factors encouraging or inhibiting private equity transactions in your Tax efficiency and flexibility are the main drivers for the use of off- jurisdiction? shore holding companies and limited liability partnerships. The use of an off-shore BidCo for PRC businesses is driven by the Innovation and sheer entrepreneurship in Mainland China continue ease of listing those vehicles and the greater perceived certainty of to provide investment opportunities for private equity. As of mid- management control that off-shore structures may have. 2018, Hong Kong’s private equity players managed to raise a total of US$152 billion, accounting for approximately 16% of the total 2.3 How is the equity commonly structured in private capital under management in Asia. equity transactions in your jurisdiction (including institutional, management and carried interests)? 1.3 What trends do you anticipate seeing in (i) the next 12 months and (ii) the longer term for private equity Management equity would usually vest over a period (three to five transactions in your jurisdiction? years, depending on the business) or on an exit, subject to “good leaver/bad leaver” provisions and may have limited voting rights. We expect private equity transactions activity to continue to be Institutional investors would typically acquire ordinary shares, but strong in the next 12 months, although perhaps at a more tempered may be subject to transfer restrictions or drag-along provisions. pace due to uncertainties around US-China trade tensions and Carried interest is often structured as an earn-out or as a contribution increasing interest rates. In the longer term, we see Hong Kong to the consideration for additional shares. continuing to develop its place as a private equity centre in Asia. Steps being taken, such as amendments to tax exemptions for 2.4 If a private equity investor is taking a minority private equity funds, (see question 9.4) will make it easier for position, are there different structuring private equity firms to carry out meaningful activities in Hong Kong considerations? from a taxation perspective and in addition, the Hong Kong government is considering introducing a new limited partnership A minority private equity investor would usually seek minority regime which would provide private equity funds with further shareholder protections, including anti-dilution rights. They may choice in terms of fund structures. also seek special exit rights (e.g. a right to tag along or a right to put their shares) as well as rights to ensure access to information about the business.

108 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London They wouldtypicallynotbepubliclyavailable. matters. reserved and representation board of respect in provisions as well as rights veto and protections minority include will These used). is governance the shareholder, structure partnership liability limited a if agreement partnership (or one than shareholders’a agreement in out set more be typically will arrangements is there Where simply definedasaholderwhichisnotbadleaver. disability and termination without cause. A good leaver can also be death, include leaver good a in of Examples and contract. voluntarily his of company breach the leaving include leaver bad a as Circumstances in which a management equity holder may be treated market valueinagoodleaverscenario. compulsory to fair at but scenario, leaver bad subject a in value costs/book at be acquisition typically would equity Management to five years (depending on the nature and maturity of the business). 15%. Management equity would usually vest over a period of three range of equity allocated to the management can range around 10%– typical the transaction, to transaction from vary will this Although Inrelationtomanagementequity, whatisthetypical 2.5 ashurst HongKong © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 veto rightsasthey choose. their exercise to free are who shareholders, for exist duties such No of their nominatingshareholder.interests the in solely rights veto exercise to ability their limit may duty This company. the of interests the in voting) (including directors as rights their exercise to duty fiduciary a owe Directors Arethereanylimitationsontheeffectivenessofveto 3.3 and budgets and plans business to expenditures overaspecifiedthreshold. relation in rights veto seek also may shareholders minority significant More business. the of further equity or incurring significant debt and changes to the nature of issuance including protections, veto Yes,enjoy typically do they Doprivateequityinvestorsand/ortheirdirector 3.2 Whatarethetypicalgovernancearrangementsfor 3.1 Forwhatreasonsisamanagementequityholder 2.6 GovernanceMatters 3 what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and in yourjurisdiction? your jurisdiction? acquisition provisions? typically addressed? the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) position, whatvetorightswouldtheytypicallyenjoy? etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such usually treatedasagoodleaverorbadin imposing therestraint. party the of interests business legitimate the protect to shareholder necessary reasonably are in they that extent the to valid provisions only are and contracts non-compete commercial other in result, as standards same the meet a must agreements As 2014. in Kong Hong into introduced was law competition Broad-based by PRClaw. governed be agreement the that law PRC of requirement a be may it China, Mainland in based are parties) the (including agreement However, where all (or substantially all) of the subject matter of the shareholder on Kong. Hong in requirements law governing particular no are There restriction or limitation general agreements andtheyarewidelyutilisedinHongKong. no is There nominating shareholder). their merely not (and company the of interests the in powers their exercise must directors nominee although investor, equity the private to or by owed duties such no are there position, general a As hy ut icoe n sc cnlcs n cno priiae in participate cannot and conflicts such any disclose must They are therefore, and, directors be exposed tothesameliabilitiesasdirectors. to considered be will directors Shadow instructions). investor’s the with accordance in acting to as acting “shadow directors” (where the board or the company is accustomed agreed of wary the be to with need investors accordance However, in requirements). so do they (assuming exposure liability no have typically for would directors nominate who Investors statements misleading or false directors involvedinauthorisingaprospectus(i.e.onexit). for liability potential also is There trading. insolvent for liability or director; a as duty their The key risks for nominee directors include: liability for a breach of undischarged bankruptorsubjecttoadisqualificationorder. an be cannot and 18 least at be must person The company. Kong Hong a of director a being person a on restrictions few are There . Arethereanylimitationsorrestrictions onthe 3.5 Arethereanydutiesowedbya private equityinvestor 3.4 . Howdodirectorsnominatedbyprivateequity 3.7 Arethereanylegalrestrictionsorotherrequirements 3.6 (rather thandirectors). For this reason, certain veto rights may be allocated to shareholders non-compete andnon-solicitprovisions)? typically addressed? of otherportfoliocompanies? portfolio companies? (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements shareholders (or to minorityshareholderssuchasmanagement party nominatingthem,and(ii) positionsasdirectors interest arisingfrom(i)theirrelationship withthe investors dealwithactualandpotential conflictsof equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin vice versa )? Ifso,howarethese www.iclg.com Hong Kong 109 Hong Kong 110 Hong Kong © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com Kong. Hong be it that in requires Code the However, permitted are fees) inducement (and fees Break Whatdealprotectionsareavailabletoprivateequity 5.2 needs tobeinplace(ifrequired)priorcommencingtheoffer. finance therefore and finance to subject be cannot Takeoveroffers private transactionwiththecontrollingshareholder. the of terms the than terms better or same the on be must offer the and equally treated be to shareholders all requires Code offer.The follow-on shareholder a make to obligation controlling an trigger immediately the will which with agreement an with commence will transaction Typically,a shareholder. that of support the have controlling shareholder or family. This means that it is imperative to single a by controlled frequently are companies listed Kong Hong (the “Code”). Such transactions will be subject to the Hong Kong Takeovers Code Whatparticularfeaturesand/orchallengesapplyto 5.1 increasingly is insurance indemnity and popular inprivateequitytransactions(whichisacontinuingtrend). warranty of use The Havetherebeenanydiscernibletrendsintransaction 4.2 sector-specific and issues competition requirements. ownership, foreign both to relating requirements, approval regulatory significant may face China Mainland in targets involving (e.g. transactions However, regulation sector-specific by financial servicesortelecomssectorsinHongKong). required regulatory other unless or competition approval, for need Kong. no Hong generally in is is There business underlying the if timing transaction on impact an have which issues non-sector-specific few are There Whatarethemajorissues impactingthetimetablefor 4.1 vote, a or herobligationtoactintheinterestsofcompany. in participate to director his dischargedfrom not is director the conflict, the notwithstanding a permit Articles the Where permit themtodoso. decisions where there is a conflict unless the Articles of Association ashurst HongKong the of interests best the in shareholders. Itmustbefullydisclosed. is fee the that Executive Takeovers target company’s Board and the its financial and adviser must confirm value) to offerthe the of 1% than more no normally is suggests rnato em:Pbi custos Transaction Terms: Public Acquisitions 5 Transaction Terms: General 4 disclosure obligationsandfinancingissues? acquisitions? investors inyourjurisdictionrelationtopublic commonly dealtwith? transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private terms overrecentyears? and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust de minimis de (which the Code the (which aaeet ih sgiiat tk wl b epce t give to expected be will extensive warranties. stake significant a with Management which caseamuchfullersetofwarrantiesmaybegiven). warranties are fully backed by warranty and indemnity insurance (in usually are extremely sellers limited (e.g. title, capacity and authority only), unless the equity private by offered packages Warranty the in equity management acquiring entitytoallowthemroll-overpartoralloftheirstake. offer cash also offer may commonly They buy-side consideration. the on investors equity Private of respect in future claims. purchasers to comfort provide to accounts, as escrow such mechanisms to look may warranty and indemnity insurance, rather than retained payments or They the of preference house. general equity the post- private by driven account be to tends completion choice The both mechanisms. box use locked and mechanisms to adjustment completion tend and transaction consideration cash a prefer sell-side the on investors equity Private liability willoftenbecappedatthe purchaseprice. authority), and capacity (title, given are warranties limited Where of thepolicycoveragelimit. 1%–2% of PRC range in generally is insurance such of cost typical certain The of respect in (Mainland China)taxesaretypicallycarvedout. claims and claims Environmental (including thenatureofbusinessandperceivedrisk). transaction the on depending vary will limits policy and excess The Kong privateequitytransactions. Hong in popular increasingly is insurance indemnity Warrantyand non-compete give may team management undertakings foraperiodaftercompletion. the of Members value priortocompletion. of leakage no and business the to changes material no are there that ensure to restraints pre-completion of set a be typically will There . Whatisthetypicalpackageofwarranties/indemnities 6.2 Whatconsiderationstructures aretypicallypreferred 6.1 . Whatlimitationswilltypicallyapplytotheliabilityofa 6.5 To whatextentisrepresentation&warrantyinsurance 6.4 Whatisthetypicalscopeofothercovenants, 6.3 Transaction Terms: Private Acquisitions 6 team toabuyer? on thebuy-side,inyourjurisdiction? warranties, covenants,indemnities andundertakings? the typicalcostofsuchinsurance? equity selleranditsmanagementteamtoabuyer? offered byaprivateequityselleranditsmanagement by privateequityinvestors(i)onthesell-side,and(ii) private equitysellerandmanagement teamunder exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) undertakings andindemnitiesprovidedbyaprivate iclg to: privateequity 2019 Hong Kong No. These arenotcommon. Bank commitmentlettersareusuallynotlegallyenforceable. may berequiredtoprovideabankcommitmentletter. sufficient financial resources. Where there is uncertainty, the bidder Bid letters will typically contain a representation that the bidder has and warranty via with dealt commonly indemnity insurance. increasingly is This Do(i)privateequitysellersprovidesecurity(e.g. 6.6 manage theirrisk. to insurance indemnity and warranty use to sellers equity private 10%–100% (although that would be from unusual). It is increasingly range common for the may and negotiation for matter a be will Where broader warranties are given, private equity sellers’ liabilities ashurst HongKong © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 being thecontrollingshareholder. shares for a further six months if the sale would result in it no longer sell not must shareholder controlling That prospectus). the in sale offeredwere for shares the that stated prospectus the that extent the be held by it in the prospectus for six months after listing (except to to stated shareholding the maintain must shareholder Acontrolling Whatcustomarylock-upswouldbeimposedon 7.2 the and committee listing the regulator whichcanhaveasignificantimpactonthetimetable. by questions of series a asked be The process can be lengthy and tedious and the company will likely significant liabilityformisstatementsinaprospectus. face company’smay target directors the and seller Aequity private Whatparticularfeaturesand/orchallengesshoulda 7.1 Are reversebreakfeesprevalentinprivateequity 6.8 Howdoprivateequitybuyerstypicallyprovide 6.7 Transaction Terms: IPOs 7 warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and If so,whattermsaretypical? under anequitycommitmentletter, damages,etc.)? the managementteam)? private equitysellersonanIPOexit? exit? private equitysellerbeawareofinconsideringanIPO transactions tolimitprivateequitybuyers’ exposure? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and available. rdtoa bn (eeae) et s h ms cmo suc of debt finance. source common most the is debt (leveraged) bank Traditional likely toresultinthebetterpriceoutcome. that sellers appear to determine clearly, and early, which approach is fact the and involved costs the of because likely is This occur). do Dual-track processes are not common in Hong Kong (although they These mechanismsarerarelyused inHongKong. structures beingused. off-shore sees frequently Kong Hong However, investors. equity private for considerations tax Kong Hong limited very are There deals. finance to order in into tap can firms equity of private pool that liquidity another institutional adding is of loans growth leveraged Asian the in participation and buyouts equity private to support eager remain Asia in Banks 2018. from increase transactions equity private in employed leverage of amount the seen have We arrangements financial certain of use the on impact can this and assistance” “financial giving company a on prohibition a is There . Arethereanyrelevantlegalrequirementsor 8.2 Pleaseoutlinethemost common sourcesofdebt 8.1 Doprivateequitysellers generallypursueadual-track 7.3 . Whatarethekeytax-efficientarrangementsthat 9.2 Whatarethekeytaxconsiderationsforprivateequity 9.1 Whatrecenttrendshavetherebeeninthedebt 8.3 o e sd o cur sae) shares). acquire to used be to (including the use of the target company’s assets to secure borrowings Financing 8 Tax Matters 9 bonds). through asaleorIPO? shares, deferred/vestingarrangements)? off-shore structurescommon? financing marketinyourjurisdiction? financing) ofprivateequitytransactions? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare equity acquisitions(suchasgrowth shares,incentive typically consideredbymanagement teamsinprivate investors andtransactionsinyourjurisdiction? Are hr i a wieah procedure “whitewash” a is There www.iclg.com Hong Kong 111 Hong Kong 112 Hong Kong © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com sound and broadcasting andcivilaviation. television banking, as such industries certain in exist national investment or foreign on restrictions although security considerations, interest national on particular based Kong any Hong investment in foreign to restriction broad-based no subject is There not scrutiny. are enhanced transactions equity Private Areprivateequityinvestorsorparticulartransactions 10.2 rights voting weighted with structures. companies of biotech listings of listings and permit issuers to 2018 April in rules new published In relation to potential IPO exits, the Stock Exchange of Hong Kong Havetherebeenanysignificantlegaland/or 10.1 non-qualifying other includes it if transactions. even fund a of transactions qualifying the to applied be now can exemption tax the i.e. regime, old the of features tainting the removes (iii) and companies; Kong non-Hong and Kong Hong both in investments fund’s a to to exemption apply the allows (ii) Kong; Hong outside or in exercised is fund the of control and management central its which for fund effect1 on a to apply to exemption the allows (i) which 2019, April into came equity private for regime perspective. exemption tax profits new The taxation a without from Kong establishment Hong permanent in triggering tax activities meaningful the out carry amended equity to private firms has for easier it government make to equity Kong private for exemption Hong the 2019, In private Kong’s Hong equity fundindustrybyattractingmoreoff-shore funds. boosting at aimed were amendments The funds. equity private off-shorecertain for cover exemption to funds tax Kong profits the Hong of extension the in was funds reform equity private affecting legislative significant most the 2015, In Havetherebeenanysignificant changesintax 9.4 frequently are investors tax-resident. are they which Kong in jurisdictions the in issues non-Hong these with concerned However, Hong in Kong. considerations tax similar or gains capital no are There Whatarethekeytaxconsiderations formanagement 9.3 ashurst HongKong 0Legaland RegulatoryMatters 10 anticipated? investment intoanewacquisitionstructure? jurisdiction (e.g.onnationalsecuritygrounds)? subject toenhancedregulatoryscrutinyinyour anticipated? private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities teams thataresellingand/orrolling-overpartoftheir impact onthetransactiontimetable. material a have can they identified are issues Where protections. diligence and parties will not be satisfied relying only on contractual warranties contractual around compliance in significant this area, it is usually increasingly a significant area of are there Whilst Yes. due diligencereport. Typically, private equity investors will require an “exceptions only” the and business the perceived risks. of nature the by determined be will this as no “standard” materiality threshold or scope for legal due diligence, is There buyer. trade a to compared period time compressed more a over diligence due legal conduct may investor equity private A legal systemandsophisticatedfinancialsector. law common developed highly a has It off-shore. from including investment, encourage to seeks which jurisdiction a is Kong Hong acts ofanother. the for liable company portfolio one hold or companies portfolio the of acts the for liable investors hold would they that unlikely is it and veil” “corporate the respect typically will courts Kong Hong 05Arethereanycircumstancesinwhich:(i)aprivate 10.5 Hasanti-briberyoranti-corruptionlegislation 10.4 Howdetailedisthelegalduediligence(including 10.3 11Whatotherfactorscommonlygiverisetoconcerns 11.1 1OtherUsefulFacts 11 diligence, contractualprotection,etc.)? materiality, scopeetc.)? considering aninvestmentinyourjurisdiction? the liabilitiesofanotherportfoliocompany? and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor iclg to: privateequity 2019 Hong Kong ashurst Hong Kong Hong Kong

Chin Yeoh Joshua Cole Ashurst Hong Kong Ashurst Hong Kong 11/F Jardine House 11/F Jardine House 1 Connaught Place 1 Connaught Place Hong Kong Hong Kong

Tel: +852 2846 8903 Tel: +852 2846 8989 Email: [email protected] Email: [email protected] URL: www.ashurst.com URL: www.ashurst.com

Chin advises on M&A, private equity transactions, venture capital Joshua is a partner in Ashurst’s corporate practice in Hong Kong. He Hong Kong investments, joint ventures and energy and infrastructure projects specialises in M&A, joint ventures and private equity transactions throughout the Asian region. He also advises on Hong Kong throughout Asia. takeovers, Listing Rules governed transactions, corporate governance Joshua has advised on a number of high-profile international and securities regulation. Chin has particular expertise in complex, acquisitions, disposals and joint ventures throughout the region and cross-border transactions and advised on the largest ever foreign regularly acts as international or lead counsel on transactions across investment in a Chinese state-controlled enterprise (ITOCHU and CP a range of industry sectors, including financial services, Group’s US$ 10.3 billion investment in CITIC Limited). telecommunications, pharmaceuticals, energy and resources and Chin is the sole winner of the Hong Kong M&A category of the Client retail. Choice Awards 2019. Chin is listed as a Recognised Practitioner in Joshua is qualified to practise in Hong Kong and Australia. Chambers and Partners Global for Corporate/M&A: Hong Kong-based (International Firms) – China.

Ashurst is a leading international law firm advising private and state-owned enterprises, financial institutions, asset managers, government agencies and regulators, with core businesses in projects, corporate and M&A, finance, capital markets, dispute resolution and regulation. Our clients value us for being approachable, astute and commercially minded. As a global team we have a reputation for successfully managing large and complex multi-jurisdictional transactions, disputes and projects, and delivering outstanding outcomes for clients. Our Corporate and M&A practice in Asia has the depth, sector knowledge and jurisdictional reach to provide the highest quality advice to sophisticated clients across all aspects of their transactional requirements. We offer a truly comprehensive service on structuring, managing and executing public and private M&A transactions. Our market-leading M&A lawyers advise on a comprehensive range of corporate and commercial matters across a wide spectrum of domestic and cross-border transactions in Asia and throughout the rest of the world.

iclg to: private equity 2019 www.iclg.com 113 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 17 Hungary Dr. márton Kovács

HBK partners attorneys at law Dr. gábor puskás

1 Overview domestic economy which keeps the interest of experienced PE investors from Europe and, especially, the United States, alive. Hungary is becoming more attractive for investors from new 1.1 What are the most common types of private equity regions, such as China, the Middle East and South Africa. For these transactions in your jurisdiction? What is the current third country investors, besides the general business advantages, state of the market for these transactions? Have you Hungary offers free access to the EU market. seen any changes in the types of private equity transactions being implemented in the last two to PE transactions are sometimes inhibited by the relatively small three years? market itself. Dealmakers in Hungary are also keeping an eye on geopolitics focusing on the occurring strains with the EU, a crucial The business environment for private equity (PE) transactions in trading partner and investor in the region. Hungary is favourable. Central and Eastern Europe (CEE) is trending upwards, the domestic economy is growing and financing is cheap 1.3 What trends do you anticipate seeing in (i) the next 12 and readily available. Thus, Hungary is a well-liked target of months and (ii) the longer term for private equity international PE investment companies interested in share and asset transactions in your jurisdiction? deals. Hungary closely follows Poland, Latvia and Romania as the most-frequented jurisdiction for PE investments in the region. Since the fundamentals underpinning an active M&A market remain Venture capital (VC) markets in particular are emerging and there are firmly in place for the next year ahead, and the Hungarian GDP is a host of domestic funds specialised in small-scale investments that forecast to average more than 3% over the next 12 months, we do are financed from EU resources (funds of funds) and by PE investors. not predict significant change in M&A activity this year. Such public funding is generally available on the condition of Transactional activity is nonetheless expected to grow in the coming receiving private funding which attracts PE investors. years particularly in the segments of agriculture and healthcare providers. For the longer term, we expect that the intensity of M&A Riding the wave of EU funds and the Hungarian Government activity will be affected by the general global economic slowdown, initiatives providing strong support for VC investments, the past few predicted by many. Although, investors will find many incentives in years saw the rise of seed and start-up investments providing capital the Hungarian market in the forthcoming years that can compensate for the early phases of product development and distribution. This is the potentially less favourable economic environment. shown by the fact that Hungary saw the largest amount of companies receiving PE investments in 2017 (104) accounting for 40% of the Apart from the incentives mentioned above, the new JEREMIE total number of companies in the entire CEE region despite the fact programme, which started in August 2018, will bring HUF 80 that the volume of investments make up only 5% of the region’s share. billion (approx. EUR 250 million) to Hungary within the next five years from which 150 Hungarian start-up companies will receive funding. Based on experience in recent years, this will most likely 1.2 What are the most significant factors encouraging or attract regional PE investors in the initial and the possible future inhibiting private equity transactions in your investment rounds. jurisdiction?

Hungary has already proven to be a credible and growing market for 2 Structuring Matters international and domestic players. The growth potential is still great in CEE and Hungary ranks among the top four countries in PE activity. Hungary, unlike more mature Western European markets, 2.1 What are the most common acquisition structures offers opportunities for off-market deals and reasonable pricing with adopted for private equity transactions in your jurisdiction? an economy growing at an average of more than 3%. In addition, the rising domestic consumption allows investors to maximise their profits within the region. The most common acquisition structure for PE transactions is naturally the acquisition of 100% or the majority of the target’s The availability of EU and domestic funds and their attractiveness to shareholding. PE, the low interest rates and cheap financing possibilities, the booming start-up scene, as well as the Hungarian Government, have In the VC market, portfolio companies are usually set-up jointly by many times accentuated the drive to draw in capital to fuel the the founders and the investors to serve as a special purpose vehicle

114 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London rfrnil ihs eaig o xt dcso-aig dividends, decision-making, exit, liquidation, controloverthemanagementandkeyemployees. to relating rights preferential of range wide a of form underlying the take usually the arrangements contractual and structure corporate the into embedded rights Such quota. business or shares its to attached rights stronger much requires general in interest shareholding minority with investor An limited are investments VC liability companies, namely and “ PE for form popular most The on structuringmatters. some cases, other considerations, such as tax, have substantial effect In investors’rights. the of preservation and target the over control corporate have to is structures acquisition the for driver main The Whatarethemaindriversfortheseacquisition 2.2 the keep thebrandgoing. presence, market and to order in increase capital or purchase share a for opt may investor development product ongoing with companies mature more of case in but rounds investment future for HBK partnersattorneysatlaw © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 leaver Good member. conditions sometimesincludelong-term healthorfamilyissues. management the to attributable reasons mutual consent or unilaterally by the company, unless it is based on by terminated is relationship employment the if leaver good a be to basis but, in general, a management member is typically considered Good/bad leaver conditions are usually negotiated on a case-by-case Forwhatreasonsisamanagementequityholder 2.6 In relationtomanagementequity, whatisthetypical 2.5 Ifaprivateequityinvestoristakingminority 2.4 Howistheequitycommonlystructuredinprivate 2.3 or “ or netr’ ed i rgr t peeeta rgt ascae t the investors’ to equityinterest. associated rights preferential to regard in the needs meet investors’ to able still are they but shares, to compared flexibility of terms in limitations of share their have quotas Business shares. by acalloptionestablishedforthebenefitofinvestor. ensured usually is This shareholders’(SHA). the agreement violate or company the leave they if shares their management of part or the all divest must where vesting reverse so-called the is retention management ensuring for solution preferred the VCs, for especially and, problematic be sometimes can law Hungarian under Vesting 5%–10%. from ranges Programme) Ownership Stock Employer or to management members and key employees (hence the term, ESOP Transactions vary in this regard, but a typical pool of shares allocated kfts considerations? institutional, managementandcarriedinterests)? structures? your jurisdiction? usually treatedasagoodleaverorbadin acquisition provisions? what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and position, aretheredifferentstructuring equity transactionsinyourjurisdiction(including ”, a company form which issues business quota instead of instead quota business issues which form company a ”, zrts ”, i.e. companies limited by shares,

rwak f uh rvt lw gemns n non-statutory and civil court,whichmaytakesignificanttime. agreements law in enforced be only can they dispute a of case in private that is regulations internal such be The of public. can drawback the from there hidden remain but that SHAs anyone and regulations for accessible publicly are registration of court the to submitted are that documents Corporate laws andinternalby-lawsofthecompany. relevant the with compliance oversee which companies portfolio the of most in operating is board supervisory a level, third the On it isararesight. parties’either serve not does usually this but thus and well interests board, the replaces who member management single a to allocated veto be exercises may directors’functions of board The usually issues. material in rights investor the by delegated member board the then, even but meeting shareholders’ the of authority of scope the to allocated specifically not issue every in decides board The member. board one one least have at delegates not investor does the where company already, portfolio the if directors, of board On the management level, investors generally require the set-up of a company areadoptedwithdueregardtotheinvestor’s interests. portfolio the of life the affecting decisions fundamental that ensure minority, a if especially investor, generally retains the most important veto rights in material the issues to level, ownership the On legitimate of controller the as serving board supervisory the ■ board of directors or a single director heading the day-to-day fundamental the as operating meeting ■ shareholders’ the ■ corporate of terms of Hungariancompaniesare: in flexibility of bodies governance important most three The deal both. for governance great a enables law Hungarian partnerships. limited sector, VC the in especially and ot f h prflo opne oeae s rvt limited private as operate companies portfolio companies (or stock companies, abbreviated as “ the of Most the portfolio company. In recent years, recent In company. portfolio the minority with of operation the investors over control reasonable maintain to especially shareholding, investors, for tool common very a are level management and shareholder both on Vetorights . Whatarethetypicalgovernance arrangementsfor 3.1 . Doprivateequityinvestorsand/ortheirdirector 3.2 material breachesoftheSHA ortheirtermsofemployment. attributable to the portfolio company nor the contract investor, or committing employment neither reasons without or investment the of years their early the during terminating members e.g. broader, management much obviously are leaver bad a as sanctioned and considered is member management a which under Circumstances to be replaced by a high quorum required to decide critical issues. issues. critical decide to required quorum high a by replaced be to GovernanceMatters 3 operation. business operation(managementlevel);and decision-making body(ownershiplevel); in yourjurisdiction? position, whatvetorightswould theytypicallyenjoy? arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor de facto de www.iclg.com zrt. veto rights started rights veto ” in Hungarian) Hungary 115 Hungary 116 Hungary © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com the towards duty a have shareholders law, Hungarian Under Are thereanydutiesowedbyaprivateequityinvestor 3.4 Arethereanylimitationsontheeffectivenessofveto 3.3 key vesting, (ESOP, employees, managementbonus,etc.). decisions management crucial in say final directors) where the board member delegated by the investor has the of board a (usually level management a on exist rights veto Similar to subject usually are they as negotiation bytheinvestorandfoundersorothershareholders. rights veto of list exhaustive no is There rights. property intellectual licensing and loans out taking contracts, high-value into entering like issues to operation business report) annual liquidation, transformation, (merger, decisions the of operation core portfolio company the that can usually range from the most important affectingcorporate issues are material meeting, to restricted shareholders’ the level, decision-making important incorporating most the at quorum high Vetorequiring topics and rights with careful more becoming investor rightsintothecorporatedocuments. are investors and founders both procedures, time-consuming and costly these avoid notification or even approval to be sought by the parties. In order to strict EU and domestic competition law and result in mandatory pre- exists between two to or relationship more companies, this may call for controlling the application of a rights If right. veto controlling a as strong qualify considers (HCA) Authority Competition Hungarian the and law competition Hungarian the because is This investor. the of consent the without decided be can issues portfolio material the in share 4% a company, then setting holds a minimum quorum of 96.01% means that no investor the if example, For HBK partnersattorneysatlaw investor rights. ensure to quorum) (high tool softer a to resort to inclined more be under competition law which makes the market players cautious and hardcore rights controlling as are them sees HCA the above, Association mentioned already of Articles the limitations as to in the business operation of portfolio companies and as rights veto Also, corporate documents. SHAthe the and/or of violation serious of case in exercisable rights other and call-and-put-options flip-over, example, for insurances, investors of types and other negotiate and risks associated the accept must simply addressed, effectively be cannot limitations These court such and several years,evenifthelawprovidesforanexpeditedprocedure. court in challenged procedures may take a long be time, ranging from a couple of months to must rights investor’s either level, is the fact that any decision adopted in violation with the the Further limitation on the to effectiveness of such veto arrangements, on contrary adopted been have corporate documentsincludingvetorights. they if even effective, and valid is management the or shareholders the by adopted decision a that registry third parties rely corporate on and third the parties may presume, in in good faith, listed that not are rights veto accessible, publicly are documents absolute. corporate are Although that rights proprietary to compared regulations internal such of nature relative the from stems companies portfolio of documents corporate the into The drawback of veto rights or high quorum provisions incorporated typically addressed? shareholders (orviceversa)?If so,howarethese to minorityshareholderssuch as management typically addressed? the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii)

n nte cniet teeoe hs udraig ae usually are undertakings these underlined bypenaltypaymentobligationsoftheinfringingparty. therefore continent, another on activities or parties against provision such enforce to unable being is obligations affected the geographic region and scope of on activity. Investors run a high limitation risk of non-solicitation reasonable a without tricky and especially non-compete Enforcing management orput/calloptiononshares. like violations, triggering exit rights of at a given return on case the investment, flip-over of in investors the for insurances additional by SHAs the in addressed usually is unenforceability of risk The for etc.) UNCITRAL, (ICC, disputes stemmingfromtheSHA. court arbitration international an of jurisdiction the to themselves submit parties the that uncommon not is it and deals high-value in acceptable more much however,is a to related SHA a that rare Hungarian company stipulates rather foreign law. Commercial is arbitration, it and seated is company the governing law and jurisdiction of the country where the portfolio stipulate why,SHAs is practice, That in EU. the outside especially nationalities, different with parties very of case and the in problematic time-consuming become may SHAs of enforceability The delegated members usually have less rights and information related information and rights less have usually members delegated procuration, to investor- fact, in as But, areas. by-laws regulated other and internal decision-making the with comply must they and interests; company’s the representing their functions perform must management they member’s: board other any as same the are investor an by delegated members board of liabilities and Risks requires professional expertiseincertainfields. that sector other any or companies sector financial portfolio the in to operating apply may conditions Special member. management a being from court by prohibited being not and record criminal no having capacity, legal full having age, legal of being delegated by an investor or not. These general requirements include officers”) “executive are they whether and nationality of regardless companies all called across altogether general, in management There are standard conditions applicable for all board members (and . Arethereanylimitationsorrestrictions onthe 3.5 . Arethereanylegalrestrictionsorotherrequirements 3.6 shareholder didnotapprovethegivenresolutionwithitsvote). the that condition the (with company the of incorporation of articles board of a company, if the resolution violates legal regulations or the decisions. business a resolution of the supreme body, the certain management or the supervisory of investigation Furthermore, all shareholders have the right the to contest the validity of for auditor an shareholders’the convening to regard in laws appointing or meeting corporate the to pursuant rights special enjoy shareholders Minority company itselforthemanagement. hrhles hv rgt ta te cn xrie exercise can they that rights have Shareholders’ then, even contributions. capital respective their providing of extent the to only and shareholders other the not and company portfolio non-compete andnon-solicitprovisions)? portfolio companies? (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin iclg to: privateequity 2019 Hungary i--i vis-à-vis

the not usually are investor PE same the by nominated Directors (ii) have may investor PE a transaction, actual the on Depending (i) the bad faithorqualifiesasacrime. and deals in was appointment the instance, for where, circumstances extreme background any shareholders are not legally liable for the appointment except under of regardless the shareholders by appointed ultimately under are issue members Board regulated board law. legally Hungarian delegated a their not is to “delegation” related as liability members or risk legal no have The investors (or any other shareholders or third parties) themselves actual and information of control overday-to-dayoperation. lack the off set to board immunity investor-delegated member the granting provisions through SHAs in results higher turn, business risk for the in investor. which, This is usually addressed members in the board these of capability and position the affects asymmetry information The members. board other the to compared operation actual company’s portfolio the to HBK partnersattorneysatlaw © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Transaction terms vary greatly depending on the parties, negotiating Havetherebeenanydiscernible trendsintransaction 4.2 invested due already have the parties serious resourcesintopreparingthe transaction. the during time emerge the by well process diligence may issues such regulatory Unfortunately, various with involved deals. of feasibility the even or scheduling affectthe may practices, are jurisdictions multiple if GDPR, Portfolio deals involving large databases of the personal data, especially alike. investors especially and buyers sellers, for issues, headaches frequent present protection data but transactions PE various for Hungary in available easily and cheap is Financing take betweenonetothreemonths. easily can proceedings clearance These clearance. regulatory prior to subject is entity regulated a over control of transfer the energy, investment is taking place. In the industries like which banking, insurance and in industry the on depend much very will issues These Whatarethemajorissuesimpactingtimetablefor 4.1 Howdodirectorsnominatedbyprivateequity 3.7 Transaction Terms: General 4 s ut rr fr P ivso t ivs i companies in invest to investor PE a competing witheachother. for rare quite is it and market, Hungarian small the to regard with especially activities, competing with companies portfolio to delegated arising betweenshareholdersandmanagementmembers. potentially issues interest of conflict general from different not are they and rare are nature this of interests of conflicts and successful potential practice, in so, company the the of operation profitable in interests investors’ PE the with line in also is which company portfolio the of interest best the in In either case, the directors must act all times by force of law company portfolio the in rights voting minority or majority of otherportfoliocompanies? terms overrecentyears? disclosure obligationsandfinancingissues? and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof ouet o te itd opn t lf cran restrictions certain lift to company listed applicable tothesharetransfers. the of corporate documents the into incorporated be may provisions Breakthrough the amountofequitycapitalpershare,whicheverishigher. or bid takeover the in quoted price the at shareholders minority the bid process. In such cases, the majority shareholder can squeeze out ending up with more than 90% of shares following a public takeover Special rules apply to a takeover bid exceeding 90% or shareholders a submit the may for takeover bidregardlessofthevolumeaffected shares. party third except any bids means which takeover threshold voluntary minimum to apply rules period. 30–65-day Similar a within shares their sell and opt-in to decide be may shareholder must Any well. as takeover company the to the sent and published time, same the At authority. supervisory as Bank Central Hungarian the to submitted be public must bid mandatory takeover a company, listed a in shares company) the in the to 10% than more has shareholder other no Pursuant if 25% (or 33% than more companies. listed acquire to intending party third Market any Capital Act, Hungarian of number low relatively the to due Hungary in common not are transitions Public-to-private E elr i Hnay rfr h lce bx ehns which mechanism box the of signing of date the at price purchase locked the of fixing the enables the prefer Hungary in sellers PE with thetakeoverbid. along published be must price the affecting arrangement any but fee) between the seller and buyer may be applicable break and enforceable reverse or fee break a (like arrangements contractual Other 50% ofthetotalshareslistedcompany. than less are acquired be to shares the acceptance, the of to declarations pursuant if, bid takeover the withdraw to right the reserve may buyer a bid, takeover their In investors. PE for manoeuvring Public takeover bids are strictly regulated and there is little room for . Whatparticularfeaturesand/or challenges applyto 5.1 . What considerationstructuresaretypicallypreferred 6.1 Whatdealprotectionsareavailabletoprivateequity 5.2 was actuallyexercisedinHungarythepastdecade. right tag-along or drag-along no players, market of understanding SHAs despite the fact that, according to the common experience and tag-along provisions still consist a part of the regular set of rights in and drag-along that noting worth but observation, minor a but is It up friendlyenvironmentandthecheapfundingavailable. as and pitches international targets for Hungarian in VC funds which may be the result of the start- start-ups frequent foreign more of the is appearance trend noticeable one but etc.), VC investment, deal, asset or (share transaction of type the and sector skills, Transaction Terms: Public Acquisitions 5 Transaction Terms: Private Acquisitions 6 commonly dealtwith? on thebuy-side,inyourjurisdiction? acquisitions? transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private by privateequityinvestors(i)on thesell-side,and(ii) investors inyourjurisdictionrelationtopublic www.iclg.com Hungary 117 Hungary 118 Hungary © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com the and players market the but 0.8%–1.3%, of range the in moves 10 premium EUR insurance the where deals estate real commercial million) (above high-value in applied usually practice. is in insurance still spreading W&I steadily are but slowly insurance is it W&I although seldom, including transactions PE Hungarian To whatextentisrepresentation&warrantyinsurance 6.4 a for obligation limited periodoftime,usuallyonetothreeyears. non-solicitation team management and its non-competition and seller include PE a of undertakings Typical Whatisthetypicalscopeofothercovenants, 6.3 of is trend structure increasing the taking out W&I insuranceforthecomfort ofallparties. deal W&I by classic slightly seller’s transformed this the being mega-deals, currently of the breach In specific obligations. any to the related claim may amounts buyer the which from price purchase the of 15% also Seller indemnity is often backed are by an escrow typically around 5%– caps and enforced, is regularly applied. indemnity any before reached excluded). sometimes are indemnities Basket thresholds, which mean a certain aggregated tax amount a must be covers while usually period for issues longer risks, environmental associated for the indemnity on depending example, years five to (two of time period reasonable a to limited often is indemnity Post-closing the applicablelawsandregulations. with good compliance and taxes property,contracts, intellectual material to related warranties statements, financial structure, includes shareholder capitalisation, standing, usually list W&I average with the buyers’ intentions to widen the sellers’Met scope of liability, capacity. an and title legal to related warranties prevalent most the to warranties of scope the down narrow to try always investors PE and transactions M&A in terms of set negotiated heavily most the typically are indemnifications and warranties seller of list The Whatisthetypicalpackage ofwarranties/indemnities 6.2 between thesigningandclosingdate. room for the parties to adjust the price based on events that occurred acquisition the gives but parties both from effort makes more requires and longer process This company. the of data cash and debt buyer- capital, working classic the on based the adjustment price of prefer method friendly still investors PE side, buyers’ the On method asthemostcommonlyusedtoolinM&A transactions. setting adjustment price post-closing the price replacing slowly is methodology locked-box the trends, international the Following much quicker asnoclosingaccountsarenecessary. be can process sale the and advance in known and fixed is with the fixed price. The advantage for both parties is that the price the buyer’s side to make proper adjustments before signing the SHA on diligence due in-depth an requires and price the of elaboration SHA. the over seller the to control more gives method pricing This HBK partnersattorneysatlaw the typicalcostofsuchinsurance? /exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) equity selleranditsmanagementteamtoabuyer? undertakings andindemnitiesprovidedbyaprivate team toabuyer? offered byaprivateequityselleranditsmanagement Depending on the value of the transaction, the negotiated deal and deal negotiated the transaction, the of value the on Depending common inHungary. Obtaining securities by PE investors for management liability is not and lessfrequentduetothecurrentseller-friendly market. less becoming is this but buyers for option best the as seen still is retention of a certain part of the purchase price on part of the buyers escrow amount for a pre-determined part of the purchase price. The an or guarantee, parent guarantee, bank provide usually buyers PE their shareholdinginterest. the general under rules applicable for management with liability or capped dealt either is teams management of such liability The from warranties tax and capacity limitations duetotheirhighimportanceandtheassociatedrisks. title, legal exclude to diligence and a time limit of three to five years. Buyers generally try due the of outcome the especially and deal given the of conditions their liability between 10%–20% depending on the type and specific PE sellers usually negotiate a minimum and maximum threshold for u cvrg fr pcfc r o-eua rss a b more be can risks non-regular or expensive. specific thumb, for of coverage rule but a As value transaction the of 1%–1.5% between move usually premiums etc. location, geographic competency, advisor warranties, of type and list transparency, seller diligence, due of depth including conditions many by affected are Premiums are alsousuallyexcluded. fraud, corruption, environmental issues and conditions of real estate or profit level. Existing risks known by the parties, regulatory fines, turnover certain a reaching as warranties forward- post-closing and such looking of exclusion the as well as insurer the by most covered by set premium minimum a insurers, a include limits policy Usual provide another tool for both sellers and and buyers to negotiate attractive the deal. more transactions risky makes also insurance W&I are stillbetteroff withthelowpremiumrates. who sellers the on costs their charge instead and litigation closing post- as well as agent escrow an or price purchase the of retention a committing seller the warranty of breach. Buyers also spare the costs and time related to the involvement necessary the without buyer and the insurance company may directly deal with each other the where policy buy-side a having and risks sell-side limiting of advantages valuable the realise to starting is market Hungarian The for prepared reducing thesell-sidetransactionrisksbytakingout W&I policy. more and more becoming are companies insurance . Howdoprivateequitybuyerstypicallyprovide 6.7 Do(i)privateequitysellersprovidesecurity(e.g. 6.6 Whatlimitationswilltypicallyapplytotheliabilityofa 6.5 under anequitycommitmentletter, damages,etc.)? the managementteam)? warranties, covenants,indemnitiesandundertakings? funding, righttospecificperformance ofobligations by thebuyingentity(e.g.equity underwriteofdebt sellers typicallyobtainintheabsence ofcompliance (ii) equityfinance?Whatrights ofenforcementdo comfort astotheavailabilityof (i)debtfinance,and warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and private equitysellerandmanagementteamunder de minimis de or basket threshold and a cap on the risks the on cap a and threshold basket or iclg to: privateequity 2019 Hungary pro rata in Hungary. occurrence common a not are exits IPO that noted be must it Also, outcome maybeuncertain. the then even and waiting than rather exits other pursue eventually may cash quick for looking investors and efforts time-consuming and costly also are processes IPO exit. the to relating limitations several involve also the they but buyers) valuate regular than higher may company markets equity public example, (for routes exit other than investors PE for returns higher provide may exits IPO sell-side) the on usually donotappearinHungarianM&A PEdeals. fees (break buy-side the on fees break Reverse Arereversebreakfeesprevalentinprivateequity 6.8 but or lineofcredit,isusuallyrequired. mandatory, or letter confirmation loan a of availability the on offerbanks financing from conditional, a financing, debt to As equity Hungarian market. available the on letter financing that is usually sufficient commitment for buyers on the relatively small a or letter comfort the proportion of equity/debt financing, PE buyers usually provide a HBK partnersattorneysatlaw © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 transactions PE the of most out make which transactions Small-cap Pleaseoutlinethemost common sourcesofdebt 8.1 common inHungaryasotherEuropeancountriesortheUS. as not are exit M&A potential a and offering public initial an both As noted above, such exit strategies, where the PE seller is pursuing Do privateequitysellersgenerallypursueadual-track 7.3 What customarylock-upswouldbeimposedon 7.2 Whatparticularfeaturesand/orchallengesshoulda 7.1 six monthsaftergoingpublictokeepthestockpriceshigh. to three of period lock-up a with comply to required be would IPO, pre- company the in investing entities other and capitalists venture investors, angel including shareholders, PE theory, in Hungary, in going public. Also, although IPO exits are not a common occurrence There is no mandatory lock-up period in Hungary for investors before Financing 8 Transaction Terms: IPOs 7 transactions tolimitprivateequitybuyers’ exposure? private equitysellersonanIPOexit? exit? If so,whattermsaretypical? bonds). for suchdebt(particularlythemarket forhighyield current stateofthefinancemarket inyourjurisdiction your jurisdictionandprovidean overviewofthe finance usedtofundprivateequity transactionsin through asaleorIPO? and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare private equitysellerbeawareofinconsideringanIPO

potential buyershaveaccesstocheapfinancingforvariousdeals. and rates interest low the to due transactions PE for opportunities financing attractive offering still are Hungary in operating Banks of PEtransactions. No special legal requirements or restrictions apply to debt financing involve tax considerations if the volume of shares remains the same. not does structure company new a into investment the over Rolling can determinetaxexemptionsor reliefopportunities. TaxDouble (DTT) Treatyrelevant the investors, foreign of case In the on based actual profittheymake. income any realising persons natural to applicable ( contribution social 19.5% and tax selling their investment should be aware of the current 15% income Hungary in resident teams management or founders person Private unless therateisreducedunderapplicabletaxtreaty. 15%, at tax income personal to subject be may individual resident non- a to paid income of kinds such regime, tax income personal the of part integral an form tax gains capital and dividend the Since participation management a under shares qualifies foratax-exemptcapitalgainiscase-by-casedecision. of sale but Hungary, the in whether common that not is participation Management less owners non-transparent with attractive. companies offshore makes which advisors financial and legal parties’ the by transactions of phases various in identified be must parties contracting of (UBOs) strict the anti-money laundering rules to of the EU. due Ultimate Beneficial Owners preferred less becoming are structures Offshore . Whatarethekeytaxconsiderationsforprivateequity 9.1 Whatrecenttrendshave therebeeninthedebt 8.3 Arethereanyrelevantlegalrequirements or 8.2 . Whatarethekeytaxconsiderationsformanagement 9.3 Whatarethekeytax-efficientarrangementsthat 9.2 and bonds corporate bondissuanceisscarce. government by dominated is market bond Hungary’s is financing interest rateslowforthepastseveralyears. keeping of debt policy Bank’s Central cheap Hungarian the to due transactions, available large-cap and mid-cap on the Hungarian market are usually financed through equity but for Tax Matters 9 financing marketinyourjurisdiction? financing) ofprivateequitytransactions? investment intoanewacquisitionstructure? shares, deferred/vestingarrangements)? off-shore structurescommon? investors andtransactionsinyourjurisdiction? Are debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof teams thataresellingand/orrolling-overpartoftheir equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate zcái hzááuái adó hozzájárulási szociális www.iclg.com Hungary ) 119 Hungary 120 Hungary © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com investors the in shift any approach toPEtransactions. of aware not are we but in years, stricter recent becoming been have laws anti-corruption and anti- bribery Hungarian the trends, EU and international the with line In Hasanti-briberyoranti-corruptionlegislation 10.4 of theportfoliocompany. contracts, phase maturity the and room data the of quality and availability the significant on depending weeks four and two between take usually DDs Such management, lawful property). structure, estate real of and property intellectual issues, (corporate employment capacity issues legal operation, prevalent most the of identification the on concentrates which transactions smaller in review of type flag red a to mostly confined is diligence due Legal Howdetailedisthelegalduediligence(including 10.3 under strictscrutinybythecompetentauthorities. are sector, financial the especially sectors, certain but investments PE between distinguish not do laws anti-corruption and laundering anti-money anti-fraud, as well as consideration security National Areprivateequityinvestorsorparticulartransactions 10.2 market operatorsandadvisorstoworkin. for hard sometimes market Hungarian the makes practice shifting ever- regulator’s Hungarian the and clear not is thereof application the aspects, certain in unequivocal not still are funds VC and PE to set-up of funds and fund managers. Unfortunately, regulatory the laws relating new a easier an enables which funds PE introduced of establishment the for package legislator the 2016, December In Havetherebeenanysignificantlegaland/or 10.1 on cap tax 450,000 HUF The contribution paymentwasalsoincreasedtoHUF697,320for2019. 19.5%. to social increased was which by income dividend and replaced gains capital their on individuals private for is contribution contribution. healthcare Under the previous regulation, a 14% rate was applied 2019, From 2019. in force into entered TaxContribution Social on Act new A Havetherebeenanysignificant changesintax 9.4 HBK partnersattorneysatlaw 0LegalandRegulatoryMatters 10 anticipated? diligence, contractualprotection,etc.)? approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ materiality, scopeetc.)? prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors jurisdiction (e.g.onnationalsecuritygrounds)? subject toenhancedregulatoryscrutinyinyour anticipated? private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities their ownobligations. for liability stand-alone a have will shareholders, overlapping with illegal an of even companies, merger.portfolio case all circumstances normal Under in example, for behaviour, market or contract a through either companies these of conduct unlawful the between link direct a is there if only the company portfolio another of liabilities for liable be will company portfolio a law, Hungarian Under behaviour isbasicallyunprecedented. investor such practice in but applicable not for is liability limited the circumstances, extreme Under example, when a shareholder deliberately abuses its limited liability, contribution. capital own their of extent the to only company portfolio the of obligations the zrt. limited liability nature of the most common company forms ( company form in which the portfolio company every operates. Due to the the means by established predominantly is liability of extent The which extent. shareholder other same the to shareholder a as activities their for liable is shareholder any investor and PE a shareholder between distinguish not does law Hungarian The a naturalperson. 1–10 HUF of million depending on whether fine the infringing party a is a legal be entity in or result may law can the with Non-compliance decision minister’s The challenged beforecourtinanexpedited procedure. interests. Hungary’s security violates transaction national the if only latter the the of transaction, prohibition the or acceptance the about resolution written the public by later and a issues minister specified The decrees. separate utility in be Government Hungarian will public and sectors and security financial information military, the industries Strategic include transaction. a planned if the about industries Government strategic certain in prenotification is filed to the operating minister subsequently appointed by the and Hungary in (or 10% in case of a listed company) shares in a company registered 25% than more acquire may investor foreign a act, the to Pursuant foreign investorentity. non- a of controller majority the is entity foreign the where entities, foreign of investments indirect of aware be investor.also should foreign Investors a considered is Switzerland or EEA EU, the of act, any natural person or legal entity registered in a country outside security national Hungary.in investments foreign for review the of purposes the For a introduced and 2019 1, January on force into entered which 2018, LVIIof Act of aware be should investors PE 05Arethereanycircumstancesinwhich:(i)aprivate 10.5 diligence process. due financial and legal the during checked usually and is transactions compliance PE in involved if affected more are fields these within operating players market so government) (finance, sectors various in stricter are regulations anti-corruption and Anti-bribery 11Whatotherfactorscommonlygiverisetoconcerns 11.1 1OtherUsefulFacts 11 ) in PE transactions, the shareholders are, in general, liable up for the liabilitiesofanotherportfoliocompany? considering aninvestmentinyourjurisdiction? and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor iclg to: privateequity 2019 Hungary kft. and HBK Partners Attorneys at Law Hungary

Dr. Márton Kovács Dr. Gábor Puskás HBK Partners Attorneys at Law HBK Partners Attorneys at Law Kálvin Square Offices Kálvin Square Offices 1085 Budapest, Kálvin tér 12. 1085 Budapest, Kálvin tér 12. Hungary Hungary

Tel: +36 1 610 4440 Tel: +36 1 610 4440 Email: [email protected] Email: [email protected] www: www.hbk-partners.com URL: www.hbk-partners.com

From 2003, Márton worked in the real estate and litigation practice Gabor established his own law firm in 2009 and joined KMBK Legal Hungary group of the Budapest office of Baker & McKenzie. In 2006, he Partnership where he accumulated experience through working for founded his own firm and from January 2017, he became one of the various government agencies and leading Hungarian banks. Gabor founding partners of HBK Partners. Although his professional teamed up with colleagues from global law firms to represent Hungary experience covers mainly real estate and M&A, he is also proficient in against multinational investors before various international arbitration capital markets transactions, having led HBK Partners’ capital markets fora, like ICSID in Washington and the PCA in The Hague, in team in all three public takeovers at the Budapest Stock Exchange in procedures related to energy and telco issues. He provided legal 2017 and the listing of Hungary’s fourth largest commercial bank in advice on a regular basis to Hungarian agencies and companies in 2019. Further, he has gained unique experience in hotel law, large-scale railroad and waterways development projects in state aid representing various investors vis-à-vis global and local hotel operator issues. companies. Márton is also a lecturer in M&A courses of the Budapest Gabor joined HBK Partners in September 2018, where he gives legal Institute of Banking (BIB) and holds workshops for various VC funds advice to EU and private equity financed VC funds financed in respect and start-up companies. of their investments. Besides his expertise in M&A and corporate law, Gabor has extensive experience in international investment protection law, EU state aid law and the Hungarian media law.

HBK Partners is an independent leading Hungarian boutique law firm focusing on Banking & Finance, M&A and Capital Markets. Founders of our law firm previously worked for prestigious international law firms, Big Four consultancies and highly successful local law firms, as partners. Our professional experience and commitment enabled us to compile a young, talented and customer-friendly team who fully understands the business and legal expectations of both local and multinational clients. In our work, we strive to find solutions complying with international standards yet tailor- made to the peculiarities of the Hungarian legal and business environment. For years, several of our colleagues have featured as ranked practitioners and recommended lawyers by the leading legal ranking organisations.

ICLG TO: PRIVATE EQUITY 2019 WWW.ICLG.COM 121 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 18 india vineetha m.g.

Samvād: partners ashwini vittalachar

1 Overview 1.3 What trends do you anticipate seeing in (i) the next 12 months and (ii) the longer term for private equity transactions in your jurisdiction? 1.1 What are the most common types of private equity transactions in your jurisdiction? What is the current state of the market for these transactions? Have you Political stability and socio-legal reforms will continue to play a key seen any changes in the types of private equity role in ensuring a further raise in PE investments in India. From a transactions being implemented in the last two to sectoral standpoint, IT-ITeS, e-commerce, consumer, insurance and three years? financial services sectors (both traditional and fintech) seem to be promising in the next 12 months. Large global PE giants such as Private equity (“PE”) transactions in 2018 amounted to approximately SoftBank, Macquarie, KKR, Carlyle, CPPIB, CDPQ continue to be USD 35.1 billion across 761 deals. The majority of the transactions bullish about investment in India. involve investment in unlisted companies. Despite non-banking financing companies (“NBFCs”) facing liquidity concerns especially 2 Structuring Matters in the second half of the year, the financial services sector was the most attractive sector for PE investments in 2018. It was followed by the real estate and e-commerce sectors, both attracting substantial PE 2.1 What are the most common acquisition structures investments in 2018. 2018 was also a great year for exits, as the year adopted for private equity transactions in your saw significant PE exits of approximately USD 26 billion, being an jurisdiction? almost 100% increase from 2017 and almost equal to the total number of exits in the previous three years cumulatively. In particular, Co-investment structures have gained popularity in recent times. As Walmart’s acquisition of Flipkart led to exits for multiple PE funds at co-investment structures offer access to funds, better assets, a significant valuation. This year also saw a number of investments in increased degree of control over investment portfolios and increased start-ups, beating the earlier record in 2015. returns from capital, PE houses have increasingly adopted this India will continue to attract significant PE investments in the coming medium of investment. It is also becoming increasingly common to years. see control stake transactions, or transactions involving PE investors holding significant stake in the portfolio company. Transactions are typically structured either as a primary investment or a secondary 1.2 What are the most significant factors encouraging or acquisition, or a combination of the two. inhibiting private equity transactions in your jurisdiction? PE investors typically invest in a combination of equity shares and convertible instruments (such as convertible preference shares, Some of the changes in the taxation and foreign exchange law warrants and convertible debentures) wherein, the investors also regime addressed the various operational difficulties faced by typically acquire a nominal number of equity shares to exercise entrepreneurs as well as investors, and these measures in turn had a voting rights. The convertible instruments are mandatorily positive impact on the ecosystem. Please see our response in section convertible when issued to offshore investors. 10 on the nature of reforms introduced in the recent past. Convertible notes are essentially instruments evidencing receipt of With these regulatory reforms and policy announcements, the money initially as debt, which is either repayable at the option of the general outlay for PE transactions in India continues to be positive. holder or which converts to equity shares of the company. Indian With the increased political stability, India continues to be an foreign exchange laws previously did not permit convertible notes attractive destination for PE investments. to be treated as “investment” and were therefore not a popular instrument for investment. The foreign exchange laws have recently allowed convertible notes to be issued by registered start- ups to foreign investors for raising funds, subject to a maximum convertibility period of five years from the date of issue.

122 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London for undertakingthestrategicsaleofcompany drag accelerated as such in, kicking rights exit specific certain see to common is it default, of event an of case the In rights. economic around structured being consents investor special see to possible is investors’It to such to . attached shares rights affectingthe matters especially limited, generally are investors minority to granted an that ensuring in role rights veto of extent and scope key The protected. are rights investor’s a play rights exit and rights along tag- rights, information/inspection rights, quorum rights, veto seat, board as such protections customary Accordingly, company. the It is common for PE investors to hold a significant minority stake in performance ofthecompany. the on based structures sharing upside also are There 10%–25%. between anywhere retain promoters of stake, desirous controlling a is acquiring investor PE the Where investors. multiple across the group, with the capital structure of the company being dispersed in stake minority a having groups promoters/promoter in increase an been has the there by past, recent held the In typically groups. is promoters/promoter stake controlling the and company a of capital share the of 10%–25% between hold generally investors PE for investments/acquisitions especially in case of share acquisitions/ companies Indian on imposed are restrictions Several transactions. acquisition structuring in catalyst a as act laws anti-trust and laws Regulatory considerations such as the tax regime, foreign exchange Whatarethemaindriversfortheseacquisition 2.2 Samvād: partners © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 (“ plans option stock employee like benefits other with along company the in shares equity the of In a promoter-led company, management typically holds 12%–15% Inrelationtomanagementequity, whatisthetypical 2.5 If aprivateequityinvestoristakingminority 2.4 Howistheequitycommonlystructuredinprivate 2.3 breach andothersimilarinstances. on termination account of egregious situations such as fraud, embezzlement, wilful of case in proposed acquisition compulsory with years, five to four from ranges period ESOP of vesting typical A incentivise themanagementteamisanemerging trend. adequately to structures incentive appropriate Adopting packages. of therestrictionsimposedbyforeignexchangelaws. and consideration of payment issuance of securities and feasibility of escrow arrangements are for some timelines approvals, anti-trust investments, for approval government caps, sectoral and investment eligible investor, the nature of instruments that can be issued, limits on investments by a foreign investor. Restrictions such as who can be an considerations? institutional, managementandcarriedinterests)? structures? acquisition provisions? what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and position, aretheredifferentstructuring equity transactionsinyourjurisdiction(including ESOPs ) n compensation and ”)

f h cmay n te oenne tutr i rfetd n the in reflected is AOA. The AOA isapubliclyavailabledocument. structure governance the and company the of The articles of association (“AoA”) of the company are the bye-laws good a as considered leaver wherehisexitisforreasonsotherthan“cause”. typically is holder equity management A non-voting andspeakingobserver. of capacity the in appointed are observers Such meetings. attend corporate of governance. Investors also seek level to appoint observers to the board highest to the ensure to directors independent of quorum. such of Veryappointment require also investors the often, made is director absence the in adjourned such are meetings and quorum, of for mandatory Presence companies. portfolio the of PE investors seek to have a right to nominate directors on the board the with board-managed senior managementteamreportingtotheboard. typically are companies portfolio The tk. n itd opne, EI s rig o ae distinction a make between “protectionistrights”and “operationalrights”. to trying is SEBI companies, listed In minority stake. holding investors PE to provided even are rights These etc. business team, the of management diversification business, key in change of litigation, removal and appointment assets, of disposal indebtedness, incurring transactions, party related raising, fund restructuring, corporate its to and relation company in including portfolio subsidiaries a of business the of all to aspects respect material with rights veto significant given are investors PE . Whatarethetypicalgovernance arrangementsfor 3.1 Forwhatreasonsisamanagement equityholder 2.6 . Doprivateequityinvestorsand/ortheirdirector 3.2 grave reputationallosstothecompanyorits cause that instances other such or turpitude moral involving crime any of guilty held being non-performance, significant breach, wilful embezzlement, fraud, of account on termination covers “cause” for Termination resignation. voluntary of case in or “cause” for is exit A management equity holder is considered as a bad leaver where his of implementationemployeestockoptionschemes. also ensured that the have management team is investors adequately incentivised by way PE The existing value. shareholder creating the for game and promoters the managements and this also ensures that they on have enough skin in the imposed being restrictions companies does trigger an open offer. One would also notice transfer even include operational matters. Acquiring such rights in the listed could which matters, identified certain on rights veto the exercise to The governance arrangement includes the ability of the PE investors GovernanceMatters 3 in yourjurisdiction? your jurisdiction? position, whatvetorightswouldtheytypicallyenjoy? arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such usually treatedasagoodleaverorbadin etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor www.iclg.com investors.

india 123 india 124 india © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com dual extend to agreement the shareholders’ the of incorporate AoA company The agreement. shareholders’ the of enforceability and contents the on restrictions no are there above, the from Apart enforceability. its of extent and scope the of determining while restrictions such of post-termination enforceable not employment, but Indian courts take into consideration reasonability are restrictions compete non- Furthermore, possible. are restrictions non-solicitation and confidentiality of breach of enforceability the but laws, Indian the under goodwill of sale to limited is restrictions non-competition of ensure company.the in Enforceability roles executive maintain promoters to confidentiality and solicitation competition, regarding covenants restrictive contain often agreements shareholders’ The Arethereanylimitationsorrestrictionsonthe 3.5 exercise ofcontrolrightsbyaPEinvestor. also allege oppression and mismanagement in the event of arbitrary can stake minority a holding promoter a that note to important is It to right the have companies listed of shareholders Minority Consentrightswithrespecttomerger andacquisitions. ■ ■ Right to file an application with the tribunal (class action suit) ■ event the in tribunal the before application an file to Right ■ following the provides 2013 the in Act, protections tominorityshareholders: shares Companies 10% The least at company. holds he/it if shareholder minority shareholders. minority of interest the Aa considered is shareholder they do not act in an unfair, fraudulent or oppressive manner against PE investors holding majority stake in a company should ensure that Arethereanydutiesowed byaprivateequityinvestor 3.4 Arethereanylimitations ontheeffectivenessofveto 3.3 Samvād: partners netr osn ee pir o h mte big ae u a t at up taken being matter the to prior even consent investor the at of way by exercised than are rights veto such cases, rather certain In level. board level shareholder the at structured are rights veto veto of effectiveness arrangements at the the shareholder level. As on a result of this, very often the limitations such no are there However, board/shareholder level. not alwaysbealignedwiththeinterestofinvestor. may or may which company, the towards every duty fiduciary that a has given director companies, portfolio the of level board veto the the at exercising rights effectively in restrictions certain are There Yes. typically addressed? non-compete andnon-solicitprovisions)? (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements small such of interest shareholders inthecompany. the represent to director a appoint or members depositors. its company, manner the of a interest in the conducted to prejudicial being are the company event the the of in affairs auditors directors, company, the against the of interest the to prejudicial company. or shareholder(s) the is prejudicial to public interest or prejudicial or oppressive to that manner a in conducted being are company the of affairs typically addressed? shareholders (or to minorityshareholderssuchasmanagement the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii)

vice versa )? Ifso,howarethese he yial ses on rm h bad f n o te opne to companies the avoid conflictofinterest. of one of board the from down steps typically in engaged ordinary course of business. In such scenarios, the or nominee director other each with business transactions that are not on an arm’s-length portfolio basis competing and in the its are of two that of companies board the on director nominee common a nominates investor PE a if interest of conflict possible a be could company, as they have fiduciary duty to do so under the Act. There the of interest best the in act to bound are company a of Directors . Arethereanylegalrestrictions orotherrequirements 3.6 of theshareholdersagreement. the IPO, SEBI and stock exchange typically requires the termination protection . Howdodirectorsnominatedbyprivateequity 3.7 ae fw I adto, h drcos r nt emte to permitted not are such directorsareinterestedinbeingdiscussed. directors which in arrangement the or contract a addition, where meetings in In participate few. a name to others, or turpitude moral involving offence any for court a by convicted being person a insolvent, undischarged an being person which includes failure to procure a director identification number, a directors, of appointment the for disqualifications of Act list a provides The company. a in position that holding while interest their in changes subsequent any and appointment of disclose time the to at interest required are They companies. portfolio the of board obtain director identification numbers before being appointed on the to required are Directors directors. nominee appointing while Act the with comply to need investors PE perspective, process a From compliance ensure with corporategovernance. to director a appointing of instead board, the the PE investors are choosing to appoint a non-voting “observer” on best interest of the company, and not the nominators. Consequently, the in work to capacity fiduciary their in are directors executive as express the and contravention consent the over of such contravening act. Nominee directors are as of liable knowledge knowledge of lack of have account on liability to their recuse cannot they and deemed board the of proceedings are directors Nominee fulfil hisfiduciaryobligations. and discharge non-executive to required a is nonetheless he hold board, the on will position director nominee a While monetary from penalties. apart imprisonment, with punished even are Act the in offences Certain rupees. Indian million 250 to rupees Indian the 50,000 of from contravention ranges in Act duty such of breach h Cmais c, 03 a cdfe te iblte o the of liabilities the codified director has 2013 Act, Companies company The a of directors makes Act responsible for everyday affairs and management of the company. The laws. Indian under The directors have a fiduciary duty towards the portfolio company portfolio companies? of otherportfoliocompanies? equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof s in detail. Penalties prescribed for as a consequence for the vis-à-vis enforcement, in case of breach. At the time of time the At breach. of case in enforcement, iclg to: privateequity 2019 india popularity tohelpmitigatethisrisk. of a PE entity. Consequently, tax indemnity insurances have gained drawn at the cost of an increased indemnity exposure for the selling not is comfort such time, same the entity. At buyer the to comfort necessary provide to view a with closely more at looked being are indemnities tax and exposures tax entity, offshore another to fund PE offshore one by sale of case In securities). Indian with dealing (even where the buyer and seller entities are offshore companies but laws Indian under burden tax increased an to due fund PE a by exit Taxof context the in detail in negotiated be to continue indemnities structures arealsobecomingmorecommon. sharing Upside promoter. a to not and investor PE a to extended only previously were rights these typically as dynamics transaction the in departure a is This negotiated. being rights promoter such veto over key decisions alongside the PE investors, are examples of shareholding), exercising promoters and competitor a minority to sale control, in change as a hold such circumstances special certain in exit an given being promoters promoters where promoter company on the (especially with liability Caps several and joint of absence extended. liability, typically protections promoter in changes significant been has there terms, transaction of terms In convertible preferencesharesordebentures. equity, to subscription a of way by structured are investments PE or (“ India authority regulatory affected if approval is required especially from the Reserve Bank of concerned (“ Portal Facilitation Investment the Foreign the through ministry/department from require would practices approval market competitive the affect an to likely or sector regulated a investment into in excess of the prescribed sectoral cap or an investment investments international) PE and domestic considerations. (both tax and structuring size, deal business, target’s the of size transaction, the of nature the antitrust issues, investment, of sector the including factors, of number a on depends India in transactions PE of completion for timeline The Whatarethemajorissuesimpactingtimetablefor 4.1 is investment investor’s PE the since dependent onthegrowthandsuccessofcompany. investor PE the of that It is fairly remote that interest of the company will be separate from Samvād: partners © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Have therebeenanydiscernibletrendsintransaction 4.2 euaoy uhrt o Ida (“ India of Authority Regulatory (“ India entity,listed of a Commission into Competition investment PE a of oiyn te C, h CIs eiin i te at ae tended have past the in towards narrowingdownthescopeoftheseexemptions. decisions CCI’s the CCI, from the exemptions notifying certain for provide do regulations competition the While deals. the of size and nature the given especially deals, PE in critical very becoming is CCI the from Consent regulators. Transaction Terms: General 4 and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust terms overrecentyears? disclosure obligationsandfinancingissues? RBI CCI FIFP ”), Security Exchange Board of India (“ India of Board Exchange Security ”), ) te nin nirs rgltr te Insurance the regulator, antitrust Indian the – ”) ) codnl, ieie o tascin ol be would transaction of timelines Accordingly, ”). IRDAI ) r te similar other or ”) SEBI ”) in case in ”) opne b ivsig hog a obnto o eut or equity of combination (“ debentures a non-convertible listed and capital preferred through investing Indian in by exposure equity companies their limiting thereafter. times, shortly at are, or investors PE listing listing. after of companies in time invest investors PE the Alternatively, at company the exit the when time a and listing before years five to at three have still companies portfolio invest investors PE Consequently, listed shares. of way by liquidity the prefer and companies portfolio the who typically consider an initial public offer as a mode of exit from investors, PE for exit of mode preferred a not therefore is Delisting delisting. the for determination price and delisting the to pursuant are delist, including to minimal shareholding that a proposing promoter needs which to company hold listed a company, to apply restrictions the other Several by issued instruments any if ■ of listing the since lapsed has years three of period a unless pursuanttopreferentialallotmentmadebythecompany; ■ pursuanttoabuy-backofequitysharesthecompany; ■ ■ following the in company a circumstances: of shares of delisting permit shall make an application for delisting and no recognised stock exchange listed companies. Under the Delisting Regulations, no company can h SB (eitn o Eut Sae) euain, 2009 Regulations, Shares) Equity of (“ (Delisting SEBI The shareholding. public the of part a as classified be may fund PE the fund, PE the to available rights the on Depending groups). promoters/promoter than is other persons by company held be listed to (i.e., held a publicly be of to required capital share the of 25% of minimum A regulators public-to-private instruments inexits. control to exchange party Indian prohibit foreign investors rarely from addition, seeking guaranteed returns on equity In are investors transactions. PE India, In . Whatparticularfeatures and/orchallengesapplyto 5.1 . Whatdealprotectionsareavailabletoprivateequity 5.2 of theportfoliocompanyasashareholder. return on the NCDs, while also participating in the risks and rewards a in manner that investments maximises capital protection by stipulating a minimum their structure to able are resident investors Indian PE an trustee. of favour in assets Indian by secured be may Investments through listed and unlisted NCDs are less regulated and subsidiary of the listed entity, so as to give greater flexibility to the to flexibility greater give to as entity,so listed the of subsidiary or company holding the becomes company portfolio the that way a in structured be to transaction the for possible also is It invested. portfolio public company, in which the PE fund and management are shareholder’s agreement and a registration rights agreement with the a negotiate usually investors PE investment, its protect to order In Delisting Regulations Delisting rnato em:Pbi custos Transaction Terms: Public Acquisitions 5 ovril it te ae ls o eut sae ta are that shares equity of sought tobedelisted,areoutstanding. class same the into convertible or that class of equity shares on any recognised stock exchange; commonly dealtwith? acquisitions? transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private investors inyourjurisdictionrelationtopublic ”) governs the delisting of equity shares of shares equity of delisting the governs ”) www.iclg.com NCDs india ”). ”). 125 india 126 india © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com Whatisthetypicalpackageofwarranties/indemnities 6.2 Whatconsiderationstructuresare typicallypreferred 6.1 Samvād: partners n ae f rnh-ae aqiiin, t s omn o ae the have 100% of case In to tranche. first the in acquired being common stake majority is it acquisitions, tranche-based of case In iiain, oee, o o apy n ae f ru, wilful fraud, of case in apply not do however, limitations, the amounts, the on caps period, survival on limitations losses, consequential and indirect for non-liability are limitations Generally,these offered. normally are that indemnity to limitations of number a are There by given management warranties the shareholders areinminority. where operational especially of shareholders, management out arising indemnity liabilities shared have however, sellers, PE past, recent the In warranties. authority and title of out arising issues to limited also is seller PE a by offered indemnities of nature Consequently,the in warranties operational relation tothebusinessofportfoliocompany. provide to seller PE a for unusual is It parties. offshore of case in practices, anti-corrupt and position taxation on warranties include warranties title buyer.Such the to Typically, a PE seller provides basic title and authority warranties rnh-ae cnieain ol as icroae financial company. incorporate the also of operations future to tied be may which thresholds/milestones could well. consideration as structure consideration Tranche-based tranche single a to open are although they structure, consideration tranche-based a prefer investors to PE desire buy-side, the on investors While tranche. one PE in investment the complete sell-side, the On distribution. specie” “in certain transactions, the consideration is structured by way of swap or In structure. consideration preferred most the is consideration Cash misconduct, gross negligence, or breach of fundamental warranties of 25%valuecapand18months’ timecapbeingadheredto. escrow have to terms above the to subject offshoreparties, involving possible transaction such is in payments deferred it such with Also, connection in place in arrangements purchase. share the of date the from months 18 than later no made being payments such and basis deferred a on buyer the by paid being consideration total the of 25% of maximum a to subject permitted also are structures consideration deferred resident), a not is transaction the to parties the of one where (applicable India of laws exchange foreign of ambit the under coming However, earn-outs/ratchets. promoter through transactions of case in payments which are linked to the performance of the target company or the retaining for management team. mechanism This could either a be through deferred devise consideration to common is it acquisitions, and theseservetocapthefund’s exposure. protections, indemnity as well as company portfolio the of business the on warranties and representations detailed seeks typically also parties on the nature of rights that may be negotiated. A PE investor Transaction Terms: Private Acquisitions 6 on thebuy-side,inyourjurisdiction? team toabuyer? offered byaprivateequityselleranditsmanagement by privateequityinvestors(i)onthesell-side,and(ii)

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nld lse aiig n con o at-rbr ad corruption, fraud bysellersandothertransaction-specificexclusions. and anti-bribery of account on arising losses include exclusions These insurer. the by for provided exclusions upfront Considering that the R&WI is to minimise the risks, there are certain R&WI forthetransaction. the and the of limit coverage the of 3%–5% from ranges typically premium transaction the of value the of 10%–15% is R&WI such of limits coverage The risks. indemnity cover to investor PE a by ( obtained typically are These years. recent the in India in insurance prevalent warranty and Representation PE sellerareexplainedinquestion6.2. into the by entering provided indemnities of extent company.and the scope The team management the with engagement their of terms the out set to agreements necessary on insist usually Buyers enable betterintegrationpost-acquisition. compete, non-solicitation and confidentiality. This is with a view to the imposed on the promoters and the management team regarding non- for covenants/undertakings and fixed timelines. It is common to see restrictive covenants being law general applicable the to adhering securities the of sale of provide completion sellers PE claims. indemnity any of absence to subject released, thereafter and period the total consideration is held in an escrow account for a certain time an escrow/retention mechanism under which a certain percentage of warranties/liabilities. However, for for specific indemnity matters, the parties security usually agree to any provide seldom sellers PE in question6.2. To whatextentisrepresentation&warrantyinsurance 6.4 Whatisthetypicalscope ofothercovenants, 6.3 . Do(i)privateequitysellersprovidesecurity(e.g. 6.6 Whatlimitationswilltypicallyapplytotheliabilityofa 6.5 by the disclosure provided under the disclosure schedule liability for indemnities are subject to certai to subject are indemnities for liability The scope of warranties provided by the seller are typically limited typically are seller the by provided warranties of scope The the typicalcostofsuchinsurance? equity selleranditsmanagementteamtoabuyer? the managementteam)? warranties, covenants,indemnitiesandundertakings? exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) undertakings andindemnitiesprovidedbyaprivate warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and private equitysellerandmanagementteamunder iclg to: privateequity 2019 n limitation n R&WI hs become has ) . Additionally, s as discussed as s india hrfr, P eis r ol atmtd hr te opn is company the where confident ofcompletingitsuccessfully. attempted only are exits IPO Therefore, A failed IPO can have an adverse impact on the valuation of the PEs. related documentsincludingtheprospectus. these IPO- the execute to required be also will investor PE the of director on off nominee the sign Further, to indemnities. provided including need documents will it since documents IPO-related the all negotiate and review to need also will investor the sale, for If the PE investor is also looking to exit by way of a secondary offer agreement beterminated. shareholders the that require exchanges stock the and SEBI IPO, of be time the at to Also, upfront. needs bankers merchant which the with discussed aspect, one is This promoter. a as classified being from exemption specific obtained have investors the of some past, the In critical. more becomes issue this company, portfolio the in stake majority hold investors PE the Where listing. post and listing (including disclosure obligations at the promoter group level) of “promoter”. time the at a promoters on imposed as obligations several are identified There or designated not is investor PE the most important aspects to ensure in the IPO process is to ensure that the of one Further, rule. this to exceptions limited very are There capital of the portfolio company is locked in for a period of one year. pre-issue entire the then listed are company portfolio the of shares the Once investors. PE the with consultation in promoters its and Regulations (“ 2009 Regulations, Requirements) Disclosure and Capital The procedure involved in an IPO is governed by the SEBI (Issue of the preferredexitoptionforinvestors. Exit by way of an IPO is rarely used by the PE investors though it is may beheldinescrowtilltheexpiryofclosingdate. limited to a certain percentage of the purchase generally price and the amount is it for, provisioned is fee break reverse a if However, Reverse break fees are not very prominent in Indian PE transactions. fails tocomplywithitsobligations. buyer the case in rights performance specific as well as fee break a include would agreement purchase share the the Typically, of by buyer. given details also are representation or a as guarantees arrangements financial corporate and letters, representations commitment for cases, provide some In transaction investment. the fund to ability their PE regarding warranties a in Buyers Howdoprivateequitybuyerstypicallyprovide 6.7 Samvād: partners © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 What particularfeaturesand/orchallengesshoulda 7.1 Arereversebreakfeesprevalentinprivateequity 6.8 Transaction Terms: IPOs 7 funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and exit? If so,whattermsaretypical? under anequitycommitmentletter, damages,etc.)? private equitysellerbeawareofinconsideringanIPO transactions tolimitprivateequitybuyers’ exposure? ”) and the IPO process is typically run by the company the by run typically is process IPO the and ”) ICDR exit forPEinvestorsinIndia. of modes preferred the are IPOs and sales Private sale. third-party a for terms negotiate they as even IPO to an for investors themselves PE prepare allows This common. very is process exit track dual- a channels, exit several negotiate to tend investors PE Since locked inforaperiodofoneyear. several to subject 20% of its is shareholding. Further, the on entire pre-issue share capital lock-in IPO is three-year a an including obligations, and of responsibilities purposes the for A “promoter” document. offer the in “promoters” as named operational be may considerable control or stakes substantial with investors PE rmtr loig o ean needne r loig o debt to looking are independence retain to market. Indian looking the Promoters in maturity gaining been has financing Debt the caseofpubliccompanies. structured in in especially Companies 2013, the Act, under restrictions appropriately the given be package to security need will The funding the such to relation changes. regulates restrictive and (which liberal both in RBI brought has transactions) lending of Commercial and borrowing External international Direction the Master to changes Borrowing recent the acquisitions, financing for banks by extension loan in restrictions the than Other Foreign sources such as external commercial borrowings (“ non-banking approach do investors finance companiesforfinancingacquisitions. some However, the India. in in acquisitions to investments their for banks from finance debt raise rarely relation investors in PE Therefore, restrictions.. except certain to subject space India infrastructure in shares of acquisition an funding for loans extend to permitted not are Banks . Pleaseoutlinethemostcommonsourcesofdebt 8.1 Doprivateequitysellers generallypursueadual-track 7.3 Whatcustomarylock-ups wouldbeimposedon 7.2 . Whatrecenttrendshavetherebeeninthedebt 8.3 Arethereanyrelevantlegalrequirementsor 8.2 nldn, rvtl pae ND (hc ae oprtvl less regulated) areemerging assourcesforfunding. comparatively are (which NCDs placed privately including, Financing 8 through asaleorIPO? private equitysellersonanIPOexit? financing marketinyourjurisdiction? financing) ofprivateequitytransactions? bonds). for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof www.iclg.com india ECBs ”) 127 india 128 india © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com (“ fund capital venture Act TaxIncome the investor.(“ Under the 1961 of Act, residence of available under the relevant tax treaty between as India and relief the country to subject India, in taxed be will investor non-resident A attempting totaxIndiancompaniesonexcessivesharepremiums. are and also, non-residents to shares of allotment the on companies Indian by charged premium share examining been have authorities tax Indian Lately, hands. its in income as received so excess the on tax to exceptions) certain to (subject charged be will target the as determined value, on the basis of specific formulae market prescribed by tax laws, fair the than higher price a at investors resident to issued priced are shares be if perspective, target’s to a From investments appropriately. primary require that investors PE and companies Indian governing provisions taxation specific are There Whatarethekeytaxconsiderations forprivateequity 9.1 popularity significant gained have amongst earlygrowthstagecompanies. notes convertible and debt particular,In venture structures. debt mezzanine through financing Samvād: partners tax resident in India if its place of effective management (“ It is also important to note that a foreign company is to be treated as to not obtain taxbenefit. commercial is arrangement the on of purpose based sole the finalised and considerations is FVCI) a (including investor benefit. tax such of purposes foreign a of jurisdiction the Consequently,if apply not does GAAR the for impermissible deemed is transaction a such benefit, tax a obtaining of aim reason principal the with business any of devoid structured, is transaction a Where Anti- Generally aim of providing transparency in tax matters and the to curb tax evasion. introduced also Avoidance(“ Rule GoI been The have 2017, 1, grandfathered. April before made Singapore, or Mauritius on and after April 1, 2017. However, investments through entities in treaties with Mauritius and Singapore taking away such tax benefits avoidance tax double its amended has India that note is to It pertinent treaty. tax relevant treaty the tax under benefits a avail through can jurisdiction investing FVCI an Thus, beneficial. more are ITAct the of provisions the extent the to treaty,only tax a has India which with country a from investing investor non-resident a per Section 90(2) of the IT Act, the provisions of the IT Act apply to as FVCIs, to available exemptions tax specific no are there While the head“incomefromothersources”. for subscription of shares of portfolio company premium from being taxed under share a paying VCF a exempts Act, IT the of 56(2) Section Further, AIFs. III Category to applicable is status through and is exempt in the hands of the unit holder. However, no tax pass- rates, applicable at level, fund the at taxable is such AIF of income Business income. business than other income to respect with Act have been granted pass-through status under Section 115U of the IT (23FB) and Section 10 (23FBA) of the IT Act. Such VCFs and AIFs (“ fund investment uies f n niy s woe r i sbtne ae. f the If made”. substance and in are management whole the a as of key entity conduct an where of the business for place necessary “a are that is decisions PoEM commercial India. in is Tax Matters 9 ”), income earned by a domestic fund registered with SEBI as a as SEBI with registered fund domestic a by earned income ”), off-shore structurescommon? investors andtransactionsinyourjurisdiction? Are GAAR AIF ”), are not subject to tax as per Section 10 Section per as tax to subject not are ”), VCF ”) with effectwith from ”) the with 2017 1, April ) n cran aeois f alternate of categories certain and ”) PoEM IT ”) rsn fo te rnfr f ses fe 3 mnh ae rae as treated are long-term capital gains (“ months 36 after assets of transfer the from arising oee, h aoead a nt pl i cs te elr s an treaty withIndiaandentitledtobenefitsthereunder. is seller the case avoidance taxation in double a having jurisdiction a in entity offshore apply not may aforesaid the However, unlisted and listed (both 15% of instruments). rate the at taxed is securities and fund mutual equity-linked of sale the on STCG instruments). equity of sale instruments will be taxed at the the rate of 10% (both listed and on unlisted LTCG Further, instruments). unlisted and sale of debt instruments will be taxed at the rate of 20% (both listed (“ gains capital short-term to eligible (12 months 36 is transfer such transfer, than before securities) listed less of case in for months acquisition held is newer asset an into Where investments structures. of over sale/roll exploring Capital gains tax is one of the most significant considerations while as alternative incentivestructureswillneedtobeimplemented. well of as context shares schemes cannot be made available the to promoters, hence in such cases incentive ESOP in transactions. PE structuring both while options, stock employee especially have arrangements, to deferred/vesting common is It h RI n oebr 07 sud h Frin Exchange Foreign the issued 2017 November in RBI The of expansion and growth existing businesses. the and the businesses facilitate new will of and setting-up registration single new a The for 2017, regime. provides tax regime in single a regime under GST taxes indirect the all enforced unifying India of Government The . Whatarethekeytaxconsiderations formanagement 9.3 Whatarethekeytax-efficient arrangementsthatare 9.2 01Havetherebeenanysignificant legaland/or 10.1 Havetherebeenanysignificantchangesintax 9.4 to Indianportfoliocompanies. their cases Offshore structures are still common, some with respect to investments in in and structures, investments, inIndiancompanies. management fund their India. in structuring income while caution exercise global must investors PE Accordingly, its on 41.2%–43.26% of rate effective an at taxed be would it India, in resident becomes company foreign 0LegalandRegulatoryMatters 10 investment intoanewacquisitionstructure? shares, deferred/vestingarrangements)? anticipated? anticipated? teams thataresellingand/orrolling-overpartoftheir equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate private equityinvestorsortransactions andareany regulatory developmentsover recent yearsimpacting teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities iclg to: privateequity 2019 LTCG ”) and taxed accordingly. LTCG on STCG ) a, hra gains whereas tax, ”) india large. at economy Indian the of growth for needed sorely is which India, significant impetus to PE/venture capital activity and capital flow to a provide may approach this forward, Going India. in investments from earned income the on tax of share fair its collects India that investors a sense of certainty and clarity and at the same time ensure rules for investment into India have been changed to provide foreign The PE/venture capital industry in India is clearly in transition. The Gradual amendment in the domestic tax law to implement the ■ AIF SEBI-regulated the in investment foreign Allowing ■ Introduction of a 10% tax rate on LTCG arising from transfer ■ ■ Resolution of the Mauritius tax conundrum: amendment tax The Mauritius the of Resolution ■ of these include: Some structured. are India into investments which in manner several transformative policy changes that are helping to reshape the made have regulators and government the front, regulatory the On attractive routeofinvestment. an ECBs making thus ECBs for framework the relaxed also have laws exchange listed foreign The 10%. a of limit a in to up company Indian India outside resident persons by investment foreign for available made been also has route new a amendments, these an of virtue to By 20. FEMA compared Old the under as regime “investor-specific” regime, “investment-specific” an it by making India of regime exchange foreign the changes fundamentally direct “foreign into it investment” and “foreign portfolio categorised investment”. This categorisation and investment” “foreign of 20). The FEMA 20 introduced, for the very first time, the definition FEMA(Old 2000 Regulations, India) Outside Resident Person a by Security of Issue (Transferand Management Exchange Foreign the replace, (FEMAto 2017 20) Regulations, India) Outside Resident Person a by Security of Issue and (Transfer Management Samvād: partners © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 especially ongroundsofnationalsecurity. 4.2. Apart from these there are no other peculiar regulatory scrutiny, question in forth set been have same the of Details considerations. similar other such and investment the of size operations, of sector the to owing scrutiny, regulatory require may transactions Certain Areprivateequityinvestorsorparticulartransactions 10.2 jurisdictions. (“ instrument multilateral the BEPS project, has agreed to amend its tax treaties by signing cin are udr h Bs Eoin n Poi Shifting Profit (“ and Erosion Base the under agreed actions India in investments without attractingexchangecontrollimitations. make to citizens, Indian resident by allows AIFs, whose sponsor/fund that manager are owned and policy controlled liberal a with route automatic the under for PoEM of concept determining thetaxresidenceofforeigncompaniesinIndia. the and GAAR the of Introduction tax a policy thatexemptedsuchgainssince2004. reversed which companies listed of shares equity of su ta hs esse fr vr w dcds Te India- The Singapore DTAA decades. wasalsore-negotiatedonsimilarlines. two over for persisted has that issue to benefits tax investments made until March grandfathering 2017, provides certainty on an while exemption, tax gain o h IdaMuiis obe a Aodne Agreement (“ Avoidance Tax Double India-Mauritius the to jurisdiction (e.g.onnationalsecuritygrounds)? subject toenhancedregulatoryscrutinyinyour BEPS DTAA ”) project to curb tax evasion. India, as part of the of part as India, evasion. tax curb to project ”) ) o rvd a airtd hs-u o te capital the of phase-out calibrated a provide to ”) MLI ) ln wt 7 other 78 with along ”) inter alia inter , diligence. is and counsels due external Legal by completed within three to five weeks, depending conducted on the scope of the evaluated. often also most are is diligence routes exit potential and gaps Foreign Corrupt Practices Act, 1977 (“ the including laws anti-bribery with compliance confirming team management the from covenants and warranties seek investors PE their in applicable jurisdiction, bywayofcontractualundertakings. as laws anti-bribery stringent/encompassing more the with compliance seek specifically investors PE offshore as n ni India in laws Hence, given the gap in the scope of applicability of anti-corruption criminalising act the private sector bribery is pending approval by the Indian to Parliament. amendment An India. in bribery private sector cover not does currently legislation the However, India. in servants public by gratification illegal of receipt the criminalises 1988, Act, Corruption of Prevention The transactions. PE in role Anti-corruption laws and compliances thereunder, play an important examining to extended now has however, the process, The of company. business the and to applicable company laws the various under of compliance contracts licences, and approvals corporate to the records, of limited review as such was compliance of diligence issues examining due legal Particularly, compliances. was financial and diligence tax legal, of due aspects traditional Previously,examining to limited company. the of operations the of term the on depends diligence due legal of extent and scope The the of veil corporate company ispiercedbyIndiancourts. the where circumstances limited very are be may director nominee subject to the liabilities, especially in case However,of breach of his duties. any There company. for a liability by negligible breach has investor PE a shareholder, a As 04Hasanti-briberyoranti-corruptionlegislation 10.4 Howdetailedisthelegalduediligence(including 10.3 05Arethereanycircumstancesinwhich:(i)aprivate to 10.5 addition in exit, immediate an seek to indemnity/damages asapplicable. investor PE the Act, 2010 (“ oesc, omril H ad T sus Te nete r target or investee company’s competitive positioning, The promoter integrit issues. IT and HR commercial, forensics, diligence, contractualprotection,etc.)? materiality, scopeetc.)? the liabilitiesofanotherportfoliocompany? approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof UKBA vis-à-vis ”). Breach of such warranties/covenants entitles rvt biey n fsoe jurisdictions, offshore in bribery private FCPA www.iclg.com ”) and the UK Bribery y, management india 129 india 130 india © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com effectively andinacommerciallysavvymanner. disputes resolving for preferred Singapore is Centre, International Arbitration the as such arbitrations institutional overseas present, at evolving, is arbitrations a of conduct While for framework legal companies. robust portfolio with funds PE resolution by executed be to dispute institutional proposed are which agreements in arbitration as such mechanisms of incorporation recommend pose we Therefore, involved. India costs and time the in of terms in challenges courts the through resolution dispute Adversarial Whatotherfactorscommonlygiverisetoconcerns 11.1 Samvād: partners 1OtherUsefulFacts 11 considering aninvestmentinyourjurisdiction? should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor time totime,mitigatesuchconcerns. from steps implementing is and concerns these of note taken has PE to challenges offshore. few those especially Toinvestors, government the extent, this a pose do bottlenecks regulatory and Tax or years afteradealisclosed. months for often penalties, and fines huge in result can which throughout. liabilities, successor corruption potential to funds the exposes so do to Failure against safeguards anti- adequate adequate to conduct conform to and funds investments their with connection PE in diligence due for corruption critical it or make associates laws their Such event practices. corrupt the in engage countries in foreign in employees liabilities to funds laws PE aforesaid The expose funds. PE for concern increasing of area an The threat of initiation of actions under the FCPA and the UKBA are iclg to: privateequity 2019 india Samvād: partners india

Vineetha M.G. Ashwini Vittalachar Samvād: Partners Samvād: Partners Free Press House, 4th Floor, Office no. 41 & 43 10 Sundar Nagar Free Press Journal Marg, 215 Nariman Point New Delhi 110 003 Mumbai 400021 India India Tel: +91 11 4172 6205 Tel: +91 22 6104 4001 Email: [email protected] Email: [email protected] URL: www.samvadpartners.com URL: www.samvadpartners.com india

Vineetha has extensive experience in advising clients on PE Ashwini has more than a decade’s experience in advising on PE and investments and venture capital. Vineetha represents and advises venture capital transactions and has been instrumental in the various PE investors including Government of Singapore Investment establishment of the New Delhi office of the firm. She is an established Corporation, New Silk Route, Morgan Stanley Infrastructure Fund, name in the PE and venture capital industry and has acted for a broad Cerestra Advisors, Sequoia Capital, ICICI Ventures and IDFC spectrum of clients that include PE investors, mid-to-late stage Investments in relation to their investments in India, in both listed and companies receiving PE investments, existing venture capital unlisted companies, as well as on exits from such investments. investors, as well as promoters and start-ups. Her clients in this area Vineetha has also represented and advised Warburg Pincus, IDFC include Delhivery, PolicyBazaar, PaisaBazaar, Zomato, Fundamentum, Private Equity and SBI Macquarie in relation to their investments and Times Internet, EightRoad Ventures, Aujas and Zap. She has exits in India. represented different stakeholders across the entire lifecycle of a transaction – right from an early stage investment, to co-investment, Vineetha has been awarded “Most Influential Woman in Private Equity mid-to late stage investments, negotiation of non-participating investor Investments 2018 – India” by Acquisition International – The Voice of rights, as well as investor exits, giving her a holistic and practical Corporate Finance. approach at the negotiation table to balance rights of diverse Vineetha has been recognised by Insight Success magazine as one of stakeholders. “The Top 10 Powerful Lawyers in 2018”. Ashwini works extensively on PE, venture capital, cross-border M&A Vineetha is ranked Band 2 in Banking & Finance and Band 3 among and joint ventures, as well as acqui-hires, business restructures and PE lawyers in India by Chambers & Partners 2019, 2018 and 2017 and other acquisitions. Her expertise extends to strategic investments/ sources consider her “one of the most active private equity acquisitions as well as those involving financial investor exits and professionals in the market”, adding that “she is a very knowledgeable promoter buyouts. Ashwini is also an established practitioner in and constructive presence at the table”. employment law and draws on this expertise in structuring transactions. Vineetha “is frequently engaged by private equity investors and has extensive experience of fund-raising work” (Chambers & Partners In addition to co-authoring, with Vineetha M.G., this present chapter Asia-Pacific 2016). for The International Comparative Legal Guide, Ashwini co-authored a chapter on “Employment laws in India” in Getting the Deal Through, She is also ranked in Chambers & Partners Asia-Pacific and Global among several other publications. 2015. She is recommended by All China Lawyers Association as one of the leading lawyers in Belt and Road region. Ashwini is admitted to practise law in India. Ashwini Vittalachar is recommended practitioner for Labour & Employment (The Legal 500 2019, 2018, 2017 and 2016). Ashwini Vittalachar has played a key supporting role in many of the firm’s recent M&A deals. This has included acting on cross-border M&A deals in the life sciences and automotive sectors. (Chambers & Partners 2015). Ashwini is singled out by clients for her “communication skills, quick understanding of key business issues, and negotiating ability”. She has acted on several mandates for clients in the automotive and pharmaceutical sectors of late (Chambers & Partners 2014).

Samvād: Partners is a full-service Indian law firm with offices in Bengaluru, Chennai, Hyderabad, Mumbai and New Delhi. The Firm is committed to providing innovative and quality legal advice to our clients, maintaining the highest levels of professional integrity, and nurturing our lawyers in a work environment that motivates them to achieve and maintain the highest standards. The majority of our Partners have a rich mix of domestic and international experience – having worked in several international financial centres outside India, including Hong Kong, London, New York and Singapore. We strive to provide our clients with innovative and simple solutions to their complex legal and business challenges in India. Our people are our strength. Many of our lawyers are acknowledged leaders in their respective fields. We maintain a ratio of associates to partners significantly below that of other Indian law firms in order to ensure that our young lawyers receive the necessary training and supervision to match the Firm’s reputation for high quality and prompt responsiveness to our clients.

iclg to: private equity 2019 www.iclg.com 131 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 19 indonesia Freddy Karyadi

ali Budiardjo, Nugroho, reksodiputro anastasia irawati

1 Overview 1.3 What trends do you anticipate seeing in (i) the next 12 months and (ii) the longer term for private equity transactions in your jurisdiction? 1.1 What are the most common types of private equity transactions in your jurisdiction? What is the current state of the market for these transactions? Have you The private equity investor will keep focusing their investment on: seen any changes in the types of private equity (i) the unicorn of tech digital companies, as this tech/digital business transactions being implemented in the last two to trend is booming lately; (ii) logistics; and (iii) financial technology three years? for the payment and crowd funding. For the longer-term transaction, they will probably focus on co-working space, The most common types of private equity transactions in Indonesia healthcare, and financial institutions as these have been proven as are private equity transactions through direct equity participation, the traditional investment of private equity investors. mezzanine loans, and convertible notes or bonds where the loan can be converted into shares in the call of the private equity investor 2 Structuring Matters upon certain events (e.g. IPO, change of laws, etc.). For certain tax purposes, the loan plus warrant would replace the convertible notes/bonds structure. 2.1 What are the most common acquisition structures The current state of the market for private equity transactions in adopted for private equity transactions in your Indonesia is stable at the moment and there has been no significant jurisdiction? change in the types of private equity transactions being implemented in the last two to three years. However, we note that As previously stated, private equity investors would prefer to invest there are more private equity investors who invest directly through in equity directly to the target unless the negative lists or certain equity instead of loans right now due to the change in regulation regulations prevent them from doing so. They normally would have which now allows some types of business activities, which were a holding company in a jurisdiction with a good tax treaty with previously closed for foreign investment, to be owned directly by a Indonesia. They also would provide mezzanine loans to the target to foreign investor. not only boost the financial support to the target, but also to the mechanism to control the target as lender.

1.2 What are the most significant factors encouraging or There is a new structure/trend that is developing for targets that are inhibiting private equity transactions in your start-up tech digital companies. In this case, the investors usually jurisdiction? require the founders of the start-up company to establish a foreign holding company (in a country that they consider friendly for their Despite experiencing slowing growth, Indonesia’s economy keeps investment, usually in Singapore). The investors will invest directly growing. Indonesia also has a large domestic consumption base and in the newly set up foreign holding company and then this entity will natural resources. These factors make investment in Indonesia acquire 100% of the shares of the Indonesian target company. interesting. Even though Indonesia is an interesting market for private equity 2.2 What are the main drivers for these acquisition investments, some of the investors still doubt investing their money structures? in Indonesia due to its complicated bureaucracy, lack of infrastructure, high corruption rate and the uncertainty of the laws The main drivers for these acquisition structures are: (a) the exit and regulations. possibility; (b) the negative list issued by the authorities where some Nevertheless, Indonesia’s investment climate remains conducive business activities are closed or restricted for foreign investment; and attractive for private equity investors. The government also and (c) the dividend repatriation and tax consideration. realises the potential of private equity investment for economic Factors (a) and (c) are the two factors that drive the new trend of growth. In this regard, the government has tried to simplify the setting up a foreign entity for investment purposes (as mentioned in investment process to make it easier for investors to invest in question 2.1 above). The investors request the founders of the target Indonesia. company to establish a new entity in a country which they consider

132 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London r b te tc oto pa wl ol b rgltd n the in regulated be only have arisen. will plan option rights the once on later issued be will and shareholders’ stock agreement the (b) or the founders to be later given to the eligible employee/management, by held and issued been has plan option stock the company,(a) i.e. the by used being ways common two are there plan, option stock have a management or employee stock option plan. For this type of to company Indonesian an for common quite and possible also is It quite commoninprivateequitytransactions. is it and shares of categories different these of issuance the permits oiin tee ol nt e ay ifrn structuring different a certain putoptionfortheexit. and percentage many ownership increase to options be matter, reserved not stricter having than other abovementioned would the from considerations there position, quite common in private equity transactions. In the case of minority is it and shares of categories different these of issuance the permits different a nominal value compared to the common shares. and/or The Company Law directors/commissioners) nominate to right or shares of classes other having different rights (voting right, (ii) dividend right, liquidation right and/or shares; common/ordinary (i) The equity structure of the target company is usually in the form of: ( Companies Liability Limited regarding of 40 different2007 No. Law a shares. common the and/or to compared value directors/commissioners) nominal nominate to or right right liquidation right, dividend right, (voting rights different having shares of classes other (ii) and/or shares; common/ordinary The equity structure of the target company may be in the form of: (i) indonesia of utilisation listing, venture capitalormutualfundsasaholdingcompany, etc. door back as such structures sophisticated rights as if they are shareholders in the target company,same or use other the require will they where bonds convertible use will they targetcompany.Indonesian the in equity through invest Therefore, for easily cannot restricted investor or equity private closed the is then investment, business foreign of line the if (b), factor For exit fromtheinvestmentwithoptimumupside. i.e. – goal main their achieve can they that so possibility) exit and treatment tax the to regard (in them for investment-friendly be to ali Budiardjo,Nugroho,reksodiputro © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 under therelevantlawsandregulations). provisions lock-up any to (subject seen often is period vesting year plan other.the to investor equity private one from varies A option three- to two stock management this for period vesting The 10%. 5– of range the in usually but other, the to company one amongst target The typical range of equity allocated to the management is different the of employees plan. incentive management the key in included typically are company or management key of Members Inrelationtomanagementequity, whatisthetypical 2.5 Ifaprivateequityinvestoristakingminority 2.4 Howistheequitycommonlystructuredinprivate 2.3 considerations? institutional, managementandcarriedinterests)? acquisition provisions? what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and position, aretheredifferentstructuring equity transactionsinyourjurisdiction(including opn Law Company ) ■ Investor’s representation on the Board of Directors of Board the on representation Investor’s ■ agreement ofprivateequityinvestmentsinIndonesia: governance the in included frequently are features following The gross misconduct. the from resignation (i) to: for dismissal (ii) or time; of period agreed certain to prior company due leaver bad a as treated are they due to: (i) death; (ii) incapacity; or (iii) retirement. As the opposite, leaver good a as treated usually is holder equity management The rils f soito o te agt opn s ta i wl be will it that so company publicly availabletotheotherthirdparties. target the of association of articles the in included the be to right that pursue in will investors equity private stay can They company. shareholders’However, the parties. usually the between agreement the the of in association available of publicly articles abovementioned made the be that must agreement require governance not does Law Deadlockmechanism. Company The applicable ■ (if provisions non-solicitation and Non-compete Exclusivitytokeypersonnel. ■ Certaininformationandauditrights. ■ Rightoffirstrefusalandtag-alongright. ■ ■ matter) (reserved investor the to rights protective Certain ■ . Whatarethetypicalgovernance arrangementsfor 3.1 Forwhatreasonsisamanagement equityholder 2.6 . Doprivateequityinvestorsand/ortheirdirector 3.2 f) rpsd egr aqiiin lqiain n ltgto o the of litigation and target company; (g) approval of the bus liquidation acquisition, merger, proposed ) (f shares; buyback and distribution dividend (e) transaction; material or parties affiliated into entry (d) team; management and association of convertible or shares the other shareholders combined with tag-along; new (c) change of articles of issuance of shares of transfer (b) rights; anti-dilution with coupled instruments (a) rights: their minority to protect a matters reserved as following position the require a usually takes they shareholder, who investor equity private a For into entered are decisions without theconsentorapprovalofinvestors. key no that ensures veto them). effective by This nominated commissioners and/or directors the the (through require which decisions key investors’ approval, either at the the shareholder level or at the board level outlining matters, reserved of list a on agree may company target the of shareholders other the and investors equity private the above, 3.1 question in discussed As GovernanceMatters 3 in yourjurisdiction? your jurisdiction? position, whatvetorightswouldtheytypicallyenjoy? to thebusinessoftarget company). affirmative approvaloftheinvestor. which require that certain actions cannot be taken without the arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such usually treatedasagoodleaverorbadin etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor and BoardofCommissioners( BOC iness plan; and (h) put option. ). www.iclg.com (BOD)

133 indonesia 134 indonesia © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com a that event the In venue. arbitration recognised internationally the in of a contract involving a foreign investor is to utilise law arbitration in an governing mechanism resolution dispute preferred the well, as reason this For the if difficult be shareholders’ agreementisforeignlaw. will it Therefore, Indonesia. shareholders’in directly enforced be the cannot judgments court govern foreign to better is agreement under Indonesian law. it In addition, kindly be advised that Indonesia, in located the that considering However,object of the shareholders’ agreement is the target law.company which is foreign under governed be shareholders’ the There is no clear restriction that the shareholders’ agreement cannot under rights is investor’sagreement wouldbeenforcedundercontractlaw. there (and dispute the a of case discrepancy), the in shareholders’ such, As the agreement. of the whereas articles document the public to parties the amongst obligation contractual a merely is agreement since a agreement, is shareholders’ association the of terms Indonesian the than them, rather articles the to credence give between generally would courts discrepancy any is there if company the of association of articles the over prevail would terms its that Although shareholders’ agreements often contain a provision stating Arethereanylimitationsorrestrictionsonthe 3.5 to court the dissolution ofthecompany. request (ii) company; the seek (iii) and company; the the against investigation an commence of BOC and BOD the against proceeding court a commence (i) to: rights have company the the in shares that the of 10% of rights minimum a with shareholders minority the regulates also Law Company the addition, In the requires and tobuybacktheminoritysharesacertainextent. Law shareholders minority the of Company right the to attention pay to the company transactions, acquisition and merger as such transactions special for However, system. U.S. the in recognised as shareholders minority the to shareholders majority of duty fiduciary of concept the recognise not does law Indonesian Arethereanydutiesowedbya private equityinvestor 3.4 party understandsthevetoarrangementaswell. equity private written in the articles of association of the company so that the third the problem, of indonesia kind perfectly are arrangements veto the that sure make should investors that minimise to order In company andprotectsthethirdpartyingoodfaith. the binds still action the investors, equity private the of approval the if BOD of the company take some case, reserved matter actions without the that In company. target the of association of articles the in stated not is arrangement this if is problem only The level. veto the of effectiveness arrangements at either the shareholder level the or the director nominee on limitations no be should There Arethereanylimitations ontheeffectivenessofveto 3.3 ali Budiardjo,Nugroho,reksodiputro typically addressed? non-compete andnon-solicitprovisions)? (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements typically addressed? shareholders (or to minorityshareholderssuchasmanagement the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) vice versa )? Ifso,howarethese company. the of responsibility the in actions for accountable the held BOC or BOD the regulate of nominator not does Law Company The the or losses the prevent continuance ofthelosses. to BOD the to advice given have they personal a have not do (iii) and losses; the causing is that BOD the of action the in interest they (ii) company; the of purposes and objectives the with accordance in and company the of benefit the have for prudence with and faith good in they duty supervision the conducted (i) that: prove can BOC the of members the if context this in attach would liabilities no BOC, such the of members For losses. prevent to actions taken have they (iv) and existed; interest faith and good prudence for the in benefit of the duties company; (iii) no their conflict of performed have they (ii) fault; or negligence their to due arise not did losses the (i) that: prove can BOD the of members the if context this in attach would liabilities However,no for “losses” suffered by the company pursuant to the Company Law. Members of the BOD or the BOC may be held to account personally of director human resourcesmustbeanIndonesiancitizen. a that stipulates clearly law Indonesian particular, In damaged that actions criminal any for convicted been never ■ a of BOC or BOD a of member a as appointed been never neverbeendeclaredbankrupt; ■ ■ requirements setoutundertheCompanyLaw, i.e.theyhave: In general, the member of the BOC and BOD must comply with the best interest of the the company (which has more for than one shareholder). and nominator his/her of interest best the for actions their In practice, it may be difficult as a nominated director must balance the to losses causes and company duetotheiractions(asexplained inquestion3.6above). wrong goes something if accountable that would likely decision lead to an actual conflict. a Otherwise, they may be in held participate should he/she if assess to judgment business their exercise should director such conflict, potential a of that such director may not act on behalf of the company. In the case unequivocal is Law Company the conflict, actual an of case the In . Arethereanylegalrestrictions or otherrequirements 3.6 in ashareholders’ agreement. provisions non-solicitation and non-competition the of content the on restriction and limitation clear a have not does law Indonesian enforcement oftheawardthroughIndonesiancourts. and registration requires party Indonesian the against enforcement foreign investor successfully obtains an arbitral award off-shore, the . Howdodirectorsnominatedbyprivateequity 3.7 the financeofstateand/orrelevantfinancialsector. declared bankrupt;and be to company the causing for guilty declared and company portfolio companies? of otherportfoliocompanies? equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof iclg to: privateequity 2019 akt euao, h Fnnil evc Atoiy ( Authority Service Financial the regulator, market capital Indonesia’scompany, public a is target the that case the In the fulfils which criteria forreportingrequirements. situations takeover certain in required be may post-closing transaction. offer tender a do to required be would shareholder controlling new the be would who investor the and information additional request oenetl gnis Fnly rprig o h Indonesian the to reporting ( Competition Business of Supervisory the for Commission Finally, agencies. governmental relevant the require to requirements notification may and licensing transportation) additional and telecommunications example, (for industries certain in Investment GMS. the of notice the before b) the employees of the companies must be notified at least 14 days merger may not proceed until The all objections have been resolved; and GMS. the of notice the before days seven least at submitted healthcare, financialservices,miningandretail. companies, tech unicorn lending), peer-to-peer of that is moment the at private industry FinTech of popular most target (the FinTech the include equity of industries red-hot The companies. tech The round down trend quite often happens in transactions involving indonesia ( shareholders of meeting general the of notice the before days 30 least at notified be company’sto the need a) would include: creditors notices These of number a are public disclosuresintheeventofatakeoverormerger. there Law, Company notifications that need to be made to creditors, employees and other the by regulated As Whatarethemajorissuesimpactingtimetablefor 4.1 ali Budiardjo,Nugroho,reksodiputro © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 the of process long the e.g. IPO, an conduct to able be to company a for regulation strict quite provides government Indonesian The Whatdealprotectionsareavailabletoprivateequity 5.2 capital requirementsetoutbytheCompanyLaw. shares. In this regard, the company must comply with the minimum to to addition in ready extensive disclosure requirements and tender offer of the remaining shareholders, be dissenting from and shares all shareholders purchase independent the from approval In order to be able to “go private” the target company must obtain an What particularfeaturesand/orchallengesapplyto 5.1 Havetherebeenanydiscernibletrendsintransaction 4.2 rnato em:Pbi custos Transaction Terms: Public Acquisitions 5 Transaction Terms: General 4 and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust terms overrecentyears? disclosure obligationsandfinancingissues? acquisitions? investors inyourjurisdictionrelationtopublic commonly dealtwith? transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private GMS . Ay betos h ceios ae ut be must have creditors the objections Any ). OJK KPPU may ) ) knowledge. their of best the to subject be normally would warranties other The no threatsorpendingobligations. standard with office in clauses such as the due incorporation, constitutional documents and are they where period the for only these the company, the a management of the company would for be able to give to relating ask matters factual For normally seller. the for would liability of limitation seller equity private the addition, In relation tosuchownership. in owe they that obligations pending or threats no and shares the of ownership the to relate usually offered warranties/indemnities The preferred. typically is jurisdiction, low-tax a in vehicle own its via company target the in equity the to investment direct buy-side, the on While shares inaholdingcompanyresidingtaxhavencountry. equity investors (on private the sell-side) would be by an IPO and trade preferred sales of typically are which structures Consideration Typical limitations include: (a) time limitation; (b) limitation; time (a) include: Typicallimitations insurance several although Indonesia, in carriers doprovidethisservicenowadays. common not is This of lack the to relating matters compliance ofthetarget or company. limited precedent covenant conditions would team the or shares subsequent the relating to the transaction documents. The management of ownership the The other covenants, undertakings and indemnities usually relate to . Whatisthetypicalpackageofwarranties/indemnities 6.2 Whatconsiderationstructures aretypicallypreferred 6.1 . Whatlimitationswilltypicallyapplytotheliabilityofa 6.5 To whatextentisrepresentation&warrantyinsurance 6.4 Whatisthetypicalscopeofothercovenants, 6.3 authority,from thedebtequityconversion. the resulting by shares and shares founder for lock-up floating, verification minimum thorough statement, registration claim threshold;or(d)capforthe liability amount. Transaction Terms: Private Acquisitions 6 team toabuyer? on thebuy-side,inyourjurisdiction? warranties, covenants,indemnitiesandundertakings? the typicalcostofsuchinsurance? equity selleranditsmanagementteamtoabuyer? offered byaprivateequityselleranditsmanagement by privateequityinvestors(i)onthesell-side,and(ii) private equitysellerandmanagementteamunder exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) undertakings andindemnitiesprovidedbyaprivate www.iclg.com de minimis de ; (c) ; 135 indonesia 136 indonesia © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com IPO an conducting by exit to plans company equity private the that means here process exit dual-track the understanding, our on Based Doprivateequitysellersgenerallypursueadual-track 7.3 the after year one conversion. for exchange stock the in traded be not could shares the target, the by issued bonds convertible its converting by the of effectiveness Further, if the private equity sellers obtain the shares during the the IPO after months eight registration statementtotheOJK. until up be will locked shares such then price, IPO’s the than price lower a with months prior to the submission of the registration statement to OJK) If the private equity sellers obtain the shares (within the period of six Whatcustomarylock-upswouldbeimposedon 7.2 conversion. lock-up for founder shares and shares resulting from the debt equity statement, thorough verification by the authority, minimum floating, in challenges registration the main of process long the include IPO an conduct to order The IPO. an conduct to able be to company a for regulation strict quite provides government Indonesian The Whatparticularfeaturesand/orchallengesshoulda 7.1 These arenotcommoninIndonesia. Arereversebreakfeesprevalentinprivateequity 6.8 the non-paymentofcommitmentsbybuyers. the sellers usually set out some kind of liquidated damages to cover agreement, the In buyers. equity private the of ability finance the show to letter comfort bank a show may buyers equity private The indonesia Howdoprivateequitybuyers typicallyprovide 6.7 letter orotherproofoffunddocumentations. comfort bank a obtain may However,buyers the common. not is It Do(i)privateequitysellers providesecurity(e.g. 6.6 ali Budiardjo,Nugroho,reksodiputro Transaction Terms: IPOs 7 under anequitycommitmentletter, damages,etc.)? the managementteam)? through asaleorIPO? and (ii)weremoredual-trackdeals ultimatelyrealised private equitysellerscontinuing torunthedual-track, exit process?Ifso,(i)howlate intheprocessare private equitysellersonanIPOexit? exit? private equitysellerbeawareofinconsideringanIPO If so,whattermsaretypical? transactions tolimitprivateequitybuyers’ exposure? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and shares trading. also are company banks a other than securities companies to if the loan is used addition, for the or purpose of individual an In to loans granting from prohibited companies. capital venture and capital for some of line of businesses, injection such as multi-finance for companies debt of use the prohibit regulations and laws The in Indonesia. Utilisation of debt to fund private equity transactions is not common hud iey hoe h jrsito o te nete n the and pursuant tothetaxtreaty. investee the rate tax corporate lowest of the get can they that so owner, jurisdiction beneficial the choose wisely should they exit, the and investment the between In exposure. tax lowest the with investment the exit can they that so receive will they that Management teams should consider the maximum tax treaty benefit above). 2.1 question in explained (as common also are structures Off-shore scheme. treatment for the dividend, interest and royalty payment and the exit repatriated to it. The private equity would normally concern the tax is investee the from return the when and investment its from exits equity private the when exposure tax efficient most the be would transactions and investors equity private for consideration key The facilities givenbysomefinanciers. receivables factoring include financing debt in trends current The . Arethereanyrelevantlegalrequirements or 8.2 Pleaseoutlinethemostcommon sourcesofdebt 8.1 case, thismethodiscommoninIndonesia. that In time. same the at M&Aexit possible a pursuing also while . Whatarethekeytax-efficientarrangementsthat 9.2 Whatarethekeytaxconsiderationsforprivateequity 9.1 Whatrecenttrendshavetherebeeninthedebt 8.3 Financing 8 Tax Matters 9 financing) ofprivateequitytransactions? bonds). shares, deferred/vestingarrangements)? off-shore structurescommon? financing marketinyourjurisdiction? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate investors andtransactionsinyourjurisdiction? Are iclg to: privateequity 2019 ■ The Minister of Finance sets out transfer pricing regulation pricing transfer out sets Finance of Minister The ■ that ratio debt-to-equity the out sets Finance of Minister The ■ equity investments: private impact might which legislation tax in changes the are Here indonesia Whatarethekeytaxconsiderationsformanagement 9.3 ali Budiardjo,Nugroho,reksodiputro © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Havetherebeenanysignificantchangesintax 9.4 ■ The President of the Republic of Indonesia has just issued just has Indonesia of Republic the of President The ■ PER- No. Taxation General Directorate of Regulation ■ Regulation of the Minister of Finance No. 258/PMK.03/2008 ■ Competent Multilateral a signed Finance of Minister The ■ to havethelowestwithholdingtaxratefordividendpayment. of The order amount in maintain to need they that minimum investee the investor.in percentage shares the equity consider private also the should team for management benefit treaty tax better a management teams would seek that the new acquisition structure has investor.and investee of jurisdiction Further,the in shares the the of The key tax consideration must be the capital gain tax for the transfer n cutyb-onr rpr ( report country-by-country and to debt equity ratiois4:1. allowed maximum the regulation, this to Pursuant 2015. in tax income of calculation the in considered be will teams thataresellingand/orrolling-overpartoftheir anticipated? investment intoanewacquisitionstructure? teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities n o te ot motn fcos n eemnn tax determining in factors important most avoidance orillegal transferpricingpractices. the of one is transfer owner beneficial and the as taxation seeing well, impact as activities pricing will this laundering, that money believe and many terrorism combat to is regulation automatic either of institutions, possibility another nationally or internationally. Even though the purpose of with the this information (c) of and exchange reporting; the (b) owner; beneficial a of criteria the on, (a) things: focuses other amongst regulation This Indonesia. in entities legal of owner beneficial the concerns which 2018 of 13 No. Perpres and (iii)assets. and performance of transaction; (ii) active business activities; entity of establishment the in substance economic (i) having: others among criteria, some fulfil shall subject tax foreign the avoidance, taxation double the abusing as classified be not to order in Taxationthat Double Avoidanceregulates of 25/PJ/2018 regarding the Guidelines Prevention on the Abuse to 20%oftheestimatednetsalesamount. Indonesian subject is Indonesia in an establishment permanent or company with relationship special a has and country haven tax a in established was which company a of shares of regarding Withholding of Income Tax regulates that a transfer in apply automatically will jurisdictions September 2018. other 94 with Information of Exchange Automatic the agreement, this of Authority Agreement on 3 June 2015. Following the signing the for procedures the submission. and CbCR taxpayers the submit the To new to of required a classification issued authority. the just the concerning DGT regulation to the regulation, reported this be supplement to information with and transaction a conducts documentation of kind some maintain must parties affiliated who taxpayer a regulation, this to Pursuant Indonesia. in practices BEPS and avoidance CbCR t cma tax combat to )

ald h Oln Snl Sbiso ( Submission Single Online the called the general, online integrated system for the application of licences in Indonesia in investors of possible. To support this, they issue new regulations as establishing interest an simple as Indonesia in investing more make to tried has gain government to order In Japan wouldbevery concernedaboutthis. country with very strict anti-bribery protection like the U.K., U.S. or risk appetite of the investor in this regard. Investors coming from a Normally, yes. The jurisdiction of the investor would determine the due diligenceprocess. the conduct to counsel Indonesian an engages usually investor The licences, assets,andmaterialagreements. documents, corporate only covers that diligence due limited a only environmental insurances, value of the transaction is not material, the investor usually requires assets, customers, the if hand, other the On searches. court and litigation compliance, and covering suppliers diligence due full-blown corporate documents, licences, manpower, a agreements with lenders, requires usually investor the high, is value the the If of target. the of value industry the the and transaction on depends usually diligence due of scope The under regulated as investment, foreign for closed percentages are shareholder which maximum certain regulates Indonesia 01Havetherebeenanysignificantlegaland/or 10.1 04Hasanti-briberyoranti-corruptionlegislation 10.4 Howdetailedisthelegalduediligence(including 10.3 Areprivateequityinvestorsorparticulartransactions 10.2 handled bytheBKPM. h rgsrto poes o h Ivsmn Codntn Board Coordinating Investment the ( to process registration the Government Regulation No. 24 of 2018. This OSS system replaces listed asprohibitedforforeigninvestment. lines of businesses which are deemed important for the country are Some 2016. of 44 No. Indonesia of President the of Regulation others, taxpaymentfortheincomegeneratedinIndonesia the to prevailing accordance tax laws and regulations. This is for the purpose in of, among establishment permanent a establish provider to OTT an needs that regulates which – reference your for herein, otn Truh h Itre (vr h Tp r or Top The (Over Internet the Through Content and/or Application of Provision Service the regarding 2016 of 3 No. issued circular Letter of Minister of Communications and Informatics has government the Indonesia, in case tax google the from Learning BKPM 0LegalandRegulatoryMatters 10 anticipated? diligence, contractualprotection, etc.)? materiality, scopeetc.)? jurisdiction (e.g.onnationalsecuritygrounds)? private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting approach toprivateequitytransactions (e.g. impacted privateequityinvestmentand/orinvestors’ prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors subject toenhancedregulatoryscrutinyinyour , xet o cran ie o bsnse wih r still are which businesses of lines certain for except ), OSS

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137 indonesia 138 indonesia © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com ( 2003 Year 13 No. Law ■ be to need would party Indonesian an with agreement Any ■ Some minorconcernsthattheinvestorsmightneedtoconsiderare: Whatotherfactorscommonlygiverisetoconcerns 11.1 at best. remote to companies portfolio other from of debts of exposure lateral risk the reducing companies, portfolio the of each in interests normally, the investor would create a separate SPV to hold shares or The risk to other portfolio companies is even more unlikely because, low. its meet to indonesia unable is obligation. company The risk to the private equity investor is, however, quite the that such assets company’s it can be proven that certain shareholders unlawfully squandered the if place take may veil liability limited the theory,of In “piercing” a they held. shares the of value the beyond company’slosses the for liable held be not would company Indonesian an of shareholders Generally, Arethereanycircumstancesinwhich:(i) aprivate 10.5 ali Budiardjo,Nugroho,reksodiputro 1OtherUsefulFacts 11 the liabilitiesofanotherportfoliocompany? rnltd usat o ril 3 o te a o Flag, on Law the of 31 Language, EmblemandNational Anthem. Article to pursuant translated considering aninvestmentinyourjurisdiction? should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof rvsos ht a avrey mat rvt equity private impact adversely may investment inacompany, including: that provisions aor Law Labour cnan several contains ) oe on vnue my e ujc t mnaoy merger mandatory to subject be may ventures joint Some ■ uih ut e sd n eti cs ad non-cash an establishing regulation new a issued has government The and cash certain in ■ used be must Rupiah ■ under GovernmentRegulationNo.24of2018. ■ ( Yearof 1999 5 No. Law of 28 (Article requirements control nie nertd ytm o te plcto o lcne in licences the called Indonesia of application the for system integrated online (Bank Indonesia Indonesia RegulationNo.17/3/PBI/2015). of territory the in occurring transactions ■ In the event of a change of a company’s status, merger, status, company’s a of change a of event the In ■ Anti-Monopoly Law eitr n Idsra Rltos or my have may Court Relations different interpretationsonthisclause. Industrial and mediator in the stipulated vague, as is “may”, 163, term Article the that given that indicates issue this discuss to of Manpower Ministry the with the research our from However, resigned company. voluntarily have to deemed be will employee the and termination of request the reject may eoin ad hne f okn cniin o the of conditions working employee of change and demotion, ( inter-departmenttransfer reposition, eainhp n h eet f cag o onrhp is rotation, re-structurisation, ownership a is of there if change only conditional a employment of the event the continue in to relationship not decide to employee the one to decide whether to terminate or not. The right of the the from is the employer the that in meaning employer, the 117/PUU- is of hands termination Decision of No. right the that Review Decision deciding X/2012 under Judicial Court a Constitutional been severance case has there recently which However, payable. be in could entitlement their Law), terminate the Labour of to 163(1) Indonesian (Article or company remain the with to employment whether choose to change of ownership), its employees would have the right regarding policies management’s a for employees’qualify also may the entitlements and rights in change a but shareholder, controlling the (frequently of change ownership” a with associated of “change a or consolidation in theeventofa“changeownership”. not company’sbut the consolidation, mergerof and status, the right to dismiss employees only in the event of a change Law,Labour Under the has of employer 163(2) the Article I tee s o uh odto, h employer the condition, such no is there If . iclg to: privateequity 2019 online Single Submission Single online )). mutasi

– as regulated as – ), promotion, ), ali Budiardjo, Nugroho, reksodiputro indonesia

Freddy Karyadi Anastasia Irawati Ali Budiardjo, Nugroho, Reksodiputro Ali Budiardjo, Nugroho, Reksodiputro Graha CIMB Niaga 24th Floor Graha CIMB Niaga 24th Floor Jl. Jend. Sudirman Kav. 58 Jl. Jend. Sudirman Kav. 58 Jakarta 12190 Jakarta 12190 Indonesia Indonesia

Tel: +62 21 250 5125 Tel: +62 21 250 5125 Email: [email protected] Email: [email protected] URL: www.abnrlaw.com URL: www.abnrlaw.com

Freddy Karyadi has over two decades of experience practising law in Ms. Anastasia Irawati joined ABNR as an associate in January 2012. indonesia Indonesia and has been heavily involved in numerous complex cross- She graduated with honours in 2011 from the Faculty of Law of the border deals including project financing, M&A, tax, capital market, Parahyangan Catholic University. In 2016, she earned a Master of investment, and dispute settlement/bankruptcy. Laws (LL.M.) degree from New York University (NYU) School of Law, majoring in corporations law. During her studies at NYU, she gained Karyadi was one of the pioneers who focused on the digital industry exposure to U.S. legal practice by participating in the mediation of real and has handled many transactions involving technology and disputes in a variety of cases within the New York State court system FinTech/TMT companies, from early stage fundraising, integration, (including landlord-tenant disputes, loan disputes, auto accidents, exit, public offering preparation to regulatory compliance. Karyadi has work contracts and unpaid bills) alongside coaches and mediation represented independent power producers, giant ECAs and supervisors. commercial banks for various electricity sector financing. Karyadi’s clients vary from multinational to start-ups which span across a wide At ABNR, she has been part of the teams of lawyers that assist clients in range of industries including natural resources, energy, financial general corporate, antitrust, intellectual property rights, pharmaceutical institutions, private equity funds, and property. With a strong and food industry matters as well as in commercial litigation. She has knowledge of legal, commercial, tax and accounting issues that these ample experience in handling start-up entrepreneur cases and has been industries encounter, Karyadi can quickly identify the key issues and involved in projects relating to restructuring, suspension of payment, offer practical business oriented legal solutions. investment and acquisition. She also contributes articles to Getting the Deal Through, Lexis Nexis and Thomson Reuters. On litigation matters, Karyadi handled various suspensions of payment and bankruptcy proceeding of various industries including aviation, shipping, and mining sectors and also assisted clients in tax disputes. Karyadi has been consistently rated as a leading lawyer by several international publications including Asialaw, The Legal 500 and IFLR1000. He is a member of the Editorial Board of The Derivatives and Financial Instrument Journal of the International Bureau of Fiscal Documentations. He contributes numerous legal and tax articles to IFLR, International Tax Review, Thomson Reuters, The International Comparative Legal Guide series and Getting the Deal Through. Karyadi was also a speaker at IBA, IPBA, IFA and IFLR events and gave seminars for tech start-up communities. His professional membership includes Indonesian Capital Market Legal Consultant, Indonesian Tax Consultant, International Fiscal Association and International Federation of Accountant. He is fluent in English and Bahasa. Freddy read law at the University of Indonesia (1998) and earned a Master of Laws (LL.M.) degree in International Tax from Leiden University (2002). He also graduated cum laude in 1997 from the Faculty of Economics of Trisakti University in Jakarta, holds an MBA degree from Peking University (2015), and is a licensed tax consultant and chartered accountant. In 2010, he was seconded to a leading Dutch law and tax firm.

As Indonesia’s longest-established law firm (founded 1967), ABNR pioneered the development of international commercial law in the country following the reopening of its economy to foreign investment after a period of isolationism in the early 1960s. Today, we believe our legal expertise and experience is second to none, as vouchsafed by our recent confirmation as the exclusive Indonesia member firm for Lex Mundi (the leading global network of independent law firms) for a further period of six years. With over 100 lawyers, ABNR is the largest independent, full-service law firm in Indonesia and one of the country’s top-three law firms by number of fee earners, which gives us the scale needed to simultaneously handle large and complex transnational deals across a range of practice areas. We continue to value the personal touch and are proud of our reputation for responsiveness. Our lawyers are business-savvy and fully understand that – alongside legal expertise and experience – timeliness and value for money are of the utmost importance to our clients.

iclg to: private equity 2019 www.iclg.com 139 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 20 ireland Brian mccloskey

matheson aidan Fahy

1 Overview will likely lead to more flexibility from PE funds in terms of both the structure and terms of transactions, with minority investments becoming more common. 1.1 What are the most common types of private equity transactions in your jurisdiction? What is the current 2 Structuring Matters state of the market for these transactions? Have you seen any changes in the types of private equity transactions being implemented in the last two to three years? 2.1 What are the most common acquisition structures adopted for private equity transactions in your jurisdiction? A broad range of private equity (“PE”) transactions are carried out in Ireland, the most common including leveraged buyouts, PE transactions are usually structured using a holding company refinancings, trade sales, bolt-on deals and secondary buyouts. (“Holdco”) and an indirect wholly-owned subsidiary of Holdco The volume of PE transactions increased in 2018. A noticeable (“Bidco”). Holdco is commonly owned by the PE fund and trend over the last 12 months has been the increase in the number of management, as majority and minority shareholders, respectively. secondary buyouts which historically had not been a common Holdco can take the form of an offshore vehicle, although it is feature of the Irish PE landscape. usually Irish or UK tax resident. Bidco’s primary role is to acquire and hold the target’s shares and it 1.2 What are the most significant factors encouraging or may also act as borrower under the debt facilities. For tax- and/or inhibiting private equity transactions in your financing-related purposes, it is common to have intermediate jurisdiction? holding companies inserted between Holdco and Bidco. For inbound investments, Bidco is typically a private limited Ireland delivers: liability company resident, for tax purposes, in Ireland. The ■ a low corporate tax rate – corporation tax on trading profits is jurisdiction of incorporation of Bidco can vary and may be onshore 12.5% and the regime does not breach EU or OECD harmful or offshore. tax competition criteria; ■ the regulatory, economic and people infrastructure of a highly-developed OECD jurisdiction; 2.2 What are the main drivers for these acquisition structures? ■ the benefits of EU membership and of being the only English-speaking jurisdiction in the eurozone; There are a number of factors which affect the acquisition structure ■ a common law jurisdiction, with a legal system that is broadly similar to the US and the UK systems; adopted in PE transactions. These drivers include: (i) the tax requirements, capacity and sensitivities of the PE house, management ■ refundable tax credit for research and development activity and target; (ii) the finance providers’ requirements; and (iii) the and other incentives; and expected profile of investor returns. ■ an extensive and expanding double tax treaty network, which includes over 70 countries, including the US, UK, China and Japan. 2.3 How is the equity commonly structured in private equity transactions in your jurisdiction (including institutional, management and carried interests)? 1.3 What trends do you anticipate seeing in (i) the next 12 months and (ii) the longer term for private equity transactions in your jurisdiction? PE investors typically use small proportions of equity finance to subscribe for ordinary or preferred ordinary shares in Holdco. The balance is generally invested as a shareholder loan (often structured Irish economic growth is expected to continue in 2019 – the Central as loan notes issued by Holdco), or preference shares. Bank of Ireland has recently forecasted economic growth of more than 4% this year, which follows growth of more than 5% in 2018. Management will generally subscribe for ordinary shares in Holdco This means that Irish businesses will remain attractive to both local representing between 5% and 15%, commonly referred to as “sweet and international PE investors. The competition between investors equity”. On some buyouts, key senior management with sufficient

140 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London and fiveyears. three between of period a after occur typically may vesting full and from buyout to termination. Vesting may be straight-line or stepped period the of length the to reference by value) market fair and cost of higher (i.e. price leaver” “good the to entitled be will employee departing the which for shares of proportion the regulate will that provisions vesting include also may documentation relevant The “good leaver” portionoftheproceedsreceivedbyhimorher. the reimburse to required be will documentation, relevant the of provisions material other or covenants restrictive example, for breaches, subsequently but leaver” “good a as treated been has who individual an whereby provisions clawback contain also may receive the lower of fair market value and cost. The documentation to expect may leaver” “bad a while shares his/her for value market fair and cost of higher the obtain commonly will leaver” “good A the on to information good leaver/badleaverprovisions. further payable for 2.6 leaver amount question See the leaver/bad manager. departing determine good will which include provisions, usually will Documentation portfolio on relevant shares the manager’s with company. employment a his/her acquire of compulsorily termination to fund PE the enabling provisions include invariably will documents Transaction the to allocated equity management. of range typical the for 2.3 question See below. 9.1 question at contained is exemption shareholders” “substantial the on detail Further period. holding particular a for held been has capital Irish from gains tax (“CGT”) only applies where a minimum 5% shareholding relief this as investments, minority of context Ireland’s of availability “substantial shareholders” the exemption should be borne in perspective, mind in the structuring tax a From leaver leaver/bad provisions maybesomewhatrelaxed. good shares, management for periods vesting stake, the of size the on Depending control. board have to unlikely is it given rights, veto on focused more PE be typically minority will Ainvestor vehicle. purpose special Irish established newly invest will a through investing position than rather entity minority existing an through a directly taking investor PE a Typically incentive plansortobecomeadditionalemployeeshareholders. management in participate to invited be may personnel key Other remain they that and to contractualrestrictions(seequestion2.5below). investor PE the incentivised to create further value. They will also typically sign up with sufficient aligned interests their make ensure remain to to group target the expected in investment usually financial are management Senior the institutionalstrip. in invest to required) (and/or permitted be also may so do to funds matheson © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 In relationtomanagementequity, whatisthetypical 2.5 Ifaprivateequityinvestoristakingminority 2.4 acquisition provisions? considerations? what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and position, aretheredifferentstructuring the appointmentofdirectors. and shares of transfer the to regard with particularly arrangements, governance include may documents constitutional the addition, In the in of shareholderequity/debt. securities of transfer issuances further regarding provisions (iv) the and company; portfolio on restrictions (iii) house; PE the of conduct the for rights veto the extensive (ii) company; portfolio the of business to regard with (i) management provisions: from other covenants among include, likely will This company. portfolio the in shareholders as relations their govern to agreement PE houses and management will typically enter into a shareholders’ resignation, (voluntary constituting a“goodleaver”. circumstances specific termination for gross misconduct, etc.), with all other circumstances to by defined reference is leaver” “bad a whereby provisions leaver increasingly friendly an Ireland, in management more have to activity is funds PE by taken approach common PE in increase general the with parallel in increased has assets suitable for competition the As oes f n rs cmay r r cnrr t pbi plc. policy. public customary vetorightsareeffective. to contrary are that ensure to place in put or be can structures Generally,appropriate company Irish an of powers found to be void if they constitute an unlawful fetter on any statutory be may but courts, Irish by respected be generally will Vetorights budget control andacquisitionsdisposals. issues, equity/debt new around particular in and controls board control, the PE house is typically much more focused on veto In a minority PE investment, given the PE house is unlikely to have and shareholdervetorights. These veto rights will typically be split between director veto rights by management. taken be can decisions day-to-day that ensure to set commonly are thresholds although major matters, over financial and rights commercial veto corporate, significant enjoy normally investors PE . Whatarethetypicalgovernance arrangementsfor 3.1 Forwhatreasonsisamanagement equityholder 2.6 . Arethereanylimitationsontheeffectivenessofveto 3.3 Doprivateequityinvestorsand/ortheirdirector 3.2 GovernanceMatters 3 in yourjurisdiction? your jurisdiction? typically addressed? position, whatvetorightswouldtheytypicallyenjoy? arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such usually treatedasagoodleaverorbadin the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor www.iclg.com ireland 141 ireland 142 ireland © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com Arethereanylegalrestrictionsorotherrequirements 3.6 the lawofchoicewilltypicallyberespectedbyIrishCourts. as law non-Irish set and which clauses law temporal Governing geographical, scope. sectoral of terms in reasonable extent the to enforced be only will restrictions Non-complete considered. be to other from need will jurisdictions those of laws companies the of impact the jurisdictions, includes structure group the if However, enforceability. regards as company Irish an to respect with apply to contrary public policy, are there are no such or limitations or restrictions that would statute contravene they that extent the to Save Arethereanylimitationsorrestrictionsonthe 3.5 the of eligibility the establish to shareholders tobringsuchanactionundercompanylaw. difficult be may it although resort), last a as (often directors nominee the against company the Shareholders may be established entitled to bring derivative actions on behalf of is agent) and between thenomineedirectorsandshareholders. principal special specific example, a (for if (ii) relationship or insolvency; on verging is or company portfolio insolvent the (i) if: owed be also may duties Certain information disclosure). regarding example, (for shareholders to duties owe circumstances, company,may,the limited but to in duties owe generally nominees see (but shareholders minority question 3.6 below the for potential liability as shadow director). to Board law duties company other or Irish fiduciary under to subject not is itself investor PE The Arethereanydutiesowed byaprivateequityinvestor 3.4 to retainshareholderlevelvetorights. wise is it company.Hence, portfolio the of interests best the in act Directors’ veto rights need to be balanced with the directors’ duty to companies. group target relevant the by taken) not (or taken are actions certain Such an agreement may also oblige the shareholders to procure that level. shareholder the at upheld be would arrangements veto agreed Ashareholders’ that ensure to into entered be to likely is agreement matheson 04 “A) i te oie drcos r acsoe t act to accustomed are directors nominee the if (“CA”), be 2014 may they circumstances certain in construed as “shadow directors” under s. 221 that of the Companies Act aware be to ought investors PE directors, nominate to entitled being of context the In by statuteorrestrictedfromsoactingunderIrishcompanylaw. disqualified not are they that particular, in including, directors, as act to eligible are directors nominee that ensure must investors PE typically addressed? portfolio companies? equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin non-compete andnon-solicitprovisions)? (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements shareholders (or to minorityshareholderssuchasmanagement vice versa )? Ifso,howarethese would reducethislist. portfolio company’s constitution in relation to any matter of concern A specific release passed in a general meeting or included within the directorial positions. other directors’ the (ii) or house, PE nominating the (i) to respect with example, for arise, may interest of conflict potential or actual director is released from his or her duty to the company…”. Such an any conflict “avoid between the directors’to duties director and…other interests unless a the on duty a imposes )) 228(i)(f (s. CA The not tothepartynominatingthemorothershareholders. nominee and are itself company the to owed generally they are duties their directors, although that mindful be must directors Such (iv) reducing limitationofliabilityperiods. and sellers; deals PE from protection in warranty and representation increase (ii) involving warranty structure; and indemnity insurance; (iii) continuing limited consideration the of “locked-box” prevalence continuing (i) include: trends Recent Ireland. in sellers PE to favourable generally remains M&Alandscape The the given can alsoimpactsignificantlyontiming. (particularly transactions) PE in statements mechanisms locked-box-pricing of prevalence financial suitable prepare to required time The 10.2. question further see – Ireland of Bank 12 months which have been subject to the last prior approval of the Central the regulated in companies in insurance) invested (including have services funds financial PE of number regulatory a instance, by For affected approvals. sector-specific largely other or competition is mainly approvals, transactions for timing The . Howdodirectorsnominatedby privateequity 3.7 . Havetherebeenanydiscernibletrendsintransaction 4.2 Whatarethemajorissuesimpactingtimetablefor 4.1 risks throughdirectors’ andofficers’ insurancepolicies. above the of impact the mitigate to seek typically will investors PE verging oninsolvency. or insolvent is company the if time of periods certain during made decisions certain for action clawback of risk the face may and CA) 223–228 ss. under duties their statutory their directors’(including duties breach they if liabilities incurring risk directors Nominated apply toit. a If fund. PE as treated be would investor PE the directors, shadow as construed the of instructions and directions the to according director of the portfolio company and directors’ duties would duties directors’ and company portfolio the of director Transaction Terms: General 4 of otherportfoliocompanies? terms overrecentyears? disclosure obligationsandfinancingissues? party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust

iclg to: privateequity 2019 ireland Special arrangements with any category of target ■ a announced, is offer an make to intention firm’s a Once ■ A transaction must be independently cash-confirmed before a ■ Takeover Rulesfeaturesofnote: such than a typical private company transaction, there are three that particular framework means restrictive more a Rules to subject Takeovergenerally are transactions the of application the While are Rules Takeover The supervisory jurisdictionoversuchtransactions. has disclosure. which “Panel”), (the TakeoverPanel Irish the by public administered and fees break capped timetable, deal obligations, announcement confidentiality, exchanges, and contain detailed provisions covering matters such as The stock certain on listed companies Irish affecting, transactions other certain and of, apply. takeovers of usually conduct the regulate will Rules Takeover Rules”) (“Takeover Rules Takeover In public-to-private transactions involving Irish companies, the Irish Whatparticularfeaturesand/orchallengesapplyto 5.1 matheson © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 as sellers PE by preferred generally are structures “Locked-box” Whatconsiderationstructuresare typicallypreferred 6.1 Whatdealprotectionsareavailabletoprivateequity 5.2 h tre cn lo ge nt o hp h cmay r t assets, its or company the shop subject toconsiderationofthefiduciarydutiesdirectors. to not agree also can target The not would (ii) or typically beanacceptabletriggerforpaymentofabreak-fee. (i) of absence the in level acceptance minimum a achieve to failure mere The offer. competing a of success the (ii) or lapsing; or withdrawn being offer the in resulting board target the break-fee to consent by recommendation offer an of withdrawal the (i) including: events, only typically will arrangements Panel of up to 1% of the value of an offer, with The limited trigger consent. Panel with acquisitions public to relation in allowed are fees Break Transaction Terms: Private Acquisitions 6 Transaction Terms: Public Acquisitions 5 Panel. of duediligenceforthePEinvestor. to lapse or withdraw the offer. This increases the importance any condition other any invoke to scope limited have will bidder or the condition made, is offer acceptance an once condition, competition/anti-trust the for offer. save the with Furthermore, proceed to bound be generally will bidder the to available unconditionally bidder (includingpossiblybeingplacedinescrow). be to need will funding PE investor, this means that, at the time of announcement, its offer.an make to intention firm a announce can bidder a For transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private commonly dealtwith? on thebuy-side,inyourjurisdiction? by privateequityinvestors(i)on thesell-side,and(ii) acquisitions? investors inyourjurisdictionrelationtopublic generally require Panel consent. Such consent may be given be may consent Such consent. Panel require generally of such arrangements or proposals an proposals or arrangements such general of a at approval meeting. This shareholder necessitates the importance of early formulation independent to subject nldn mngmn incentivisation management including d engagement with the with engagement d rpsl, will proposals, shareholder,

warranty andindemnityinsuranceprotection. for basis the form may package warranty full negotiated process, the elicit although diligence due to the generally during target is the regarding warranties disclosure the for rationale key The deed. warranty management separate a under warranties, business percentage their ownership and on to the basis they are usually (subject better placed to) provide often will management target’s The own shares,capacityandauthority. its to title regarding warranties provides only usually seller PE A arnis ie b mngmn, u sbet o limitations to subject but management, designed toensurethatpersonalliability ofmanagementislimited. business of by set a given of basis warranties the on given be typically will These negotiation ofthesaleandpurchase documentation. are during agree to insurer insurance sell-side and initial buyer for the documentation, buy-side of transaction part as for sellers PE by terms included commonly preliminary and obtained increasingly are policies insurance indemnity and warranty Buyer . Whatisthetypicalpackageofwarranties/indemnities 6.2 . To whatextentisrepresentation&warrantyinsurance 6.4 Whatisthetypicalscopeofothercovenants, 6.3 the pricinghas,intheory, beenbased). up prior to execution of the share purchase agreement (and on which drawn sheets/accounts, balance reference from deviations on based price purchase the to made are adjustments and completion after shortly up drawn accounts of set involve or statement a on rely may structures These debt. net used and capital working to commonly reference by adjustments structures consideration Other adjustment)). any of basis the form to not so (and “permitted” as treated be to is the following group target “locked-box date” (save to the extent the parties agree such leakage the from value of “leakage” any for compensated be will buyer The completion. after investors/sellers to proceeds sale of distribution prompt and savings cost liability, contractual reduced potentially information, financial over control greater outset, the from price purchase the in certainty offer they eadn te odc o te agt uies pre-completion business at achieving target such outcome rather than an absolute procure covenant). the of (although frequently limited to exercise of voting in a manner aimed conduct the and regarding structure) pricing undertakings cases, some locked-box in and, filings regulatory a with assistance (in no-leakage in to undertakings relation pre-completion provide usually will seller PE A regarding theconductoftarget businesspre-completion. Management will also generally provide pre-completion undertakings will beacceptabletoaPEseller. the target business. Typically non-solicitation of employees covenants exiting are who management of members by provided be may these but covenants, non-compete provide to unlikely very is seller PE A team toabuyer? the typicalcostofsuchinsurance? equity selleranditsmanagementteamtoabuyer? offered byaprivateequityselleranditsmanagement exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) undertakings andindemnitiesprovidedbyaprivate

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143 ireland 144 ireland © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com becomes unconditionalandthePE fundfailstoBidco. enforce this commitment directly against the PE fund to the purchase extent it share the generally can seller in The available. being financing conditions and agreement the of satisfaction the to only subject transaction, the to committed capital equity the with Bidco The PE fund usually gives a direct commitment to the seller to fund Howdoprivateequitybuyerstypicallyprovide 6.7 with theincreasinglyflexible W&I insurance market. line in evolving is trend is this again, but warranties management for This accounts escrow have to look regularly will buyers arrangements. PE increases. such resist to particularly true as the prevalence of W&I insurance on transactions look typically sellers PE but transactions some in feature do accounts retention Escrow Do(i)privateequitysellersprovidesecurity(e.g. 6.6 brought, and be may claims which within limits time include limitations General of theinsurancedeductible/excess. level the at set be often will warranties for liability management on In a transaction including warranty and indemnity insurance, the cap warranty claims. any for liability maximum capping (ii) and awareness; proportionate share of liability for any claim its and/or its own breach) and subject to for liable only is manager (each severally them Managers can limit their liability under the warranties by: (i) giving a relativelysmallamountwhichiscommonlyescrowed. to limited be likely will covenant “no-leakage” any under Liability or price purchase aggregate the uncapped. to equal cap a to usually subject are either warranties seller’s PE a authority, and capacity title, On the basis that a PE seller’s warranties will generally be limited to Whatlimitationswilltypicallyapply totheliabilityofa 6.5 be to tend premiums amounts, broadly between1%and1.5%oftheinsuredlimit. premium minimum to Subject the policyholder. of non-disclosure deliberate and dishonesty fraud, contamination, enterprise the value ofthetarget. of 1% and 0.5% between be to tend limits Excess or gap. that sellers of all or and some bridge to limits asked be excess often can management to subject be usually will policy A matheson nld cvrg fr rmnl ie ad eate, pollutio penalties, and fines criminal for coverage include providers insurance by applied exclusions standard market Some warranties, covenants,indemnitiesandundertakings? under anequitycommitmentletter, damages,etc.)? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and the managementteam)? warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and private equitysellerandmanagementteamunder de minimis andbasketthresholds. n/ ■ Corporate governance: on the IPO, depending on the listing the on depending IPO, the on governance: Corporate ■ Contractual obligations relating to the IPO: the PE seller will ■ to able be not may sellers PE restrictions: Lock-ups/selling ■ Market risk: unlike certain other PE exit routes, PE sellers are ■ the including exit, following: IPO an considering sellers PE by considered be to need which issues key of number a are There listing. US or Typically, an Irish IPO will be part of a dual-listing with either a UK Reverse breakfeesareunusualinPEtransactionsIreland. the company’s performancedeclines. stock it retains, with no ability to sell if the market begins to turn or any of respect to in period lock-up the exposed of duration the be for risk market will seller PE the result, a As IPO. the following transaction to transaction, but is typically for a period of six months The duration of the lock-up provided by the PE seller will vary from . Whatparticularfeatures and/orchallengesshoulda 7.1 Arereversebreakfeesprevalent inprivateequity 6.8 . Whatcustomarylock-upswouldbeimposedon 7.2 Transaction Terms: IPOs 7 elr a hv ejyd otata rgt t board the IPO (pleaseseefurthertheresponsetoquestion7.3below). of to completion on constrained significantly rights be to likely contractual are these IPO, the to enjoyed prior matters other and representation have may seller PE the whilst particular Therefore, a framework. governance corporate adopt to required often are companies venue, connection withthetransaction. in incur may they losses any covering indemnity transaction of broad a banks underwriting the give to expected be also suite will a give limited extent, the company being floated and its business. It to expected matters relating to itself and the shares it owns and, to a more be of range a to as will banks the to warranties and representations seller PE The agreement underwriting the to party entered into with the investment banks underwriting the IPO. a be to required be the durationoflock-ups. on commentary further for 7.2 question to response the see Please investment. its realise fully would fund PE the which would be a delay between the time of the IPO and the time at there such, As IPO. the after immediately company the of in the business to prevent detrimental effects on the valuation which they would be unable to sell some, or all, of their stake the IPO. PE sellers may be subject to a lock-up period during dispose of their stake in the business completely at the time of be can it seen as a more reason, significant failure by the whatever investor community). for transaction the postpone to successful a secure and need a is there (equally,if outcome that however, try means this to timeline deal the in earlier campaign pre-marketing a commencing by risk this mitigate to look can Sellers process. IPO an through capital investor institutional access to looking when risk market to exposed exit? If so,whattermsaretypical? private equitysellersonanIPOexit? private equitysellerbeawareofinconsideringanIPO transactions tolimitprivateequitybuyers’ exposure? iclg to: privateequity 2019 ireland uh as n rgltos n h U, hc cn necessitate can only have which that limited USties). entities US, (or entities the non-US many in by compliance regulations and laws such of reach extraterritorial potential and nature expansive the of aware laws. Aside from local laws, borrowers and sponsors should also be sanctions and corruption anti-bribery, with compliance to regards in careful especially be to need participants market example, For and laws transactions. specific PE affecting industry regime regulatory broader the any as well as regulations, with, compliance ensure and Ireland generally. However, market participants should be aware of, affect the choice or structure of debt financing of PE transactions in There are no particular legal requirements or restrictions that would participants havealsobeenabletoturndirectlendingfunds. market some transactions, certain For products. loan lien second term loan B (“TLB”) facilities, mezzanine and unitranche loans and include These loans. and/or bank replace secured senior to traditional supplement participants market to offered being products debt other of array wide a in resulted has which funds, and lenders “alternative”) (or non-bank and lenders bank traditional competition between increasing been has there years, recent in However, large PEtransactionsinIreland. and mid-market both fund to most used finance debt of the source common remains financing loan leveraged bank-led Traditional and eithertheUSorUK. way of an IPO will look to an IPO by way of a dual-listing in Ireland by exit to looking Typically,seller PE IPO. a an than rather sale a Almost all Irish transactions in recent years have concluded through Doprivateequitysellersgenerallypursueadual-track 7.3 matheson © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 gap inthemarket,whichnon-bank lenderstookadvantageof. liquidity a left books loan their reduce and deleverage to whole a lenders. as banks on pressure regulatory increased crisis, financial non-bank the After and lenders mezzanine banks, of mixture a to credit, however, has continued to shift away from traditional lenders for businesses engaged in commercial real estate. The source of this The availability of credit continued to increase in 2018, particularly Whatrecenttrendshavetherebeeninthedebt 8.3 Arethereanyrelevantlegalrequirementsor 8.2 Pleaseoutlinethemostcommonsourcesofdebt 8.1 Financing 8 and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare financing) ofprivateequitytransactions? bonds). through asaleorIPO? financing marketinyourjurisdiction? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin (“ICAV”). The ICAV is a corporate entity that is able to elect its elect to Vehicleable the is that entity Asset-management corporate by a ICAVis Collective The (“ICAV”). 2015 Irish most in the world’s bolstered of was introduction the offering funds of investment one Our as funds. investment establish recognised to which in jurisdictions advantageous widely is Ireland attractive an provide Irish can to holding structureforPEinvestors). (which applying funds regime investment tax beneficial domiciled a has Ireland Finally, location forPEinvestmentsoutsideIreland. company holding attractive an also is Ireland above, to alluded As or reduced be can interest of eliminated. payment the on Irish tax structured, Appropriately withholding group. the target against Irish offset the of be profits can deduction tax this met, certain are Provided shares conditions satisfied). of being acquisition conditions certain an to with (subject connection in company holding Irish an by paid interest for available be should deduction interest In terms of share acquisitions generally, appropriately structured, an higher. For certain real structured. estate holding companies, the is stamp duty rate investment can be the how on depending higher), market if (or value, paid consideration the on 1% of rate the a upon at arise acquisition, generally will cost duty stamp Irish the an how company, on depend incorporated can Irish an is target the this Where structured. is costs, investment tax transaction of terms In general thincapitalisationrules. no and rules (“CFC”) company foreign controlled no has Ireland persons by resident intaxtreatycountries). controlled companies to payments, dividend of case the in additionally, (and countries treaty tax on in resident persons to taxes withholding Irish from dividends, interest and royalties, including exemptions exemptions for payments broad are There period ofatleast12monthswithintheprevious24months. continuous a for held been have must shareholding 5% minimum the EU or in a country with which Ireland has a tax treaty; and (b) a Irish in resident be must subsidiaries the (a) Twoapply: conditions main relieves exemption holding companies from Irish CGT on the disposals of subsidiaries. the shareholders” and “substantial rate Ireland’s tax corporation low availability ofIrishcreditreliefforforeigntaxes. Ireland’s a to of due is This combination tax). Irish of rate effective low very a with (or free and from foreign holding subsidiaries on an effective Irish tax-free Irish basis tax- subsidiaries Irish their companies. from dividends receive can holding companies for regime tax attractive an In terms of Ireland as a holding company jurisdiction, Ireland offers tax costs ontheflowsofcashfromportfoliocompanies. of management the and considerations, financing debt costs, PE for investors considerations will include the tax choice of holding structure, key transaction tax target, Irish an in investing When . Whatarethekeytaxconsiderations forprivateequity 9.1 will market from theEU. loan Irish loan the market in Ireland will be affected by the planned exit of the UK on the how exactly predict to impossible effectis It Brexit. be undoubtedly significant most The Tax Matters 9 off-shore structurescommon? investors andtransactionsinyourjurisdiction? Are www.iclg.com ireland 145 ireland 146 ireland © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com Irish target companies. of context the in relevant be also may relief roll-over duty Stamp the target. defer any potential CGT in respect of the disposal of their to holding in order in “share-for- preferable) (where available that be will ensure relief CGT to share” keen be also will teams Management social and security). charge social universal tax, the income not of (and rates investment marginal the on return the on rates CGT of avail to appropriate) (as order in such), as documented be (and employee an as capacity their in not and structure, acquisition or target the in will roll-over a of shareholder a as capacity their in acquired part investment an of consist as acquired shares any that ensure to be A key tax consideration for management teams based in Ireland will Whatarethekeytaxconsiderationsformanagement 9.3 activities”, andsatisfiescertainadditionalconditions. “innovation or development” and “research qualifying on carries a in and years investment six least at for an place in remains to company,which trading relate must rate reduced the from which profits a benefit of share applying The and interest. carried gains such to chargeable rate reduced to subject being as a company or partnership a by received interest carried certain treating by managing for operates regime The managers funds. capital venture capital certain in investments venture by received interest”) “carried as (known return the for regime tax specific a has Ireland certain conditionsaresatisfied. to option share qualifying a provided sector SME the in company qualifying a in shares acquire of exercise an social the on and arising charge for security social universal provides tax, income which from exemption (“KEEP”) Programme” Engagement for favourable very Employee “Key a introduced also has Ireland employees/directors. potentially, qualifying is, certain This to met). (subject being purposes conditions tax Irish for shares the of value taxable the of 60% to up of abatement material a be could employees there the rules), tax Irish that (under shares” “restricted shares as qualify the receive if However, below). comments with social the and to (subject obtained benefits any on applying generally security charge Ireland, social universal tax, in income of based rates marginal employees/directors for advantageous particularly not is incentivisation share of forms most of treatment In general, whilst share incentivisation is common in Ireland, the tax Whatarethekeytax-efficientarrangements thatare 9.2 first the in out set paragraph above. factors the the on time, depending to structure time of from choice used structures offshore see do we said, regime as set out above, Irish structures often feature. However, that it short, in depends. Given the common, attractive features of Ireland’s are holding company structures offshore whether regards As The place. in ICAV are hasgreatpotentialinthecontextofPEtransactions. declarations certain provided tax Irish of free investors non-Irish to paid be can returns in that and fund the tax within attributes, Irish of tax free accumulate Irish can attractive gains and of income that rules. particular variety tax a box” have the funds “check domiciled US the under classification matheson investment intoanewacquisitionstructure? teams thataresellingand/orrolling-overpartoftheir shares, deferred/vestingarrangements)? equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate €50 million,respectively. mandatory trigger will Ireland notification in Ireland. The previous in thresholds were €3 million and turnover €60 of generate more) together (or and million more) (or million €10 generate each target and acquirer the where mergers only 2019, January 1 From financial and police intelligence unitswillhavewideraccess. the as such Authorities Competent public. the to available made be not will addresses residential and numbers to certain content only and it should be noted that personal identifier central register, the public may access it but access will be restricted at the central register. In terms of access to information filed on the a have filings first their make to will 2019 June 22 from Companies months five of period register. central a on filed be also must register of beneficial owners, from 22 June 2019 certain information been signed into law. In addition to the requirement to have its own EU the under also now has Directives, Laundering obligations Fifth Anti-Money and Fourth Ireland’s meet beneficial to central register a ownership establish formally to legislation entity. Secondary that in interest ownership or rights voting or shares the of 25% than more of ownership indirect a or direct through entity control This legal or own ultimately owners. who individuals beneficial the list of will register register own its maintain legal to other or entity corporate body Irish an on requirement a is There States Member EU in investors pursuant tothe AIFMD privateplacement regimes. to marketed are that funds PE any also and EU the within managed are that funds PE all to apply disclosure portfolio from assets companies (the so-called release new “asset-stripping” rules). These to obligations buyers fund PE of imposes ability the on regulation PE new to requirements in relation to portfolio companies and new restrictions relation the In regulation. transactions, additional EU to the in subject operate which becoming funds PE in resulted has AIFMD The . Havetherebeenanysignificant changesintax 9.4 the in reliefs tax context ofshareawardswillalsoberelevant. any and (“FED”), deduction earnings foreign the and (“SARP”), programme relief assignee special the as such incentives employee of avail to potential the basis, ongoing an On 01Havetherebeenanysignificantlegaland/or 10.1

eid f ie er, r uh hre pro a my ae been have may as period shorter such specified by Irish Revenue when providing or the opinion/confirmation. years, five of period validity maximum a to subject be to stated are which Revenue, Irish by issued opinions/confirmations of period validity the on guidance new issued have Revenue Irish addition, In 2017. January 1 from are Ireland in effect took This basis. quarterly a on transactions” border States Member “cross- certain of respect in 2015/2376, issued rulings tax exchange to required (EU) Directive Council Under consideration inthecontextofPEinvestments. (“ATAD”) rules over the Directive coming years Avoidancein Ireland Anti-Tax will require the ongoing of implementation ongoing The 0Legal andRegulatoryMatters 10 anticipated? anticipated? teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting iclg to: privateequity 2019 ireland

omnctos Ciae cin n Evrnet n Irish and Environment airlines aresubjecttoforeigncontrolrestrictions. and Action Climate Communications, for Minister the and Media CCPC the of approval to firm. subject are mergers that of management the a over exercise influence to possible significant it makes that or firm, the in, rights voting orpinbiey eilto picpe, atclry given particularly principles, potentially and conduct corporate of scrutiny regulatory increasing legislation corruption/bribery anti- with compliance with concerned increasingly are sellers PE buyer maysetnomaterialitythresholdonthosekeycontracts. PE a contracts, key of number small a with business a to in but sector sector from vary will thresholds Materiality period. to six-week transaction from vary to three a over will conducted be will Typically, diligence diligence transaction. due legal of level The a regulated firm that represents place. A “qualifying holding” is either a direct or indirect holding in take can acquisition the before pre-approval the obtaining and CBI a the notifying first acquire without firm regulated the cannot in holding qualifying investors PE proposed the (“CBI”), Ireland of Bank Central the by regulated business a transaction of purchase the to the relates if particular, In rules. special have sectors Some Areprivateequityinvestorsorparticulartransactions 10.2 matheson © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Hasanti-briberyoranti-corruption legislation 10.4 Howdetailedisthelegalduediligence(including 10.3 subject toenhancedregulatoryscrutinyinyour diligence, contractualprotection,etc.)? materiality, scopeetc.)? jurisdiction (e.g.onnationalsecuritygrounds)? approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors 10% or more of the capital of, or the PE section 9above. for See ICAVstructure). the (e.g. investors venue PE non-Irish structuring for options tax attractive attractive are There economically industry. PE and investment an provides Ireland

offence beingcommitted. the avoid to diligence” due all exercised and steps reasonable “all to took company the available that demonstrating is offence defence this for corporates secretary, single The manager, director, subsidiary. or any agent by employee, benefit its for committed actions corrupt the for liable held be to body corporate a for allows which offence liability corporate new a introduces This 2018. in enacted was 2018 Offences)Act (Corruption Justice Criminal The by addressed is warranty protectionregardingcompliancewithsuchlaws. concern this Typically, non-compliance. resulting from damage reputational and penalties financial significant company is a limited liability company. If an unlimite liabilities of its subsidiary/investee company, provided the portfolio Arethereanycircumstancesinwhich:(i)aprivate 10.5 11Whatotherfactorscommonlygiverisetoconcerns 11.1 to impose liability on a shareholder for the underlying activities/ underlying the for shareholder a on liability impose to as so veil” corporate the “pierce not will court Irish Generally,an entity’s debts. the for liable be can shareholders/partners its used, is partnership 1OtherUsefulFacts 11 the liabilitiesofanotherportfoliocompany? considering aninvestmentinyourjurisdiction? and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor

www.iclg.com d company or ireland 147 ireland 148 ireland © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com matheson ra wrs ih let ars a ag o idsre, nldn, in including, industries, of particular, technology, range manufacturingandfoodbeverage. a across undertaking clients with companies works Brian Irish with works regularly transactions outsideofIreland. investment He strategic and providing advice. matters including commercial general issues, on business-related clients advises he transactional his practice, to addition In teams. management and sponsors including spectrum target companies, venture and growth investment capital providers, private equity full the across clients for acts Brian cross- largest the of some border transactionsinvolvingIrishtargetcompaniesinrecentyears. in on worked expertise has particular and has M&A Brian cross-border London, in firm law international large a in worked previously Having refinancings. and ventures joint reorganisations, fundraisings, equity equity, private M&A, company Group, private including M&A matters transactional Corporate of range a firm’s on clients the advising in partner a is McCloskey Brian ahsns i ofcs icuig 6 ates n tx rnias n oe 40 ea ad a poesoas Mteo srie te ea nes of needs legal the banks, six of services the world’s 10 largest Matheson asset managers, seven of the top 10 global technology brands and professionals. we largest have advised 50 world’sthe majority the tax of of the half Fortune 100. over include and clients Our Ireland. legal from and in business 470 doing institutions financial and over companies focused internationally and principals tax and partners 96 including offices, six across Matheson’s work people 700 than more Francisco, San and York,Alto Palo New London, Cork, in offices with and Ireland Dublin, in 1825 in Established R:www.matheson.com URL: [email protected] +35312322000 Email: Tel: Ireland Dublin 2 70 SirJohnRogerson’s Quay Matheson Brian McCloskey aain n rpeet hg-e-ot idvdas n owner- and individuals high-net-worth managed businesses. represents and taxation personal issues. on insolvency-related advises and also taxes, Aidan employment-related transactions, property planning, financial border tax elements of private equity transactions. He also advises on cross- of consequences tax doing business the in and from Ireland. and Aidan has a particular focus M&A, on the reorganisations, international aspects of corporate taxation including the structuring of domestic and Aidan Fahy is a partner in the firm’s Tax Department and advises on all iclg to: privateequity 2019 R:www.matheson.com URL: [email protected] +35312322000 Email: Tel: Ireland Dublin 2 70 SirJohnRogerson’s Quay Matheson Aidan Fahy ireland chapter 21 italy Nathalie Brazzelli

pirola pennuto Zei & associati massimo Di terlizzi

1 Overview Bidco, which is usually incorporated as an Italian limited liability company (s.r.l.) or stock company (s.p.a), acquires the Target shares and also acts as borrower under the debt facility. The Italian Bidco 1.1 What are the most common types of private equity is merged with the Target post-closing in order to allow the debt transactions in your jurisdiction? What is the current pushdown. state of the market for these transactions? Have you Top management commonly co-invest at Topco or Bidco level. seen any changes in the types of private equity transactions being implemented in the last two to three years? 2.2 What are the main drivers for these acquisition structures? A broad range of private equity transactions are carried out in Italy. The most common transactions are leverage buyout acquisitions, The private equity structures are generally designed in order to: i) refinancing, bolt-on deals and secondary buyouts. allow the interest expenses deduction; ii) provide efficient methods Despite the uncertain political situation, there have been no material for cash repatriation; iii) allow flexibility on exit; iv) retain changes in the last two to three years. flexibility for acquisition financing; v) minimise tax leakages; and vi) have the ultimate control of the structure.

1.2 What are the most significant factors encouraging or inhibiting private equity transactions in your 2.3 How is the equity commonly structured in private jurisdiction? equity transactions in your jurisdiction (including institutional, management and carried interests)? Italy has a wide range of medium-size companies (which are often worldwide, successful entrepreneurial cases) and companies with The structuring of the equity depends on various factors such as the good growth and development potential. This, combined with the acquisition structure, the Target group, the seniority and role of the high standards of the management, makes Italy an attractive management, etc. marketplace. In a scenario of a non-Italian private equity firm and of a non-Italian (EU) Topco, the share capital of the Italian Bidco generally consists of ordinary shares while the equity of the EU Topco may be 1.3 What trends do you anticipate seeing in (i) the next 12 composed of ordinary, preference and performance shares. The months and (ii) the longer term for private equity transactions in your jurisdiction? management typically i) subscribes for the so called “sweet equity” at the level of Topco, or ii) subscribes for financial instruments (i.e. warrants) issued by the Italian Bidco. For the next 12 months the interest of private equity in Italian transactions should be stable and reflect the previous year’s trend. In case of Italian private equity funds structures, the management commonly invest pari passu to the Italian fund in ordinary shares of

the Italian Topco. The managers’ shares usually have restricted 2 Structuring Matters administrative rights.

2.1 What are the most common acquisition structures 2.4 If a private equity investor is taking a minority adopted for private equity transactions in your position, are there different structuring jurisdiction? considerations?

Private equity transactions are generally structured using a holding The minority position will mainly impact the structure of the company (“Topco”) and a wholly owned subsidiary of Topco governance. In such a scenario, the private equity usually get a veto (“Bidco”). right on the strategic decisions and request the right to appoint of Topco is usually owned by the private equity fund. one or more directors.

iclg to: private equity 2019 www.iclg.com 149 © Published and reproduced with kind permission by Global Legal Group Ltd, London 150 italy h peec o lae si cass a ipc o te tax the on impact may clauses ship qualification ofthegainrealisedbymanagers. leaver of presence The age orincaseoflong-termillness. ( cause without terminated is manager the with relationship employment the which in event any include generally definitions leaver Good © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com certain negotiate asetofbusiness-related protections/related matters. on veto also may and have matters financial and generally business or decisions they strategic stake, minority of case and In companies portfolio and Holdcos therefore controltherelevantdecisions. the of of members majority the board appoint to right the has generally equity Private Doprivateequityinvestorsand/ortheirdirector 3.2 Whatarethetypicalgovernancearrangementsfor 3.1 company withcause( the by terminated is manager the with relationship employment the where case any includes leaver bad of definition frequent most The The leaver ship provisions, if any, may be structured in many forms. Forwhatreasonsisamanagement equityholder 2.6 along provisions. tag-/drag- include usually agreements shareholders’ the Moreover, of exit(tradesaleorIPO). event the in sponsors the of MoM/IRR) (i.e. return the to linked are returns whose shares performance or preferred in invest managers In case of investment in the non-resident Topco (typically a Luxco), Management typicallyinvestslessthan10%oftheequity. Inrelationtomanagement equity, whatisthetypical 2.5 pirola pennutoZei&associati laws arepublic). by- company’s (the confidential are agreements shareholders’ The matters. financial and business or decisions equity strategic private certain on minority investors) of case in (especially rights veto and/or Targetdecisions the control therefore and directors the of majority the appoint to right the include may shareholders’agreements The rvt eut ad ioiy oivsos yial etr no a into of the Target enter group. typically co-investors shareholders’ minority agreement to govern their relations and the management and equity Private GovernanceMatters 3 acquisition provisions? position, whatvetorightswouldtheytypicallyenjoy? etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor in yourjurisdiction? arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such your jurisdiction? usually treatedasagoodleaverorbadin what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and giusta causa giusta

) or a manager retires over statutory retirement statutory over retires manager a or ) giusta causa ). h areet bt hy ae o e rfe poel a a over- an as properly excessive provisioncanmaketheentireinvalid. drafted be to have they but agreements the allowed. is renewal in included commonly are provisions automatic non-solicit and Non-compete no and years five than longer no Under the Italian law, shareholder agreements can have a duration of are provisions commonly used. options put and Call case. the usually not is This vis agreements. Therefore, veto rights the are relevant between the parties but not in out set as provisions contractual on based are shareholders’agreements the that noting worth is It arrangements. veto the effectivenessof the limit which rules specific no are There (ii) the towards liable severally and jointly are directors the (i) the company, theItalianCivilCode,providesthat: towards directors’liability the to respect with above, the on Based company’s internal the an through supervise director(s), auditing system. to executive and) the by informed management be (to required non-executive a or mainly is executive director non-executive a above, the of an Because director. as role specific director’s the with connected directly is director each to required diligence The mustnotactinconflictofinterestswiththecompany. (iv) mustactinaninformedmanner;and (iii) be to services the by required diligence the with act must the and law applicable any with (ii) accordance in act must (i) namely they: and services, their of rendering the in directors by with complied directors’fundamental four are There be always must which duties, . Arethereanylimitationsorrestrictions onthe 3.5 Arethereanydutiesowed byaprivateequityinvestor 3.4 Arethereanylimitations ontheeffectivenessofveto 3.3 . Arethereanylegalrestrictionsorotherrequirements 3.6 thirdparties. non-compete andnon-solicitprovisions)? typically addressed? typically addressed? one ormoredirectorstoacommittee; and to delegated duties specific to related is violation the unless company for any damage caused by the breach of their duties, knowledge; and skills specific respective their on based and performed company’s by-laws; portfolio companies? (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements shareholders (or to minorityshareholderssuchasmanagement the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin liable in case of damages arisen fro arisen damages of case in liable severally and jointly however, is, director non-executive a iclg to: privateequity 2019 vice versa )? Ifso,howarethese m fact/acts/omissions/ m italy vis-à- ietr nmntd y h piae qiy eeal hv no have generally equity private executive roleswithintheboard. the by nominated Directors breach has caused damages to the person who is bringing the action. or acts his/her the (ii) and duties; his/her breached have must he/she (i) omissions: be for liable to become conditions may director general a two before satisfied forth sets Code Civil Italian The labour, taxation,environmentalandbankruptcylaws). (e.g. laws special in for provided are liabilities specific Moreover, odtos rcdn icue i te P. s h Italian the As authorisation processisnotrequired. SPA. the and in transactions generally involve mid-market acquisitions, the antitrust directors included of precedent board conditions the commitments, specific any and activity diligence due shareholders’the approvals, financing the of negotiation the approval), sector-specific and competition (mainly approval regulatory by impacted is transactions the of timeline The is goingtoapprove. their declare to required are interest in the transaction that the board of directors of the company directors exists, conflict a Where nominating them. Duties of the directors are owed to the company and not to the party the company’s individualshareholders (ii) company; the towards towards liability (iii) company’sand the civil creditors; towards liability liability of (i) kinds directors: different the three of forth liability sets Code Civil Italian The pirola pennutoZei&associati © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Decree no.58/1998 – TUF). In public-to-private transactions specific domestic rules apply (Law Whatparticularfeatures and/orchallengesapplyto 5.1 to refer the (please question 9.4). pushdown by debt related affected and transactions MLBO favourably the on been 2016 in TaxAuthorities Italian the has by issued clarifications landscape M&A The Havetherebeenanydiscernibletrendsintransaction 4.2 What arethemajorissuesimpactingtimetablefor 4.1 Howdodirectorsnominatedbyprivateequity 3.7 rnato em:Pbi custos Transaction Terms: Public Acquisitions 5 Transaction Terms: General 4 disclosure obligationsandfinancingissues? of otherportfoliocompanies? prevent, to order in best eliminate orlimitsuchdamages. his/her done not has he/she that extent the to him/her, by known were which circumstances commonly dealtwith? transactions (andtheirfinancing) andhowarethese private equityinvestorsinvolved inpublic-to-private terms overrecentyears? and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof uti singuli orthirdparties. time iscommonlyagreed. of period certain a after out way a investment, minority of case In generally investors equity private prefer the one-to-one transaction (rather buy-side, than a competitive auction). the on addition, In the between period the locked-box datetotheclosingoftransaction. in value extract to not undertakes seller the financial information and reduces the contractual liabilities. The over control offers it as This equity private the by preferred sellers. is structure equity private of case in particular in deals, equity private Italian the in common fairly is structure “locked-box” The of set strong a obtain to guarantees. need generally they buy-side, the On very offer limited warranties. to prefer investors equity private side, seller’s the On There arenospecificrules. the requiredverydetailedDDexercise. The use of insurance is very limited in Italy due to the high costs and specific amountandhaveatimelylimit. no-leakage a to capped generally are covenant leakage no any of under Liabilities consists undertakings the covenants andguarantees. of set standard The very limited. warranties/indemnities offered by a private equity seller is generally of package the anticipated, As basis. case-by-case a on depends It . Whatconsiderationstructuresare typicallypreferred 6.1 Whatdealprotectionsare availabletoprivateequity 5.2 . To whatextentisrepresentation&warranty insurance 6.4 Whatisthetypicalscopeofothercovenants, 6.3 Whatisthetypicalpackageofwarranties/indemnities 6.2 the offering partyachievea95%shareholding. share if realised be only can entire squeeze-out the as challenge a also is capital the of acquisition The process. diligence due the in difficulties creates companies listed around confidentiality of level and the implies approval by the competent authorities. In addition, the high This offer. tender significant disclosure obligations, the imposition of a strict timeline a involves process acquisition The Transaction Terms: Private Acquisitions 6 on thebuy-side,inyourjurisdiction? acquisitions? the typicalcostofsuchinsurance? equity selleranditsmanagementteamtoabuyer? team toabuyer? by privateequityinvestors(i)onthesell-side,and(ii) investors inyourjurisdictionrelationtopublic exclusions fromsuchinsurance policies,andwhatis excesses /policylimits,and(ii) carve-outs/ used inyourjurisdiction?Ifso,whatarethetypical(i) undertakings andindemnitiesprovidedbyaprivate offered byaprivateequityselleranditsmanagement www.iclg.com italy 151 italy 152 italy © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com the iii) time, of period certain a for exit fully a equity private the to prohibit which agreements up lock the ii) transaction, the of timing the and pricing the affect might which conditions market the i) are: scenario IPO an in considered be to have which features main The The exitthroughanIPOisgenerally usedforlarge-size deals. Whatparticularfeaturesand/orchallengesshoulda 7.1 They arenotcommonlyusedintheItalianmarket. Arereversebreakfeesprevalentinprivateequity 6.8 the of availability the on comfort give financial means. to seller the to shown also is letter commitment debt a financing, bank the to Withregard purpose oftheacquisition Target. the for Bidco in injected be will capital said that and investors the equity commitment letter attesting that an it will call the required capital from with seller the provide usually sponsors equity Private Howdoprivateequitybuyerstypicallyprovide 6.7 reduced bytheliabilities. is which earn-out or consideration deferred of component a with structured is price the alternative an As individuals. are sellers the if especially liabilities, the secure to guarantee) bank (i.e. securities other or amounts escrow for ask commonly buyers equity Private post-closing. time of period short a in proceeds exit the investors their to return to have they because they also and warranties limited very as provide only securities provide generally not do sellers equity Private Do(i)privateequitysellersprovide security(e.g. 6.6 the exposure. addition, minimis In price. purchase aggregate the to equal limitation cap a to subject typically also are sellers’warranties equity Private and closing. after time capacity of period short title, relatively a to to limited are and authority limited generally are warranties Sellers’ Whatlimitationswilltypically applytotheliabilityofa 6.5 pirola pennutoZei&associati Transaction Terms: IPOs 7 warranties, covenants,indemnitiesandundertakings? exit? private equitysellerbeawareofinconsideringanIPO If so,whattermsaretypical? transactions tolimitprivateequitybuyers’ exposure? under anequitycommitmentletter, damages,etc.)? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and the managementteam)? warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and private equitysellerandmanagementteamunder and thresholds/baskets are also negotiated to further reduce de market. Italian the in However, mostoftheexitsoccurviatradesale. uncommon not are processes Dual-track Typically, itisimposedforperiodbetweensixand12months. basis. case-by-case a on defined are periods sponsors’lock-up The euto o itrs epne o te custo financing acquisition the on expenses interest of deduction The key tax objectives which are considered in the structuring are: i) Italian Bidcothatperformstheacquisition of Target. the incorporates platform holding EU The structure. holding EU Non-Italian private equity funds generally invest in Italy through an be to continue should market relatively easyforprivateequity. financing debt the to access The law. Italian the the purchaseofitsownshares. under permitted not Therefore, the Target company cannot give assistance is with regard to assistance Financial platforms andissuedbyBidco. markets/multilateral regulated EU on listed generally bonds/notes, by financed frequently are acquisitions the transactions, larger In loans providedbyapoolofbanks. bank senior by financed generally are acquisitions equity Private . Pleaseoutlinethemostcommonsourcesofdebt 8.1 Doprivateequitysellersgenerally pursueadual-track 7.3 Whatcustomarylock-upswould beimposedon 7.2 higher materially are which costs the compared toatradesalescenario. iv) and private the rights, reduces equity generally which governance corporate new . Whatarethekeytaxconsiderationsforprivateequity 9.1 Whatrecenttrendshavetherebeeninthedebt 8.3 Arethereanyrelevantlegalrequirementsor 8.2 Financing 8 Tax Matters 9 through asaleorIPO? private equitysellersonanIPOexit? off-shore structurescommon? financing marketinyourjurisdiction? financing) ofprivateequitytransactions? bonds). for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare investors andtransactionsinyourjurisdiction? Are debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof iclg to: privateequity 2019 italy Specific rules on the carried interest were introduced in 2017 ■ Tax Italian the by challenged been have transactions LBO ■ as treated are investment the taxable eventforItalianindividuals. of roll-over the and sale the Both 43%). (generally rate tax income corporate progressive individual the at taxable are incomes employment while rate flat 26% a at taxable is Capital gain realised with the sale of shares or financial instruments Whatarethekeytax-efficientarrangementsthat 9.2 Italian Bidcoandthe Target groupcompanies. the between unity tax the of election the Targetwith with or Bidco The interest deduction can be obtained with the merger of the Italian ii) cash extraction;andiii)tax-efficient exit. threshold); EBITDA 30% a minimisation of the withholding taxes on the service of the debt and within available is (deduction pirola pennutoZei&associati © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Have therebeenanysignificantchangesintax 9.4 Whatarethekeytaxconsiderationsformanagement 9.3 eti crusacs cniee a pr c-netr ad the and co-investors pure as relevant gaintaxableat26%CGT considered circumstances, certain or financial instruments (e.g. warrants) at fair market value are, under performance) (ordinary/preference/ shares subscribing level) Holdco Managers which invest in the holding structure (at Italian Bidco or EU hrs ern a are itrs, hc ae ed y the by held are which management, arequalifiedascapitalgain(taxable26%). interest, instruments/ carried financial a bearing of shares disposal the from arising gains the conditions, certain Under 50/2017). Decree Law 60 (art. the substanceofholdingstructures. are, in particular, focused on the beneficial ownership and on clarifications Said tax. gain capital the on cross- and flows border the of treatments tax withholding the on structures, IBLOR the on focus particular a with structures cross-border the on also the clarifications contain guidelines The threshold). in incurred expenses interest context of the acquisition of Target deduct (within the 30% EBITDA to allowed are MLBO/LBO on vehicles acquisition Italian the that clarified and transactions guidelines important issued Authorities Authorities for several years. On March 2016, the Italian Tax equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate anticipated? investment intoanewacquisitionstructure? shares, deferred/vestingarrangements)? teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities teams thataresellingand/orrolling-overpartoftheir . Target. the of business and size the on based determined is materiality The diligence is conducted by third-party advisors before an acquisition. due environmental and commercial financial, tax, legal, Adetailed insurance wheretheprivateequitydoesnotfrequentlyinvest. The regulatory scrutiny regards particular sectors such as banks and the abilitytoreleaseassetsfromportfoliocompanies. a on restrictions provide and disclosure of rules terms in requirements AIMFD of number transactions, equity private to With regards regulations. AIMFD the to subject are States Member EU Most oftherelevantfactorshavebeen addressedintheforegoing. equity contributed.Onecompanyisliableonlyforitsownactions. the to limited are shareholders the of liabilities the entities, liability limited as incorporated generally are companies portfolio the As the all impacted legislation transactions without any specific difference for private equity deals. anti-corruption and Anti-bribery 03Howdetailedisthelegalduediligence(including 10.3 Areprivateequityinvestorsorparticulartransactions 10.2 Havetherebeenanysignificantlegaland/or 10.1 11What otherfactorscommonlygiverisetoconcerns 11.1 Arethereanycircumstancesinwhich:(i)aprivate 10.5 Hasanti-briberyoranti-corruptionlegislation 10.4 0LegalandRegulatoryMatters 10 1OtherUsefulFacts 11 materiality, scopeetc.)? jurisdiction (e.g.onnationalsecuritygrounds)? anticipated? considering aninvestmentinyourjurisdiction? the liabilitiesofanotherportfoliocompany? diligence, contractualprotection,etc.)? prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors subject toenhancedregulatoryscrutinyinyour private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ www.iclg.com italy 153 italy 154 italy © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com pirola pennutoZei&associati 150 lawyersaswellwithworld-widecorrespondents. and consultants tax 350 than more with independently acts It Shanghai. in one and Beijing in one London, Italy,in in one offices 10 has Firm The aspects, regulatory including matters, financial and banking corporate andcommerciallaw,transactions, aviation,labourlaw, IT lawandcopyrightlitigation. equity The Firmalsoprovidescorporatefinanceservices. private M&A, of respect in matters legal as well as to advisory expatriates, VATtax pricing, and transfer planning, and compliance tax international and domestic as such matters tax cover services Firm’s The excellence. The Firm has grown steadily over the years and has continually sought to reinforce its multi-disciplinary approach by creating specialised centres of years inprovidingtaxandlegalservicestomedium-large-sizecompaniesmultinationalgroups. Associati & Zei Pennuto Pirola She isaPartneratPirolaPennutoZei& Associati’s Milanoffice. acquired has and groups significant experienceinPrivateEquitytransactions. international and domestic for planning Nathalie mainly provides tax advice on corporate tax issues, M&A, tax of Chartered of ( Accountants the with registered is Association and Bocconi Milan’sUniversità from legislation Business and Economics in graduated Brazzelli Nathalie and theRegisterof Auditors ( R:www.pirolapennutozei.it URL: [email protected] +3902669951 Email: Tel: Italy Milan Via Vittor Pisani20 Pirola PennutoZei& Associati Nathalie Brazzelli Ordine dei Dottori Commercialisti Dottori dei Ordine Registro deiRevisoriContabili was established in the 1970s as a partnership by a group of specialists who had been engaged for a number of number a for engaged been had who specialists of group a by partnership a as 1970s the in established was ). ) of Milan of ) uio o Iain opne ad tla sbiire o foreign of subsidiaries Italian and Statutory companies multinational groups. and Italian Directors of of Boards of Auditor Member and a also Equity is Massimo Private M&A, law, tax restructuring. and commercial with experience and corporate, of knowledge extensive has He (Milan). SpA Finance Corporate Pirola and Shanghai) and (Beijing Ltd Consulting Co. China Pirola both at Chairman is Massimo (London). LLP UK Equity Partner and Managing Partner at Pirola Pennuto Zei & Associati of the Board at Pirola Pennuto Zei & Associati’s Milan office, Taxas well as Certified and Committee Executive of the of Member a and Partner Equity also is Register Italian the Statutory Public Auditor.Certified He of Register Italian the Advisors, with registered is Massimo of SolicitorstheSeniorCourtsEnglandandWales. roll the to and Court Italian the of Lawyers of roll the to admitted been has He 1960. October 30 on Milan in born Terlizziwas Di Massimo iclg to: privateequity 2019 R:www.pirolapennutozei.it URL: [email protected] +3902669951 Email: Tel: Italy Milan Via Vittor Pisani20 Pirola PennutoZei& Associati Massimo DiTerlizzi italy chapter 22 luxembourg Holger Holle

eversheds Sutherland (luxembourg) llp José pascual

1 Overview structures; a multilingual and technically-skilled workforce; and finally the strong governmental commitment towards the private equity sector. 1.1 What are the most common types of private equity transactions in your jurisdiction? What is the current 1.3 What trends do you anticipate seeing in (i) the next 12 state of the market for these transactions? Have you months and (ii) the longer term for private equity seen any changes in the types of private equity transactions in your jurisdiction? transactions being implemented in the last two to three years? PE funds structured under the RAIF regime or as unregulated LPs have increased by almost 20% in 2018 and it is expected that this trend Luxembourg is one of the most pre-eminent jurisdictions globally continues in the next 12 months. Luxembourg will continue to attract for the structuring of private equity transactions, both in the PE funds from all over the world and it is likely that the country will regulated and the unregulated space. Luxembourg has developed an continue to follow the current growth path (in 2018, pursuant to a impressive toolbox of structuring solutions to accommodate recent ALFI survey, assets under management across 640 private investments in both spaces. Besides the “all time classic”, the non- equity funds regulated in the country reached €88.5 billion, up from regulated SOPARFI (participation holding companies in any form €73.8 billion for nearly 630 funds in the previous year). available for commercial companies under the Luxembourg law of 10 August 1915 on commercial companies (1915 Law)), the most significant examples are the creation of the SICAR in 2004 2 Structuring Matters (regulated investment company in risk capital), the SIF in 2007 (specialised investment fund, a regulated alternative investment fund (AIF) vehicle used for any type of investment, including 2.1 What are the most common acquisition structures private equity) or the RAIF (reserved alternative investment fund, adopted for private equity transactions in your not subject to supervision by the Luxembourg financial supervisory jurisdiction? authority (CSSF), but to be managed by an authorised external alternative investment fund manager (AIFM) within the meaning of Acquisition structures typically include one or more Luxembourg the AIFMD). On the unregulated side, recent years have seen an unregulated SOPARFI companies which in turn acquire and hold increasing use of the overhauled S.C.S. and the new S.C.Sp. type of the target shares or assets. In secondary buy-out situations, typically partnerships (LP), the latter created in 2013 as a flexible structure the original acquisition structure is sold as part of the transaction. In without its own legal personality similar to an English LP to recent years, LP structures have become a preferred choice of accommodate investors from an Anglo-Saxon background. structuring investments in private equity transactions. LPs can be unregulated SOPARFIs or established as one of the (directly or indirectly) regulated types (SICAR, SIF or RAIF). In both 1.2 What are the most significant factors encouraging or alternatives, the LP regime benefits from a large degree of inhibiting private equity transactions in your jurisdiction? flexibility. Unregulated LPs are often used for feeder funds, carried interest vehicles or “club deal” type of co-investment constellations. Luxembourg has been a major hub in the private equity industry for over 20 years and continues to attract an increasing number of 2.2 What are the main drivers for these acquisition private equity firms. Luxembourg has positioned itself as one of the structures? jurisdictions likely to benefit from Brexit by attracting private equity houses and asset managers thanks to its distinctively private Acquisition structures typically include one or more Luxembourg equity-friendly environment. The following factors are typically unregulated SOPARFI companies which in turn acquire and hold mentioned as encouraging private equity transactions in the target shares or assets. In secondary buy-out situations, typically Luxembourg: political and economic stability; an attractive tax the original acquisition structure is sold as part of the transaction. In framework with a large number of double tax treaties; the modern recent years, LP structures have become a preferred choice of and pragmatic legal framework with a wide array of available structuring investments in private equity transactions. LPs can be unregulated SOPARFIs or established as one of the (directly or iclg to: private equity 2019 www.iclg.com 155 © Published and reproduced with kind permission by Global Legal Group Ltd, London 156 luxembourg © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com resigning of cause A for cause. dismissed voluntarily wouldbeconsidereda bad leaver. without holder dismissed equity if instances management some in and, death or illness or incapacity permanent of reasons for leaving if leaver good a considered be typically would holder Aequity management Forwhatreasonsisamanagementequityholder 2.6 the by main managed LP sponsor. an the of form alongside the in investing often vehicle, vehicle acquisition is separate equity a management in Alternatively, structured favour. sponsor’s the in options call or pledges share with combined provisions, drag-along by ensured typically is sponsor the of exit upon management’sexit The company. portfolio relevant the with employment manager’s the of termination upon equity equity management’s acquire private to the sponsor allowing provisions leaver) leaver/bad (good other include in usually documents seen transaction and jurisdictions, be European can what to similar are provisions compulsory and vesting typical The directs. sponsor the as vote to or vote to the equity and management equity holders will undertake either not of percentage small a represent typically will equity Management Inrelationtomanagementequity, whatisthetypical 2.5 agreements. LP or agreements shareholders’ in included usually are provisions These etc. provisions, exit restrictions, transfer the share provisions, against it anti-dilution decisions, protecting major in rights mechanisms veto e.g. investor, majority other by control of lack the mitigate to Aaim typically will investor equity private minority Ifaprivateequityinvestoristakingminority 2.4 both In RAIF). or SIF alternatives, the LP (SICAR, regime benefits from a large degree of types or regulated (directly the indirectly) of one as established or SOPARFIs of unregulated choice preferred be can LPs a transactions. equity private in become investments structuring have structures LP years recent the original acquisition structure is sold as part of the transaction. In the target shares or assets. In secondary hold buy-out situations, typically and luxembourg acquire turn in which companies SOPARFI unregulated Luxembourg more or one include typically structures Acquisition Howistheequitycommonly structuredinprivate 2.3 both In RAIF). or SIF alternatives, the LP (SICAR, regime benefits from a large degree of types regulated indirectly) eversheds Sutherland(luxembourg)llp neuae Ls r otn sd o fee fns crid interest carried funds, feeder for vehicles orthe“clubdeal”typeofco-investmentconstellations. used often are LPs Unregulated interest carried funds, feeder for vehicles orthe“clubdeal”typeofco-investmentconstellations. used often are LPs Unregulated institutional, managementandcarriedinterests)? your jurisdiction? usually treatedasagoodleaverorbadin acquisition provisions? what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and considerations? position, aretheredifferentstructuring equity transactionsinyourjurisdiction(including flexibility. flexibility.

less overbusinessplanningandstrategymatters. and actions fundamental over only rights veto enjoying investors typically minority with held, percentage share the i.e. influence, The actions. scope of the veto rights will, to a large extent, depend on the overall corporate major over agreements shareholders’ in investors equity private for rights veto for provide to common is It agreements enforceableagainstthirdparties. company the of association which are public of in order to make articles the provisions of the shareholders’ the governing in those shares, e.g. of transfer provisions, key certain reflect to common required to be made public, but as a way of easing enforcement it is is agreement Neither agreements. LP or of agreements part shareholder typically are provisions exit and proceeds of distribution consent, shareholder requiring matters rights, pre-emption rights, nominee appoint to directors, restrictions of transfer of shares, tag-along right and drag-along the as such arrangements Governance drco, let nmne f saeodr nes o c i the in act company’s to interest, notinthatofthenominatingshareholder. needs shareholder, a of nominee a albeit director, a between interests of the shareholder(s) and interest of the company; interest of the company. Luxembourg law also clearly distinguishes its corporate the against abusing interests own its favouring by from rights majority refrain times, all at shall, shareholder a majority however, rule, general a As shareholders. minority the toward duties fiduciary specific any have not do investors equity Private . Doprivateequityinvestors and/ortheirdirector 3.2 Whatarethetypicalgovernance arrangementsfor 3.1 . Arethereanydutiesowedbyaprivateequityinvestor 3.4 Arethereanylimitationsontheeffectivenessofveto 3.3 these limitationsbyincludingtheappropriateexceptions. Voting address deliberations). typically board arrangements from shareholder a director a depriving excluding completely by or rights voting by its of entirely (e.g. Luxembourg public in to contrary rules not are policy they as long as contract of freedom of principle prevailing the of expression an as effective generally Vetoare level board at and level shareholder at both arrangements GovernanceMatters 3 position, whatvetorightswouldtheytypicallyenjoy? in yourjurisdiction? typically addressed? typically addressed? etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such shareholders (or to minorityshareholderssuchasmanagement the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) iclg to: privateequity 2019 vice versa )? Ifso,howarethese

uebug n a a eea picpe ny h itrs o the of interest the individual company itselfisrelevant. only principle in general restrictively a very as applied and is Luxembourg interest group of notion the that ietr, s og s hy o o itree iety ih the with directly interfere facto not do they company’s management, as in which case they may be held liable as long nominee as their of are directors, omissions and investors acts equity the for Private liable not director.generally other any of those from differ to not directors do obligations nominee their generally, risks; expose liability increased practice somewhat in This may shareholders. position the the delicate to to company related the information of business confidential easily and cannot sensitive and duties disclose confidentiality by bound even are or directors with, line in necessarily contrary to, the not interest of the private equity investor. is Moreover, the which itself company a of directors faith and to carry out their duties in the best corporate the interest of the contrary, the To good in mandate their fulfil to Luxembourgduty the have company shareholder. that to duty particular any owe not does shareholder a by nominated Adirector shareholders isatthesametimeanemployeeofcompany). the of none that (assuming restrictions specific to subject not or and courts and common are law provisions non-solicit Luxembourg and Non-compete using arbitration. to shift clear a been has courts have been the preferred choice; however, more and recently there law York New or English Historically, jurisdiction. and law luxembourg governing the choose to free generally are parties The ineffective. party or the right to a share in the profits for another party would be one for loss of risk the excluding clauses e.g. rules, policy public deem Luxembourg commercially under applying they of restrictions certain what with freedom appropriate, agree of may principle parties overarching the the contract, of expression an As Arethereanylimitationsorrestrictionsonthe 3.5 eversheds Sutherland(luxembourg)llp © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 does not create a conflict nominee a company portfolio that another of director time, same fact the at is, director The interest. of conflicts such of existence the of directors of board the by informed be must shareholders of director has a conflicting interest. Finally, the next general meeting impacted the which in transaction the to respect with deliberation the in participating from refrain and meeting board the of minutes such of existence the the in recorded it have notify directors, of board the to interest of conflict to obligation the under is interest company’s the to opposed is which interest monetary a indirectly, or directly has, who director a law, corporate Luxembourg Under Howdodirectorsnominatedbyprivateequity 3.7 Arethereanylegalrestrictionsorotherrequirements 3.6 directors. (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements portfolio companies? non-compete andnon-solicitprovisions)? of otherportfoliocompanies? party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin per se , but the director needs to be mindful de

a as apy o h fnig f h aqiiin o a regulated a of business. acquisitions the of funding the to apply also may regulatory the of Financier approval the the as sector, such financial authorities the itself. as Luxembourg such in sector regulated a clearances in target a concerns transaction the regulatory if However, or antitrust any require usually not do Luxembourg in transactions equity Private amount ofthebreak-up isproportionatetothesizeof thedeal. the that provided fees break-up as such protections, deal specific for provide contractually to parties the for possible is it said, That is abouttobedone. one party can legitimately expect from the counterparty that the deal have that advanced so is negotiation parties the unless process the during point the law, Luxembourg in contractual freedom to negotiate and to abort principle the negotiations at any general a As specific imposing provision restrictions, a stringent procedural framework and a law strict timetable. squeeze-out the Takeover and EU legal Luxembourg Directive the strictly implementing the law a to takeover the subject law, From securities are transactions transaction. such of perspective, type this for market standard genuine a identify to difficult is it transactions, to-public private- targetsof potential be may that Luxembourgitself in listed publicly companies Luxembourg of number small very the to Due . Havetherebeenanydiscernible trendsintransaction 4.2 Whatarethemajorissues impactingthetimetablefor 4.1 . Whatdealprotectionsareavailabletoprivateequity 5.2 Whatparticularfeaturesand/orchallengesapplyto 5.1 courts), withthearbitrationprocedurebeingheldinLuxembourg. state of instead tribunal arbitral an to submission the with however, coupled, (often jurisdiction of place the as Luxembourg of choice preferred choice. To a certain extent this tendency also applies to the while historically English law or New York law would have been the the transaction documents to Luxembourg law as the governing law, submit to investors equity private by readiness increasing an to led other and courts industry,equity have private the of particularities the for by authorities understanding and experience of wealth the available with coupled LP), new the as such of law local into instruments style “toolbox” the of Anglo-Saxon transposition expand the (including alternatives structuring to legislator Luxembourg the of thriving constant the and Law 1915 the of modernisation The Transaction Terms: General 4 rnato em:Pbi custos Transaction Terms: Public Acquisitions 5 terms overrecentyears? disclosure obligationsandfinancingissues? acquisitions? commonly dealtwith? and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust investors inyourjurisdictionrelationtopublic transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private CS) il e eurd Sc apoa requirements approval Such required. be will (CSSF) omsin e uvilne u Secteur du Surveillance de Commission www.iclg.com

157 luxembourg 158 luxembourg © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com acquisition Luxembourg for agreements typicallyrangesfrom0.9% to1.8%oftheinsuredsum. insurances W&I for premium negotiation. other The to in subject always as is this standards but jurisdictions, practice European market and become carve-outs limitations, will similar exclusions that expected be may it and W&I jurisdictions European of other in as players providers same the are likely insurances the Luxembourg, for standard market genuine a identify to early too is it while However, in Luxembourg. common increasingly are insurances indemnity and Warranty To whatextentisrepresentation&warrantyinsurance 6.4 to relating matters tax for periods pre-signing/pre-closing. given be common. typically are will Indemnities non-solicit) (non-compete, covenants Restrictive any purchase agreements using a “black box” purchase price model. be taken over by the buyer. Non-leakage provisions will be found in of the pre-closing period and on whether the management team will length the business, the of nature the on depend would and closing regarding the conduct of business in the period between signing and covenants to apply jurisdictions other in as considerations Similar Whatisthetypicalscopeofothercovenants, 6.3 their sharesalongsidetheprivateequityseller. teams may be pressured to give operational warranties if they co-sell resist typically will seller against giving any operational or business equity warranties. Management private A provide and matters. authority usually tax and certain capacity will title, European to seller respect other with equity only in warranties private seller a equity i.e. ones private the jurisdictions, a to by similar given is typically warranties/indemnities of package The Whatisthetypicalpackage ofwarranties/indemnities 6.2 seen butlessfrequentthaninotherjurisdictions. potential warranty/indemnity claims. Earn-out components are also will attempt to retain a portion of investor the purchase price as collateral for equity cash private buy-side the a of while closing, payment at full consideration a prefer naturally will investor equity consideration. luxembourg of merger arrangements are type possible, but fairly rare. A sell-side private cash-for-shares or consideration of shares-for-sharestypes including Arrangements a have Luxembourg in realised transactions M&A equity private of majority vast The Whatconsiderationstructures aretypicallypreferred 6.1 eversheds Sutherland(luxembourg)llp Transaction Terms: Private Acquisitions 6 on thebuy-side,inyourjurisdiction? the typicalcostofsuchinsurance? exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) equity selleranditsmanagementteamtoabuyer? undertakings andindemnitiesprovidedbyaprivate team toabuyer? offered byaprivateequityselleranditsmanagement by privateequityinvestors(i)onthesell-side,and(ii) aaeet em s ae oe ad mngmn incentive management a and over programme isputinplaceatthetarget). taken is team management security (other than possibly the vesting of shares in the target if the personal provide to asked be or not typically warranty will for claims, indemnity liable all at if teams, Management price purchase discussions. of part as matters warranty resolve to tend rather will sellers equity private occasionally,but seen are price purchase their sponsors. Escrow arrangements for a (small) proportion of the to proceeds distribute to interest their to due warranties/liabilities Private equity sellers will generally resist providing security for any due the in identified diligence exercisemay, inveryexceptionalcases,beuncapped. risks particular for Indemnities be can price observed. purchase the of 100% to up 30% of caps seller, the of position bargaining the on depending latter, the to respect With amount. 24 capped a and to exposure 12 financial of between limitation and (typically months) brought be within can limits claims the time which include limitations general i.e. jurisdictions, European other in applied ones the to similar are limitations The e pbil lse cmais n uebug ht ol be would that Luxembourg in eligible. However, the legal companies and regulatory framework exists and an listed publicly few very are there as Luxembourg in seen frequently not are exits IPO standard a as observed been practice intheLuxembourg market. (yet) not have fees break Reverse either In no specific performanceoftheSPV’s obligationsmaybeclaimed. and damages SPV. contractual to the limited is for liability the alternative, guarantor a as documents transaction the to party become may wealth financial proven with affiliate an or itself fund equity frequently,private Less the comfort. financial provide to buyers equity private for means frequent a are benefit SPV’sthe to fund equity private the by letters commitment Equity . Do(i)privateequitysellersprovide security(e.g. 6.6 Whatlimitationswilltypically applytotheliabilityofa 6.5 . What particularfeaturesand/orchallengesshoulda 7.1 Arereversebreakfeesprevalentinprivateequity 6.8 Howdoprivateequitybuyerstypicallyprovide 6.7 Transaction Terms: IPOs 7 the managementteam)? warranties, covenants,indemnitiesandundertakings? exit? If so,whattermsaretypical? under anequitycommitmentletter, damages,etc.)? warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and private equitysellerandmanagementteamunder private equitysellerbeawareof inconsideringanIPO transactions tolimitprivateequitybuyers’ exposure? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and iclg to: privateequity 2019 Exchange areanotherfrequentsourceoffinancing. High-yield bonds which are usually listed on the Luxembourg Stock frequent lenders. and, to a lesser extent, US and French banks being amongst the most banks German and UK with Luxembourg of outside from sourced typically is financing Bank used. most finance debt of source the common remains financing loan leveraged bank-led Traditional this time. at identified be cannot standard common a jurisdiction, another in pursued IPO the of requirements procedural the on largely depends track dual the continuing for timeframe possible the and small very overall number of dual-track exits involving Luxembourg entities is the As above. not out set reasons are the to due Luxembourg Luxembourg in common in IPO an with combined exits Dual-track luxembourg an IPOexitinLuxembourg. A lock-up period of up to 180 days seems to be a standard period in Whatcustomarylock-upswouldbeimposedon 7.2 the of provisions the to subject Luxembourg prospectuslaw. and CSSF the of supervision under out carried be would seller equity private a by initiated IPO eversheds Sutherland(luxembourg)llp © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 international and jurisdiction European most the any likely in is collateral that lender-friendly framework on legal 2005 a August offers 5 arrangements, of law the through Luxembourg, Whatrecenttrendshavetherebeen inthedebt 8.3 financial assistanceandupstreamorcross-streamguarantees. governing rules restrictive rather the to given be should attention or guaranteeing company needs to in be taken into account and special however, perspective, borrowing the of law interest corporate the financing debt with dealing corporate a From in Luxembourg. authorities tax the by accepted is 85:15 a of ratio generally debt-to-equity but capitalisation, thin no regarding is There legislation specific financing. debt the of structure or nature the affect There are no particular legal requirements or restrictions that would Are thereanyrelevantlegalrequirementsor 8.2 Pleaseoutlinethemostcommonsourcesofdebt 8.1 Doprivateequitysellersgenerallypursueadual-track 7.3 Financing 8 bonds). through asaleorIPO? private equitysellersonanIPOexit? financing marketinyourjurisdiction? financing) ofprivateequitytransactions? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare SICAR regimeiftheRAIFinvestsinriskcapital. RAIFs are subject to the same tax regime as SIFs, but can opt for the the SIF. a is due tax of value only asset net quarterly the on The based 0.01% of tax subscription Luxembourg. on in taxes income to or subject gain not capital are form, legal the of irrespective SIFs, LPs aretax-transparentandnotsubjecttocorporateincometax. interest paymentsareexemptfromwithholdingtax. and Dividend Luxembourg. in tax to subject not are shareholders not non-resident does by realised SICAR gains Capital a income. taxable by constitute held securities from derived income but taxation, corporate normal to subject are LPs) than (other SICARs many of exemption the income andexittaxcharges forprivateequityinvestments. for allowing SOPARFIs for available are alternatives structuring Directive. various taxable, Parent-Subsidiary fully being EU it Despite the double- from of and network treaties extensive taxation Luxembourg’s from benefit but SOPARFIs (other than LPs) are subject to normal corporate taxation Member OECD States). all almost (including countries other of number a with and Cyprus) (except States Member EU all with treaties tax and attractive tax regimes within the EU. Luxembourg has bilateral their companies, does not aim to be, a tax haven, and but for it offers one of the not, most flexible is Luxembourg Europe alike. employees their in and shareholders business-friendly and stable most the among considered is Luxembourg in framework tax The hrs sud y Lxmor cmay r ol txbe in taxable only are company Luxembourg a by issued shares on managers resident non-Luxembourg by realised gains Capital in described exemptions the case questions 9.1and9.3belowwillapply. which in AIF, the by issued to tax-efficient be may structure the it receipt of carried interest as sale of shares or securities managers resident Luxembourg For being their interest of investors initial investments. equity carried the to the return prior and the upon recipient conditional the recipient by the received e.g. been fulfilled, having are payments advance no resident, conditions tax Luxembourg becoming certain if rate, tax have income may derived from carried AIFM interest taxed at an 25% of the by global employed teams management interest: Carried . Whatarethekeytaxconsiderations forprivateequity 9.1 . Whatarethekeytaxconsiderationsformanagement 9.3 Whatarethekeytax-efficientarrangementsthat 9.2 underlying assets. the of location the of irrespective and documents convenient loan the of a law governing the as of irrespective Luxembourg financing, the secure use to jurisdiction to opt increasingly lenders Tax Matters 9 off-shore structurescommon? investment intoanewacquisition structure? shares, deferred/vestingarrangements)? investors andtransactionsinyourjurisdiction? Are teams thataresellingand/orrolling-over partoftheir equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate www.iclg.com 159 luxembourg 160 luxembourg © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com in activity transactional the of particular part any large to a subject as not are restrictions; transactions equity Private Areprivate equityinvestorsorparticulartransactions 10.2 Fund Investment Alternative the Manager Directive. and laws, laundering money anti- Luxembourg, in law company e.g. transactions, corporate equity of private the deals, their investors must comply with the provisions applicable in the context structuring In investors. equity private the to applicable regulations or laws specific no are There Havetherebeenanysignificantlegaland/or 10.1 for method standard Luxembourg the doubletaxtreaties. currently is which method, the exemption of instead company, foreign a from company Luxembourg a Luxembourg must apply the credit method on dividends received by whereby solution, a for opted has a Luxembourg which the under have MLI, of 5 will article from plans, resulting Luxembourg action in impact BEPS significant different the with treaties tax 68 jurisdictions, including Luxembourg, in view of aligning existing by 2017 June 7 on signed (MLI) instrument multilateral not the Finally measures additional certain contained inthe ATAD. comprising 2018, December domestic law in Luxembourg by the adoption of the ATAD law of 21 the affecting functioning of directly the internal market (ATAD), practices has been transposed avoidance into tax against setting rules 2016, forth July 12 of 2016/1164 (EU) Directive the Council The between exchange information participating taxauthoritiesonanannualbasis. automatic an thus authorities, facilitating tax Luxembourg the to information (ii) such and report Luxembourg, with agreement sharing information tax a with country a in or State Member EU a in resident fiscally are that institutions sponsors their about information certain collect (i) to obligation the financial LuxembourgRAIFs) and SIFs SICARs, SOPARFIs, cases on certain in (including Luxembourg imposed the level, has Union legislator European at plans action the BEPS implementing itself 2014, December Common Reporting Standard developed by the OECD as part of 9 the of 2014/107 (EU) Directive Council the transposing 2015 December 18 of law the By luxembourg Havetherebeenanysignificant changesintax 9.4 described inquestion9.1above. exemptions the from benefit further may and exemptions similar Luxembourgshareholding; the from benefit may managers resident of acquisition the from months six within disposal) the of date the substantial participation (more than 10% over the five years prior to a of disposal the upon realised are gains capital the if Luxembourg eversheds Sutherland(luxembourg)llp 0Legal andRegulatoryMatters 10 anticipated? jurisdiction (e.g.onnationalsecurity grounds)? subject toenhancedregulatory scrutinyinyour anticipated? private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities uebugs euain s tasaet n trustworthy and transparent a jurisdiction fortransactionsofanyscale. as reputation While Luxembourg’s fast- a of context legislation. moving transaction, the the stringent AML in legislation has contributed to investor laundering an for burdensome anti-money sometimes applicable with comply Luxembourg, in investment an of cycle life the throughout epc, t s ot ntn ta Lxmor hs o largely now has Luxembourg that noting implemented the 4 worth is it respect, that In years. the over reforms of number a by fostered been has Anti- world. the transparency and decades for strong been has legislation corruption in countries corrupt least the of one it making Perceptions Index reported by the NGO Transparency International, Corruption 2017 the on 100 of out points 82 scored Luxembourg financing arrangements. due i.e. diligence, due diligence will typically be limited to title, corporate governance the and of scope the due impacts necessarily financial this the structure, holding the on conducting is Luxembourg in focus the If auditors diligence. the tax alongside and legal due advisors outside The by conducted diligence. usually due is the process of diligence scope the within covered be to The diligence. timeframe depends due on the complexity and the number of documents legal detailed relatively a investors conduct equity typically private jurisdictions, European other to Similar a liability limited as liable held be may faults, management committing and company private/public a the of management the in involved personally of becoming company shareholder a Similarly, contribution. capital share its of amount the beyond sought be can liability its partnership, the of management active gets the partner in involved limited as capacity its in investor equity private a if company.the of capital share the However, partnerships, of case in liability companies or partnerships is limited to their contribution to capacity as shareholders or limited partners of private/public limited corporate veil, i.e. the liability of the private equity investors in their As a general principle it is not possible for a third party to pierce the

04Hasanti-briberyoranti-corruptionlegislation 10.4 Howdetailedisthelegalduediligence(including 10.3 or specific jurisdictions, other in regulatory scrutinyoftenoriginatesfromsuchotherjurisdictions. assets holding ultimately Luxembourgof Luxembourginvolvement the structures of consists 05Arethereanycircumstancesinwhich:(i)aprivate 10.5 de facto diligence, contractualprotection,etc.)? materiality, scopeetc.)? the liabilitiesofanotherportfoliocompany? approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof manager. th AML Directive. A private equity investor shall, iclg to: privateequity 2019 rvt eut frs hud o fc ay atclr sus or issues particular any face not concerns apartfromtheonesindicatedspecificallyinthischapter. luxembourg should firms equity Private framework sector. equity private legal the promote to commitment and clear a showing environment an created has Luxembourg Whatotherfactorscommonlygiverisetoconcerns 11.1 eversheds Sutherland(luxembourg)llp © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 ■ ■ u Ivsmn Fns em s xeine i avsn cins n h srcuig frain n mngmn o ivsmn fns corporate funds, investment of Luxembourg lawwithinawidercommercial context. management and formation structuring, the on clients transactions and advising regulatory or compliance matters. As in part of the Eversheds Sutherland global network, we experienced hold an excellent understanding of local is team Funds Investment Our team inLuxembourgisparticularlyexperienced inadvisingcompaniesandinstitutionsoncomplexmultijurisdictional transactions. Our businesses. national and global leading for transactions corporate of spectrum full the across advising versed well are lawyers corporate Our and corporateentities.We alsoadviseonregulatory issuesrelatingtoinvestmentfundsandportfoliomanagers. and fund managers) on private equity transactions and M&A as well as the structuring, setting-up and organisation of all types of AIFs, UCITS funds office Luxembourg Our houses equity private corporates, large (including clients Asia. international Weand domestic funds. advise investment and and clients corporate on focuses Africa East, Middle the States, United the Europe, across jurisdictions 34 in offices 67 and worldwide working Eversheds Sutherland is one of the largest full-service law firms in the world acting for the public and private sectors. We have thousands of people Holger’s experienceincludesadvising: Holger’s acquisitions andprivateequitytransactions. and mergers cross-border and national in specialises particularly and and our Munich office. Holger focuses on business and corporate law between our Luxembourg office where he leads the corporate practice time his divides He group. corporate our in partner a is Holle Holger ■ ■ 1OtherUsefulFacts 11 exit fromtheSICAR. subsequent the and SICAR Nycomed entity holding Luxembourg custo o te pns mnfcue o fo cn Mivisa farm. cans food of off-shorewind German largest manufacturer the in investment the and Envases Spanish the of acquisition financing in relation to several investments in Europe, including the Oldenburgische LandesbankbyBremerKreditbank. K euy iiin o ign odns n. n te custo by acquisition the and Inc. WestRock ofMultiPackagingSolutionsInternationalLimited. and Holdings health Silgan home, to its division of beauty disposal billion $1.025 the of aspects B Bn (oa Bee Keibn) n th and Kreditbank) Bremer (today Bank KBC NYSE-listed WestRock Company, on the German an The private equity investors in the sale of Nycomed Group by the by Group Nycomed of sale the in investors equity private The laig e ok rvt eut hue n h srcuig and structuring the on house equity private York New leading A h Tahr eieet ytm f ea o te custo of acquisition the on Texas of System Retirement Teacher The should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor considering aninvestmentinyourjurisdiction? BC Bank Deutschland, the German banking business of Belgium’s R:www.eversheds-sutherland.com URL: holgerholle@ +35227864696 Email: Tel: Luxembourg L-2763 33, rueSainte-Zithe Eversheds Sutherland(Luxembourg)LLP Holger Holle eversheds-sutherland.com aqiiin of acquisition e d Luxembourg oé od a otrdae ere ( degree postgraduate a holds José the and funds alternative such structures setupforacquisitionpurposes. to relating aspects transactional acquisition structures. He is also deeply involved in the corporate and related the as well as funds, assets alternative of type other any and funds, real estate funds, infrastructure funds, hedge funds, debt funds equity private on focus specific non- a with arrangements, or operating and regulated (whether AIFs matters law,regulatory company contracts, includes This regulated). of organisation structuring, and the to setting-up relating matters on clients foreign and domestic José Pascual specialises in investment funds formation work, advising n a atrs ere n oeg afis rm h Universidad the from affairs of Diplomacy, Madrid(Spain). foreign School in Spanish the with partnership in (Spain) Madrid degree Complutense, Master’s a and (France), (ESCP) Paris de Commerce de Supérieure École the des with partnership in École (France) Paris the (HEC), from Commerciales Études management Hautes and law business international R:www.eversheds-sutherland.com URL: josepascual@ +35227864695 Email: Tel: Luxembourg L-2763 33, rueSainte-Zithe Eversheds Sutherland(Luxembourg)LLP José Pascual eversheds-sutherland.com atr Spécialisé Mastère www.iclg.com in ) 161 luxembourg Chapter 23 Macedonia Dragan Dameski

Debarliev, Dameski & Kelesoska, Attorneys at Law Vladimir Boshnjakovski

1 Overview attracting foreign investors in the state, by offering competitive tax rates and by presenting the benefits of investing in the state around the globe. This policy has contributed to significant inflow of 1.1 What are the most common types of private equity capital, know-how and the pace of development, domestic transactions in your jurisdiction? What is the current consumption and investment; it is likely to continue. In addition, state of the market for these transactions? Have you the government has initiated an ambitious start up support seen any changes in the types of private equity programme that might lead to inventive concepts that will attract the transactions being implemented in the last two to interest of PE investors, who are looking for placement of their three years? capital. Thanks to the final resolution of the so-called “Name Disputed”, the As in most jurisdictions, the types of equity transactions in the next 12 months, and in the long-term, we are likely to see the pace Republic of North Macedonia come in various forms such as capital of these positive trends pick up, as the Republic of North Macedonia transactions, private and public M&A, financial instruments buyout, enters NATO and opens the EU negotiation process. One most swaps, real estate, etc. obvious indication is the increased trading rates and index prices of The general trend is a slow but steady increase of investments. the Macedonian Stock Exchange. However, the mechanisms used for investing and transferring

private equity (PE) remain fairly traditional due to the conservative nature of the local market, its small size and the fact that modern 2 Structuring Matters financial and corporate trends have not penetrated the business or law community. As a result, most equity transactions are conducted 2.1 What are the most common acquisition structures with simple and regular agreements and one can rarely see complex adopted for private equity transactions in your vehicles used for making PE transactions. jurisdiction?

1.2 What are the most significant factors encouraging or Investors usually purchase shares in local companies either directly inhibiting private equity transactions in your or through an investment vehicle located in a jurisdiction that has a jurisdiction? stable and flexible corporate regime, but also has a double taxation avoidance agreement with the Republic of North Macedonia. This One significant factor encouraging PE transactions is the fact that the structure is especially used when there is more than one investor in Republic of North Macedonia has a fairly simple, fast and efficient the investee company, whereby all the investors acquire shares in administrative environment for doing business. Namely, conducting the investment vehicle company, which in turn wholly owns the equity transactions is efficient and accompanied with relatively low investee company. administrative costs. The corporate taxation system offers a flat rate The foreign PE transactions are usually supported by syndicated tax of 10%. Also, the legal treatment of foreign investors is almost bank loans or holding corporate capital, secured by guarantees and equal to residents in every field, including the acquisition of real other security instruments. estate. An inhibiting factor is the fact that the economy is small and not very 2.2 What are the main drivers for these acquisition integrated in global trade chains. Another factor is the restrained structures? nature of debt financing. Until recently, political instability might have discouraged investments, especially of small- and middle-sized companies or investment funds. As a result, there is a limit to the There are few types of reasons why such structures are preferred. frequency of equity transactions especially more complex ones. One driver is the fact that the local corporate law regulation is a bit rigid and investors would like to have more freedom in potential sales, pledges or other activities involving the shares. Another is the 1.3 What trends do you anticipate seeing in (i) the next 12 fact that foreign investors do not trust that the local courts would months and (ii) the longer term for private equity have the competence or the impartiality to solve any potential transactions in your jurisdiction? shareholder disputes.

Every consecutive government in the past has invested energy in

162 WWW.ICLG.COM ICLG TO: PRIVATE EQUITY 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London any compulsoryacquisitionwouldbeblockedorpostponed. therefore and courts the by resolved be must matter the acquisition, Note that, if the manager refuses to voluntarily accept a compulsory i.e. the exclusion, stipulate the must of association compulsory acquisition. consequences of and articles procedure the conditions, case a such In shareholders. the of creativity and freedom the to up left is done be the to in is this holder.manager-equityway the The of exclusion of form be may provisions acquisitions, compulsory to regards In to statewhatthetypicaltimeframewouldbe. 5% and 20%. Vesting periods are rare and therefore it is not possible between vary usually management to allocated equity of range The of amemberthesupervisoryorexecutiveboard. position a them gives that way a in amended association of articles the have to seek also would Investors Companies. Trade on Law the from deriving rights blocking and control certain acquiring for investee threshold the the is holdings of amount of this that fact 10% the to due least shares at acquire to seek would investor An a separatecontract. limitation to regulate the relations with the articles of association or no is there way, any in regulated not are interests carried Though the in place guaranteed a management orsupervisoryboards. cases some in and (minority) shares of amount certain a retains usually management the company, the the management. If the management prior to the acquisition owned want to get involved in the management of the company, they retain When PE investors invest in an already existing company and do not articles ofassociationasitsuitsthembest. the structure to shareholders the of freedom contractual the to left are them of most and matters these of regulation legal no is There Howistheequitycommonlystructuredinprivate 2.3 © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 association of articles the by governed usually is company EP One Whatarethetypicalgovernance arrangementsfor 3.1 practice. local the in non-existent are situations leaver good/bad for Practice Forwhatreasonsisamanagementequityholder 2.6 Inrelationtomanagementequity, whatisthetypical 2.5 Ifaprivateequityinvestoristakingminority 2.4 Debarliev, Dameski&Kelesoska,attorneysatlaw GovernanceMatters 3 equity transactionsinyourjurisdiction(including acquisition provisions? considerations? institutional, managementandcarriedinterests)? in yourjurisdiction? arrangements requiredtobemade publiclyavailable private equityportfoliocompanies? Are such your jurisdiction? usually treatedasagoodleaverorbadin what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and position, aretheredifferentstructuring veto rightsofmanagersnominatedbyoneinvestor. the regulate also can one addition, In stated. explicitly be also can investors some of rights veto Certainly, listed. be can usage their of shareholder decisions, the necessary majorities and situations for primacy.the hold association terms of In articles the whereby acts, However,corporate various by regulated be also can rights veto the have acertainamountofsharecapitalordecision-makingrights. should shareholder minority the provisions, statutory under exist to particular other situations, on the and basis of capital the law itself. share For this of veto right amount significant a transactions, up take that deals party related as company,the of liquidation association, of articles the of changing such decisions corporate major Minority investors and their director nominees enjoy veto rights for and minorityshareholders. of investor PE the articles between arrangement an the for allow rights, can association veto to regard in However, minority to investor shareholders. PE a by owed duties statutory no are There for deem decision the or appointment oftheindividual’s positionholder. association they of articles the if with done be situations may different for appropriate. On the management level, majorities allocation of blocking rights higher for made; however, it is clearly stated that the shareholders can arrange be to decisions certain for necessary majorities support minimum certain are there that stipulates law the level, shareholder’s the For level. nominee director the nor level shareholder’s the on neither arrangements, veto any of effectiveness the to limits no are There . Doprivateequityinvestorsand/or theirdirector 3.2 . Arethereanydutiesowedbyaprivateequityinvestor 3.4 Arethereanylimitationsontheeffectivenessofveto 3.3 only theinvolvedshareholdersandnotanythirdparties. for effect have would these However, company. the of inter-shareholderdocuments corporate the with in arrangement made such including without be agreements, can arrangement Governance of from the Trade Registry. articles excerpt the an through anybody only to accessible publicly documents are association enumerated the Of managers. Managerial of incentives and duties rights, specific regulate rights. might agreements reporting and exclusion for grounds shares, management/supervisory positions, rules and procedures for selling fill to rights prescribe These bodies. management/supervisory and and internal regulation documents, such as decisions of shareholders position, whatvetorightswouldtheytypicallyenjoy? typically addressed? typically addressed? etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor shareholders (or to minorityshareholderssuchasmanagement the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) vice versa )? Ifso,howarethese www.iclg.com macedonia 163 macedonia 164 macedonia © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com third any in rights shares/voting the of more or 20% or of ownership control the (i) disclosing: by interest of conflicts potential must positions supervisory or inform the managerial or supervisory organs and shareholder of any managerial holding persons All Howdodirectorsnominatedbyprivateequity 3.7 those positions. hold to able be to order in qualification other or experience education, work additional have some to in required be position may branches supervisory industry or managerial any for Nominees preferring bankruptcy, or fake creditors. damaging and of activity, crime dishonest with the bankruptcy committed they final that a by judgment convicted bankruptcy persons c) under and duty; or are an profession conducting activity, for or prohibition a have blocked who persons b) been procedure; have accounts a whose or bank company a founders of body a) supervisory or The positions: managing of quoted members Companies. the Trade have on cannot Law following the from criteria general the All nominees for any managerial or supervisory position must fulfil Arethereanylegalrestrictionsorotherrequirements 3.6 as thosederivingfromcompetitionprotectionlaw. enforceable, and allowed such provisions, regulatory mandatory some against go they unless generally are provisions Non-solicit for anyemployee. relation the of termination the after years two for clauses compete management). and (company Under the employment law, one parties can extend the duration of the non- the between relationship the of duration the during binding are they general, In themselves. the of elements provisions statutory of basis as the on also but association, of articles both enforceable are clauses Non-compete establishment, seat withinthelocaljurisdiction. the a have which exclusive companies, from trade of have changes arising status and termination Macedonia disputes North the of over jurisdiction Republic the of Courts corporate decisions. the of or reevaluation acts general other judicial any and association a of articles the for of content request a court the the to submit by made may interest, legal a has which decisions party third any as well as member, for relevant body supervisory or management is shareholder, Any shareholders. same The this limit still law freedom. the of provisions mandatory the of association, articles the with matters supervision or manager and relations shareholder the regulating for flexibility gives law the though Even Arethereanylimitations orrestrictionsonthe 3.5 Debarliev, Dameski &Kelesoska,attorneysatlaw non-compete andnon-solicitprovisions)? of otherportfoliocompanies? party nominatingthem,and(ii) positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof portfolio companies? equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements h atoiis n se a ocnrto cerne f h legal the if clearance concentration geographical orprofit/incomecriteriaarefulfilled. a seek and authorities the In terms of antitrust regulation a there might be an obligation to notify only some for while shares, notification willsuffice. the of ownership the change to and similar. Thus, for some fields, prior approval is needed in order activity,business regulated energypharmaceutical, finance, as such or industry some of specifics the on depend will transactions the of in the Republic of North Macedonia. Any extension of the timetable fast completed and simple fairly are transactions equity general, In by the offerer. However, there are mechanisms established by the by established mechanisms are there However, offerer. the by In cases of voluntary and mandatory takeover offers, the price is set the stockseventhoughshareholdersdidnotacceptitsoffer. has offerer of rest the out an buy may it voting-rights-stocks the of when 95% acquired that is mention to point important Another this to exceptions some are there that obligation listedinthelaw. Note stock. the of rest the of 25% acquires the out buy to offering together, an give to obliged is it voting-rights-stocks, acts it which with entities other One thing to point out is that when one entity, alone or together with Companies, whichregulatessomeoftherelevantissues. this within Stock Joint of Takeoveron spot Law a is to there However, jurisdiction. rare very are transactions Public-to-private Whatarethemajorissuesimpacting thetimetablefor 4.1 the interestsofcompany. to detrimental them deem not do they if activities such approve can bodies supervisory or managerial Normally,the or shareholders the supervisory bodiesinanycompetitorcompanies. in deals, possible and which theymightbeaninterestedparty. current all (iii) and position; supervisory or managerial a have they which in companies third (ii) company; . Whatdealprotectionsareavailabletoprivateequity 5.2 Whatparticularfeaturesand/orchallengesapplyto 5.1 Havetherebeenanydiscernibletrendsintransaction 4.2 in the same activity themselves or ar or themselves activity same the in or supervisory positions face prohibitions for competition, i.e. engage In addition to such information obligations, the holders of managerial there arenonewtrendsthatcanbediscernedinthelastfewyears. Due to the conservative and relatively isolated nature of the economy, Transaction Terms: General 4 rnato em:Pbi custos Transaction Terms: Public Acquisitions 5 disclosure obligationsandfinancingissues? acquisitions? commonly dealtwith? terms overrecentyears? and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust investors inyourjurisdiction relationtopublic transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private iclg to: privateequity 2019 e members of management or management of members e macedonia

aaig h bsns i te eua mte ad osby the completion undertakingsareveryrareandlimited. possibly and matter regular obligation to the seek approval from transaction, the buyer for certain actions. Post- in ongoing business the the of managing non-disclosure as such guarantees pre-completion providing to itself restricts seller PE the Usually, big transactions. in only included are and rare very are warranties/indemnities Other title, valid covering thereof. restrictions any of lack or transaction the enter to authority thus as well as basic, information, disclosed of completeness and and correctness simple are indemnities and warranties Standard seller. a of capacity the have they warranties/indemnities when the limit least at or avoid to try Investors are adjustment for mostly relatedtoworkingcapital,CAPEXanddebt. used parameters such The though rare. adjustments, are closing arrangements is option Another locked-box a structure. is for, and opt investors EP approvals option One necessary field. signing, business and closing the between gap the on depends prefer investors PE structure of type particular The Whatconsiderationstructuresaretypicallypreferred 6.1 the offered pricemustbethesameforallstockholders. aimed at protecting the interests of minority shareholders. Note that stock, per price the of price minimal the determining for used law © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Whatlimitationswilltypicallyapplytotheliabilityofa 6.5 To whatextentisrepresentation&warrantyinsurance 6.4 Whatisthetypicalscopeofothercovenants, 6.3 Whatisthetypicalpackageofwarranties/indemnities 6.2 warranties insurance,arenegotiatedoutsideofthisjurisdiction. or representations incorporate which Macedonia, North of Republic on the market. Complex and substantial investments for equity in the present not are warranties or representations corporate for products insurance complex and conservative very is market insurance The time limitations;and(iv)obligation of basis the on claims of exemption (iii) aware; was buyer the which of issues on based claims of exemption (ii) practices; administrative or regulations laws, of changes from deriving claims of exemption (i) and indemnities covenants, undertaking come in a couple warranties, of forms. Typically, given limitations include: a for limitation The Debarliev, Dameski&Kelesoska,attorneysatlaw Transaction Terms: Private Acquisitions 6 by privateequityinvestors(i)onthesell-side,and(ii) equity selleranditsmanagementteamtoabuyer? team toabuyer? on thebuy-side,inyourjurisdiction? warranties, covenants,indemnitiesandundertakings? private equitysellerandmanagementteamunder the typicalcostofsuchinsurance? exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) undertakings andindemnitiesprovidedbyaprivate offered byaprivateequityselleranditsmanagement to mitigatelosses.

statutory damages,aswellreturningofallacquiredbenefits. and contractual of payment to lead could compliance of failure A in charge ofthetransactioncanbeused. fee a cmot o te viaiiy f et iac ad equity and finance debt of availability the for comfort as offered Though rare, banking guarantees or corporate guarantees have been a of form the in usually personal guarantee. is This security. grant to manager the and ask to buyer the for happen may it transaction, the conducting in liberty and influence strong has manager one when situations In market through or research wouldbesubjecttomorestringentsecurity. intermediaries by facilitated transaction a or be will start-up partners a hand, other the On security. on insistence established less to subject between transaction a established an or or company listed a example, For parties. the among trust of personal of level the as degree well company,as the of placement market The liabilities. and and condition size, the on depends buyer a of security on insistence warranties established the for guarantee a as present are accounts escrow of form the in Security omsin o scrte. n tahet o h rqet for request documents, includingaprospectus. the to attachment of set a include must In listed be to wishes that company the approval securities. for Commission the of approval prior a after done are securities public of sales and The IPOs are regulated with the Law on Securities. Issuance, offers liability limited company tobetransformedwithanIPO. a for allows law The and company. stock process a transformation become a undergo may companies of forms The IPO exit is only applicable to stock companies. However, other it choosestowithdraw. fee. Sometimes, such fees are applicable to the seller as well in case the pay must but contract the from withdraw may he price the pay to fails buyer the if result, a penalty. As contractual of form the in Reverse break fees in the Republic of North Macedonia might come . Howdoprivateequitybuyerstypically provide 6.7 Do(i)privateequitysellers providesecurity(e.g. 6.6 . Whatparticularfeaturesand/orchallengesshoulda 7.1 Arereversebreakfeesprevalentinprivateequity 6.8 finance. Also, sometimes personal guarantees of physi Transaction Terms: IPOs 7 under anequitycommitmentletter, damages,etc.)? the managementteam)? exit? If so,whattermsaretypical? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and private equitysellerbeawareofinconsideringanIPO transactions tolimitprivateequitybuyers’ exposure? www.iclg.com macedonia cal individuals 165 macedonia 166 macedonia © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com no developmenttrendsaretobenoted. and conservative remains jurisdiction our in market financing The Whatrecenttrendshavetherebeeninthedebt 8.3 the to reporting and informing National Bankapply. for obligations abroad from is from the business strategy nature of derive banks. When financing the debt financing debt inhibiting factors The obligation. statutory from derive that requirements or restrictions relevant no are There Arethereanyrelevantlegalrequirementsor 8.2 it transaction, a sponsor would mostlikelyrequireahighdebt-to-equityratio. to decides bank local a when case rare the In loans. syndicated usually undertakings, their fund to banks foreign of loans to resort investors PE most result, a As rare. are – parties third from loans direct or bonds corporate of forms the in to financing their limit projects of established companies. would Also, corporate debt financing – and investors PE to credits to decisions grant its in conservative quite is sector banking local The Pleaseoutlinethemostcommonsourcesofdebt 8.1 North Macedonia. No dual-track exit process has ever been recorded in the Republic of Doprivateequitysellersgenerally pursueadual-track 7.3 this in IPO any lock-ups. scarcely been has to relation in is practice the there what say to impossible is it jurisdiction that fact the Given Whatcustomarylock-upswould beimposedon 7.2 conducted withprivateoffers. are transfers securities most and IPOs any been scarcely have there Macedonia, North of Republic the history whole the in that, Note period whichcannotbelongerthan12months. prospectus are written down and paid for, within the public offering the by offered stocks the of 60% if successful deemed is IPO The Debarliev, Dameski &Kelesoska,attorneysatlaw Financing 8 private equitysellersonanIPOexit? financing marketinyourjurisdiction? financing) ofprivateequitytransactions? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof bonds). for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin through asaleorIPO? and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare and gainsfromgames ofchance. rights, income from ease and sub-lease, property capital income, capital industrial gains from deriving income all of and 16,000) EUR have. all where and will registered, be to have will 2019 company a of beneficiaries ultimate spring in established was which Register”, Beneficiary “Ultimate new the impact of kind what unforeseeable is it addition, In structures. these of extent the inhibit and burden might beneficiaries, ultimate of controls of imposes Terrorism,which Sponsoring and Laundering Money of Prevention the on Law Offshore structures are present in our jurisdiction; however, the new of theinvestment. size the on depending break this on caps However,are there years. tax typical break is a complete The exemption to tax for a period of maximum of 10 zones. development the technological so-called the between agreement in invest which investors, greenfield for breaks tax offers taxation state The double a jurisdictions, whichstipulatessomethingelse. is there unless There is also a profit repatriation withhold tax of companies. 10% that active is payable locally or incorporated locally on imposed rate tax corporate 10% the course of is consideration taxation key The 10% to 15% for personal income tax, above MKD 1 million ( million 1 MKD above tax, income personal for 15% to 10% from rate tax the of increase the from aside authorities, tax the of There have been no significant changes in the legislation or practice such on tax a imposing regular sharetransfersandarenottaxedasanincome. as read as be conducted are payments of ways can these practice in arrangement, law the While tax. gains capital the of top on paid be to have will contribution social so, If such. as taxed thus and income as treated be should bonus contracts managerial a of form the in manager a to awarded stocks recently,theory in arisen has that question One or shares whether is of 15%tax,noothertaxisimposedonsuchtransactions. selling or transferring shares due to the fact that, beyond capital gain when management the for consideration tax significant no is There . Whatarethekeytaxconsiderations forprivateequity 9.1 . Havetherebeenanysignificantchangesintax 9.4 Whatarethekeytaxconsiderationsformanagement 9.3 Whatarethekeytax-efficientarrangementsthat 9.2 No specificarrangementshavebeenusedinordertoavoidthis. obligation. tax gain capital triggers this and shares of transfer usual Exchange of shares or other equity transaction schemes are treated as Tax Matters 9 off-shore structurescommon? anticipated? investment intoanewacquisitionstructure? shares, deferred/vestingarrangements)? investors andtransactionsinyourjurisdiction? Are teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities teams thataresellingand/orrolling-overpartoftheir equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate iclg to: privateequity 2019 macedonia

ca . unlikely tochangeintheforeseeablefuture. significant No changes in these legal instruments have been noted recently and are underdeveloped. remains practice the therefore and limited fairly is actors such of presence the However, Funds. Investment on Law the and Companies Tradeon Law the by given The relevant legal framework for PE investments and transactions is h lnt o te rcs i uuly n mnh og tog for though long, major transactionsthistimeframemayalsobelonger. month one usually is process the of length The flag dueissuesreports. activity. Most due diligences, however, are aimed at producing red- regulatory and corporate of aspects many of analyses detailed to up financial standing and pending court disputes or administrative fines the investors. They vary between general review of property rights, of preferences the and investment of field the of regulation of level the investment, the of size the on depending varies acquisition any The level of legal due diligence, which PE investors conduct prior to investment, theultimatebeneficiariesmustbedisclosed. of type some for that, fact the be likely most would concerns main the of One investors. PE to applicable also are investors of kinds all to applicable guarantees and approvals checks, background The and prudence EP investors,interesttofacilitateinvestmentandlack ofcapacities. basic the regulatory scrutiny. This is due to the from extremely limited presence of aside for responsibility checks this Commission does not pose any additional However, Commission the by conducted is securities. funds PE of control The 03Howdetailedisthelegalduediligence(including 10.3 Areprivateequityinvestorsorparticulartransactions 10.2 Havetherebeenanysignificantlegal and/or 10.1 been tokeeptaxlevelsaslowpossible. has investors foreign attracting for state the of instruments policy lax a are have compliant with the text of the authorities law. they Namely,as local long one of as the key investors public the of structures tax that favourable on approach said be can it general, In © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Debarliev, Dameski&Kelesoska,attorneysatlaw 0LegalandRegulatoryMatters 10 anticipated? materiality, scopeetc.)? jurisdiction (e.g.onnationalsecuritygrounds)? prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors subject toenhancedregulatoryscrutinyinyour private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting iiec o cruto ae oty oiae t d s b the Act. by Practice so Corruption due Foreign do US the to place of application motivated extraterritorial who mostly are Investors corruption on diligence themselves. protect to protections liability protectioninordertodamagecreditors. limited the of abuse to due veil corporate the lifting of situations company. Under this arrangement the investor can be responsible in investor is shielded from almost all of the obligations of the investee Under the Limited Liability Company and Joint Stock Company, the The the JointStockCompany. investors. PE by least preferred forms are at the Limited Liability Company and, more Macedonia, rarely, North of Republic the in used never almost are company a of forms these However, Partnership. Limited and Partnership General the as such liability, limit not does that type the of are companies these if portfolio, its in companies the for liable held be may investor PE a Theoretically investors some However, transactions. PE into entering risk a when as considered rarely is it Therefore, Macedonia. North of entities is not a major issue for PE or other investors in the Republic legal for practice and legislation anti-corruption and Anti-bribery and loopholes. administrative through issues, as well as and protect their interest by market pointing out local practices the in them guide will which rent- and political bring seeking benefits. Both types of investors might need local trusted advisors which to transaction, interest an the have facilitate authorities local or government the that fact undertaking. Bigger foreign investors face lesser hurdles due to the their in partner local a include to choose usually they why is This market the is fairly conservative and most that businesses are family owned. fact the given difficulties face might investment Smaller 05Arethereanycircumstancesinwhich:(i)aprivate 10.5 Hasanti-briberyoranti-corruptionlegislation 10.4 11Whatotherfactorscommonlygiverisetoconcerns 11.1 whose corporate responsibility policy dictates so, incl 1OtherUsefulFacts 11 the liabilitiesofanotherportfoliocompany? diligence, contractualprotection,etc.)? considering aninvestmentinyourjurisdiction? and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor www.iclg.com macedonia ude contractual 167 macedonia Debarliev, Dameski & Kelesoska, attorneys at law macedonia

Dragan Dameski Vladimir Boshnjakovski Debarliev, Dameski & Kelesoska, Debarliev, Dameski & Kelesoska, Attorneys at Law Attorneys at Law Mirce Acev no. 2, 3rd floor Mirce Acev no. 2, 3rd floor Skopje Skopje Macedonia Macedonia

Tel: +389 2 313 6530 Tel: +389 2 321 5471 Email: [email protected] Email: [email protected] URL: www.ddklaw.com.mk URL: www.ddklaw.com.mk

Dragan Dameski is one of the founders and the head of the foreign Vladimir Boshnjakovski has been an Associate at DDK since the macedonia investments department in DDK. He works mostly for foreign clients middle of 2016. In 2012 he graduated at the Faculty of Law Iustiniana and has been involved as legal counsel in practically all important Prima in Skopje. At the same faculty, on the cathedra for International projects in Macedonia, especially in energy, capital markets and real Law, he concluded his master studies with a thesis in the field of the estate. Dragan is member of the Macedonian Bar Association, international legal system for the protection of foreign investments. Association of mediators, the International Union of Lawyers (UIA), During his studies he partook in many international competitions and and the International Bar Association (IBA). His areas of expertise conferences in the field of law, such as the prestigious competition in include M&A, foreign investments, real estate, energy, securities and the field of international commercial arbitration – Willem C. Vis finance. International Commercial Arbitration Moot – and a competition for the region of former Yugoslavia in the field of the European Convention for Human Rights (ECHR). He developed his professional experience in an attorney’s office in Skopje, in the Economic Chamber of Macedonia and the Republic’s Council for Road and Traffic Safety.

Debarliev, Dameski & Kelesoska, Attorneys at Law (DDK) is the first law company established in the territory of the Republic of Macedonia, distinguishing itself in the market with a clear business and corporate law orientation, complemented by an excellent network of legal experts covering the complete territory of the Republic of Macedonia. The quality of DDK rests mainly upon the quality of its attorneys, their accessibility and efficiency. DDK’s attorneys at law share outstanding academic backgrounds, as well as a strong commitment to legal perfection. The partners of DDK have more than 15 years’ law practice experience and have exceeded clients’ expectations by providing sophisticated and efficiently managed legal services. DDK offers excellent legal services to clients involved in the biggest M&A and capital market projects in Macedonia, and has been engaged as counsel in numerous successful PPP and infrastructure projects, privatisations, real estate transactions, banking, etc.

168 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 24 mexico Fernando eraña

Solórzano, carvajal, gonzález, pérez-correa, S.c. (Solcargo) carlos eduardo ugalde

1 Overview the capital markets – has made raising capital in Mexico a very cumbersome and expensive endeavour.

1.1 What are the most common types of private equity 1.3 What trends do you anticipate seeing in (i) the next 12 transactions in your jurisdiction? What is the current months and (ii) the longer term for private equity state of the market for these transactions? Have you transactions in your jurisdiction? seen any changes in the types of private equity transactions being implemented in the last two to three years? There is a bill in Congress to amend the AFORES investment regime that, among other matters, would permit them to invest in private offers subject to certain rules. The bill should be approved The Mexican private equity market has been developing during within the next year, and if such is the case, we expect a major influx recent years and the most common types of transactions in Mexico of capital for private equity and venture capital. If the bill does not continue to be: (i) fund incorporation through vehicles such as go through and AFORES continue to invest only in the capital transparent trust, investment trust ( fideicomiso de inversión en markets, we anticipate a slower, yet steady, growth of the private capital privado or FICAP), Ontario or Quebec Limited Partnership equity/venture capital market. (LPA) or the Mexican Corporation (SAPI); or (ii) private equity and venture capital transactions (equity, debt, and debt-like instruments). The private equity market in Mexico is growing at a steady pace, as 2 Structuring Matters private equity funds operate in the country doing investments in all sectors of the economy. In the last years, private equity funds have shown great interest in the technology sector, and we foresee that 2.1 What are the most common acquisition structures adopted for private equity transactions in your private equity/venture capital transactions over this market will jurisdiction? continue to represent a significant percentage of the private equity/venture capital investments in Mexico. The most common structures are: the FICAP; the transparent trust; and the LPAs. For smaller funds, SAPIS are popular. No new 1.2 What are the most significant factors encouraging or structures have been developed. inhibiting private equity transactions in your jurisdiction? 2.2 What are the main drivers for these acquisition structures? Several legal reforms that occurred during the first decade of the 21st century triggered the private equity/venture capital industry in Mexico: the creation of the (FICAP) and the transparent trust The main drivers are tax benefits (such as tax transparency, except ( fideicomiso de administración no empresarial); and the creation of for the SAPI, which is taxed at the corporate rate) and the corporate the SAPI, which is a form of corporation with a very flexible flexibility of these vehicles. Currently, Mexico has a network of regime. Further creation of new types of special purpose vehicles approximately 70 treaties for the avoidance of double taxation and during the current decade, such as the real estate trust (Fibra), the the prevention of fiscal evasion. This enables foreign investors to capital certificate (CKD), the project finance certificates (CERPIS) derive benefits attending to their own country of residency. or energy and infrastructure certificates (Fibra-E) have triggered investment by public pension funds (AFORES) in private equity. 2.3 How is the equity commonly structured in private On the other hand, the key factor inhibiting further expansion of the equity transactions in your jurisdiction (including private equity industry in Mexico is (i) the lack of an equivalent to institutional, management and carried interests)? the LPAs, obliging fund sponsors to use expensive trust structures (FICAP; transparent trusts) or non-transparent vehicles such as At the fund level, it typically follows international trends; with a SAPIs, and (ii) that Mexico continues to be the only (or one of the management fee of 2%–3% over committed capital and an 80/20 few) countries in which AFORES are prohibited from investing in carry interest. At the target level, it will depend on the chosen private offers. This particular fact – that AFORES can only invest in structure, but will typically involve some type of preferred stock

iclg to: private equity 2019 www.iclg.com 169 © Published and reproduced with kind permission by Global Legal Group Ltd, London 170 mexico © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com the with registered Public RegistryofCommerce. be must law, Mexican under which, bylaws, target’s the in contained be must such as Commerce, of Public Registry the in available publicly be to required are Arrangements Restrictionstoassumesecuredandunsecureddebt. (viii) Informationrights. (vii) Drag-ortag-along rights. (vi) the of directors of board the of member a appoint to Right (v) Transfer restrictions. (iv) Rightsoffirstrefusal. (iii) Anti-dilutionrights. early (for (ii) preferences liquidation and dividends Preferred (i) protection rightssuchas: minority on focus arrangements governance corporate Typically, Whatarethetypicalgovernancearrangementsfor 3.1 underperformance, stay, include wilful misconductorfraud. to will agreed provisions Leaver holder Bad equity whereas management the which for term the of completion or death include typically clauses Leaver Good Forwhatreasonsisamanagementequityholder 2.6 passing awayofthemanagerbeforevestingterminates. or term specific a within agreement management the of termination time, include typically over will vest provisions acquisition typically compulsory whereas will management to allocated Equity Inrelationtomanagement equity, whatisthetypical 2.5 rights minority standard exclusively. structure typically will consolidation) (growth, financings stage later dividends); preferred states, later in (with standard minority protection rights, liquidation preference and deal stock preferred convertible a at look typically financings “A” or consolidation). Minority investors in seed transactions or Round It will always depend on the type of deal (whether it is seed, growth Ifaprivateequityinvestoristaking aminority 2.4 dividend andliquidationpreference. preferred a protection, shareholder minority standard includes that Solórzano, carvajal,gonzález,pérez-correa,S.c.(Solcargo) GovernanceMatters 3 considerations? company. stages). in yourjurisdiction? arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such your jurisdiction? usually treatedasagoodleaverorbadin acquisition provisions? what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and position, aretheredifferentstructuring Mexico. in enforceable be to homologation require foreign will a court/jurisdiction to referral case, any In law. foreign or domestic using arbitration under controversies their resolve also may Parties law. but to be resolved under foreign law or to foreign courts using local Also, shareholders may agree to refer the controversy to local courts law. any under resolution dispute refer to agree of may Shareholders Registry Public the with registered Commerce. and notarised be must which bylaws, target’s the in contained be must they enforceable, be to provisions governance corporate For company’sbylaws. the against provisions include cannot agreements shareholders’ Also, target’s the bylaws. in and agreement shareholders’ the in provisions corporate governance including by addressed typically is issue This invalid. be will resolution corresponding the then company’sbylaws the in company’s bylaws. If the veto/voting arrangements are not included any other corporate governance provision) must be contained in the (and arrangements rights voting veto/affirmative levels, both For (vi) and business; of amendments tothecompany’s bylaws,amongothers. course unsecured ordinary and the outside secured indebtedness (v) amounts; certain above agreements capital the into entering (iv) business; in of course ordinary the or plans business included not (i) disposals and acquisitions include: (iii) distributions; usually dividend and profit (ii) capital; of reorganisation and rights contributions voting Veto/affirmative both shareholderanddirectorlevel. major decisions of the company. The veto right is usually granted at over rights voting affirmative or veto enjoy usually Yes,investors rahn mnrte’ ihs rvdd y h Gnrl a for include Law General may ( the Corporations law” Business by the provided “against rights minorities’ that breaching consider to important is not being against the law or good social standards. In this regard, it can parties of restriction only the with arrangements and agreements any make the law, Mexican to pursuant therefore, agreements; commercial for rules general the follow agreements Shareholder’s and shareholdersarefreetoagreeontheircorporaterelationship. investors equity private however, law; under exist duties such No . Arethereanylimitationsonthe effectivenessofveto 3.3 Doprivateequityinvestors and/ortheirdirector 3.2 . Arethereanylimitationsorrestrictionsonthe 3.5 Arethereanydutiesowedbyaprivateequityinvestor 3.4 typically addressed? position, whatvetorightswouldtheytypicallyenjoy? non-compete andnon-solicitprovisions)? typically addressed? the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements shareholders (or to minorityshareholderssuchasmanagement iclg to: privateequity 2019 e Gnrl e oidds Mercantiles Sociedades de General Ley vice versa )? Ifso,howarethese mexico . ). performance upontheirappointment(usuallyasecuritybond). their guarantee to required are directors otherwise, agreed Unless company. the of shareholders the of status financial the and policies principal the reporting company to report annual an draft must directors an appropriate account. In this regard, pursuant to law, the board of the by shareholders have been effectively paid and that made the company keeps contributions the that verify to responsible are the they to caused losses and furthermore, faith; bad or negligence actions, their damages to due company for liable be may Directors of degrees certain (at kinship); and(iv)legalrepresentativesofthecompany. relatives their or directors of board the of members (iii) thresholds; certain in company the of shareholders or crimes); (ii) employees of the company or employees of subsidiaries as examiners (i.e. public brokers, individuals convicted for property appointed be cannot activities business perform to disqualified are who individuals (i) examiners: statutory to apply will restrictions not a member of the board of directors) is appointed. The following is (who examiner statutory a that require SAPIs and Corporations they mayhaveaconflictofinterest. directors are obliged to refrain from voting in any decision in which Furthermore, directors. as serve cannot appointment their before the company or of the company’s corporate group within 12 months of auditors external as served who individuals companies, public of public perform (i.e. directors to as brokers, individuals convicted for property crimes); and (iii) in case appointed disqualified only be directors, are cannot activities as who business appointed individuals be (ii) cannot individuals; entities legal (i) are: directors of board the of member a as serve to restrictions Statutory Arethereanylegalrestrictionsorotherrequirements 3.6 that suchindividualwillbeboundtothenon-compete. time the for compensation a include to advisable company,is the it of individual) (an shareholder the of exit the survive will compete connected with confidentiality obligations. Furthermore, if the non- free specific territory, of a specific activity or market, temporary basis, and a right to non-compete the the limit to to advisable is contrary it therefore, enterprise; deemed if court in challenged be Non-compete and non-solicit provisions are generally valid but may © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 from refrain must director the interests of conflict of case In (ii) information the all regarding obligations Confidentiality (i) the following: with comply must they therefore company; portfolio the with duty fiduciary a have investor equity private the by nominated Directors Howdodirectorsnominatedbyprivateequity 3.7 Solórzano, carvajal,gonzález,pérez-correa,S.c.(Solcargo) equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin portfolio companies? rest ofthemembers oftheboarddirectors. voting and inform such circumstance to the Chairman and the party includingtheprivateequityinvestor. third any to disclosed be not must which company portfolio the of directors as position their with connection in received of otherportfoliocompanies? party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof each investorprovidesaKYC. that and committee banks’risk the by approved is agreement trust the that others, among with, complied be to procedures bank other to directors of board the of members alternate Appoint (iv) portfolio corporate the relevant the of transparency the for policies Draft within bodies (iii) corporate internal Create (ii) company’sand investor’s the align to policies internal Draft ( Coordination (i) Business for Board Coordinador Empresarial Mexican the and investors by equity private for advisable portfolio companies to is consider the best corporate practices set forth it regard, this In If capital is raised through a through raised is capital If the offering ismadetolessthan100people. with the that (ii) and investors; complies qualified or institutional to it exclusively offered is it extent that (i) offer: private a considered the be to requirements to Commission, Securities Securities National the and Banking National with the of authorisation/supervision or registration Registry require not do funds equity private authorisation, and compliance regulatory of terms In public acquisition. a in investor other any to available are that protections same The corresponding investor. be structure of the must target and the amount of equity the to be acquired by on the that depend considerations regulatory obligations Specific with. complied regulatory anti-trust certain triggers often transactions of type this that consider shall investors (ii) and strict (i) Commission; with: Securities and Banking National deal the from regulation must investors Therefore, exchange. stock corresponding the in offer tender public a through made be must transaction of type this that consider must investors equity Private No, therehavenot. . Whatarethemajorissuesimpacting thetimetablefor 4.1 . What dealprotectionsareavailabletoprivateequity 5.2 Whatparticularfeaturesand/orchallengesapplyto 5.1 Havetherebeenanydiscernibletrendsintransaction 4.2 Transaction Terms: General 4 rnato em:Pbi custos Transaction Terms: Public Acquisitions 5 for theprincipalmember. participate in the decisions that represent a conflict of interest decisions atthedirectors’ level. company tosupervisetheperformanceofdirectors. interests. disclosure obligationsandfinancingissues? acquisitions? commonly dealtwith? terms overrecentyears? and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust investors inyourjurisdiction relationtopublic transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private ), includingthefollowing: FICAP or transparent trust transparent www.iclg.com mexico , there are there , Consejo 171 mexico 172 mexico © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com the of survival the to limitations and indemnification clauses,etc. caps thresholds, include can limitations Such indemnities. and warranties the from arising liabilities potential to limitations include to try will Sellers Whatlimitationswilltypicallyapplytotheliabilityofa 6.5 of 3%–5% from ranges insurance such for cost typical The (iii) contingencies facts, known include exclusions Common The policylimitisusually10%oftheticketsize. (ii) (i) and wheretheinsurancecompany’s adviserisaMexicanlawfirm: (buyer/seller); counterparties Mexican with million US$20 tickets: US or European law firm. We have now seen a few deals of smaller US a was company insurance the of diligence due the chargeof in firm or European where if M&Aan in seller,acted or counterparties buyer law as the deal and only million US$300 by above only tickets implemented be to largeof only used risks accept to used insurers companies; multinational Insurance R&W Mexico In To whatextentisrepresentation&warrantyinsurance 6.4 under theprivateequitydeal. obligations its meet to condition financial the for scope typical The Whatisthetypicalscopeofothercovenants, 6.3 indemnities. warranties/ of types certain negotiate to target the of diligence due the on rely authority.may corporate Buyers and capacity business, the and shares the of title legal standing, good i.e. period, survival accept standard representations and warranties with a short/medium usually sellers equity private but transaction each on depend will It Whatisthetypicalpackageofwarranties/indemnities 6.2 as welltheinvestorprofilesinvolvedintransaction. The structures vary depending on the size and dynamics of the deal, Whatconsiderationstructures aretypicallypreferred 6.1 Solórzano, carvajal,gonzález,pérez-correa,S.c.(Solcargo) Transaction Terms: Private Acquisitions 6 team toabuyer? on thebuy-side,inyourjurisdiction? warranties, covenants,indemnitiesandundertakings? private equitysellerandmanagementteamunder of theticketsize. the limit of liability and the retention is usually from 1%–3% money laundering,warandterrorism,amongothers. corruption, leakage, profit, lost diligence, due the in detected the typicalcostofsuchinsurance? exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) equity selleranditsmanagementteamtoabuyer? undertakings andindemnitiesprovidedbyaprivate offered byaprivateequityselleranditsmanagement by privateequityinvestors(i)onthesell-side,and(ii) negotiated fee. previously certain a of payment the upon transaction the terminate to unable is and financing debt consummate the transaction due to lack of financing, the buyer may their obtain to unable is the buyer if However, Mexico. in common not are fees break Reverse buyers breachtheirfinancialcommitments. equity private should court in losses and damages claim to entitled This is typically provided through representations. Sellers would be may requirecertainholdbackmechanisms(i.e.escrows). and liabilities. Nevertheless, depending on the buyer’s profile, they warranties any for security provide to sellers for common not is It Exit Mexico. funds. in or investors other common to target the of sale the not in focused are strategies are processes exit Dual-track IPO exitsarenotacommonpractice. since Mexico in investors to imposed customarily not are Lock-ups The second feature is the time and costs incurred in making an IPO. economy. its of size the to compared Mexico in market securities the of size small relatively the consider should seller a Foremost, . Arereversebreakfeesprevalentinprivateequity 6.8 Howdoprivateequitybuyerstypically provide 6.7 Do(i)privateequitysellers providesecurity(e.g. 6.6 . Doprivateequitysellersgenerallypursueadual-track 7.3 Whatcustomarylock-upswouldbeimposedon 7.2 Whatparticularfeaturesand/orchallengesshoulda 7.1 Transaction Terms: IPOs 7 If so,whattermsaretypical? under anequitycommitmentletter, damages,etc.)? the managementteam)? through asaleorIPO? private equitysellersonanIPOexit? exit? transactions tolimitprivateequitybuyers’ exposure? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare private equitysellerbeawareofinconsideringanIPO iclg to: privateequity 2019 mexico very become has stock popular withinrecentyears. into convertible financing Mezzanine Mexico. in transactions equity private for financing debt the of structure the affect that restrictions or requirements legal relevant no are There bank loanfinancingforlarge privateequitytransactions. credit facilities (term loans or revolving credits). It can also involve The most common sources of debt finance in Mexico are traditional Pleaseoutlinethemostcommonsourcesofdebt 8.1 © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 (i) are: plans. teams stock phantom management (iii) and plans; option (ii) plans; for vesting traditional arrangements common Most Whatarethekeytax-efficientarrangements thatare 9.2 transactions inMexico. On the other hand, off-shore structures are common in private equity non-deductible. be would ratio such exceeding debt party related non-resident on which basically provide a three-to-one debt-to-equity ratio. Interest a by paid is Mexican interest resident. Furthermore, if Mexico has thin capitalisation or rules Mexico, in invested deemed is capital the if Mexico in taxable be would non-residents by earned interest that consider shall investors transactions, equity & debt Regarding Whatarethekeytaxconsiderationsforprivateequity 9.1 What recenttrendshavetherebeeninthedebt 8.3 Arethereanyrelevantlegalrequirementsor 8.2 otoi ivsmns ls ta 2% neet o double-tier or interest) 25% than (DTC), treaties investments areexemptfromtaxationinMexico. (less taxation investments double certain portfolio of provisions the under Furthermore, entity. operating Mexican the by Mexico in paid taxes income for credits tax foreign receive also could they and investors, purposes; foreign the to structure the through pass tax could deductions and losses for pass-through gains, as income, of entity’sitems operating Mexican consequently,the treated be may jurisdictions, There are some Mexican corporations which, under the laws of certain Solórzano, carvajal,gonzález,pérez-correa,S.c.(Solcargo) Tax Matters 9 Financing 8 for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin off-shore structurescommon? financing marketinyourjurisdiction? financing) ofprivateequitytransactions? bonds). shares, deferred/vestingarrangements)? equity acquisitions(suchasgrowth shares,incentive typically consideredbymanagement teamsinprivate investors andtransactionsinyourjurisdiction? Are debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof

u dlgne ed t b poon, ih soe iia to similar scope a with profound, be traditional M&A transactions. to tends diligence due investments conversely,stage comprehensive; later less be to tends This depends on the size of the deal. For early stages, due diligence No, theyarenot. the of creation the FICAP since and transparenttrusts. reform regulatory major the be would This markets. equity private the to capital needed much releasing approved, If therefore be offers, private in invest year.to will authorised be this will AFOREAS AFORES of September of in regime Congress in investment discussed the amending bill A No, therehavenot. . Havetherebeenanysignificantchangesintax 9.4 Whatarethekeytaxconsiderations formanagement 9.3 03Howdetailedisthelegalduediligence(including 10.3 Areprivateequityinvestorsorparticulartransactions 10.2 Havetherebeenanysignificantlegaland/or 10.1 of type other no since SAPIs for company pursuanttoMexicanlawisableacquireitsownstock. applicable only is plan this Nonetheless, all. them of plan tax-efficient most the as considered be may it therefore, company; the by sold are shares the until only triggered is tax income plans, stock phantom in hand, other the On plans, option they candecidewhentheincometaxwillbetriggered. therefore, the shares; the in subscribe to that when decide will is beneficiaries schemes both between difference from the plan; and (ii) when they sell such shares. In this regard, the derived shares the receive they when (i) moments: specific two in plans the of beneficiaries the to tax income in result will they since consequences tax similar have plans option and Traditionalvesting effect a DTC, the aforementioned tax may be reduced or eliminated Should the seller be a resident of a country with which Mexico has in certain requirementsaremet. provided gain, net on 35% or proceeds gross on 25% of rate the at disposing of shares issued by a Mexican corporation would be taxed non-residents that considered be should it gains, capital Regarding 0Legaland RegulatoryMatters 10 investment intoanewacquisitionstructure? materiality, scopeetc.)? jurisdiction (e.g.onnationalsecuritygrounds)? anticipated? anticipated? teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities teams thataresellingand/orrolling-overpartoftheir prior toanyacquisitions(e.g.typical timeframes, compliance) conductedbyprivateequityinvestors subject toenhancedregulatoryscrutinyinyour private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting www.iclg.com mexico . 173 mexico 174 mexico © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com company is limited to the amount of participation in its equity stock. portfolio the against investor the of responsibility the parties, with third or shareholders the between agreements certain to pursuant company portfolio the with responsible jointly held be to the investor by agreed is it unless therefore, companies; portfolio the and investor the between veil corporate a is there laws, Mexican Under Arethereanycircumstancesinwhich:(i) aprivate 10.5 shareholders’ regarding anti-briberyandanti-corruptionmatters. in representations the agreements and increased the review of the target’s internal policies increased equity have private Therefore, investors company. for the of sanctions including winding-up of judicial and subject the to fines from the go officers sanctions Such as dispositions. these breaching public entities legal for and individuals sanctions regulation criminal the and increasing administrative to amendments been have certain there regard, this In anti-corruption. and anti-bribery regarding legislation in increase an been has there 2016 Yes,since Hasanti-briberyoranti-corruptionlegislation 10.4 Solórzano, carvajal,gonzález,pérez-correa,S.c.(Solcargo) diligence, contractualprotection,etc.)? the liabilitiesofanotherportfoliocompany? and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ Tel: +525550015420/Email:[email protected] capital transactions. venture His and equity private M&A, transactions, estate real matters, chapter. this of preparation his professional practice is focused in the for corporate and financial regulation Montenegro in Eduardo assistance thank invaluable to like would authors The Acknowledgment in certain stagesofthehydrocarbonandenergy markets. participate now may entities foreign example, for investment; foreign for barriers therefore, certain decreased has Mexico years, last the investment; In foreign of activities. certain in amount invest can they whether consult shall investors certain a to limited consider that certain economic shall activities are reserved investors to Mexicans or foreign however, flexible; is jurisdiction Mexican 11Whatotherfactorscommonlygiverisetoconcerns 11.1 1Other UsefulFacts 11 considering aninvestmentinyourjurisdiction? should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor iclg to: privateequity 2019 mexico

Solórzano, carvajal, gonzález, pérez-correa, S.c. (Solcargo) mexico

Fernando Eraña Carlos Eduardo Ugalde Solórzano, Carvajal, González, Solórzano, Carvajal, González, Pérez-Correa, S.C. (SOLCARGO) Pérez-Correa, S.C. (SOLCARGO) Insurgentes Sur, 1602 piso 11 suite 1102 Insurgentes Sur, 1602 piso 11 suite 1102 Col. Crédito Constructor, Del. Benito Juárez Col. Crédito Constructor, Del. Benito Juárez C.P. 03940, Mexico City, C.P. 03940, Mexico City Mexico Mexico

Tel: +52 55 5062 0050 Tel: +52 55 5001 5405 Email: [email protected] Email: [email protected] URL: www.solcargo.mx URL: www.solcargo.mx mexico Fernando Eraña is an attorney with more than 15 years of experience. Carlos Ugalde is an attorney who has focused his transactional His practice focuses on Mergers & Acquisitions, with an emphasis on practice on Mergers & Acquisitions, in which he has been able to close Private Equity & Venture Capital, Finance and Corporate law, and relevant domestic and global transactions, working jointly with foreign attending to a wide portfolio of clients that includes VC funds, top-tier law firms in jurisdictions like the United States, Canada and technology companies, non-bank financial institutions and public and France, among others. private corporations. He collaborated with AMEXCAP’s “Capital Regarding his practice in Fintech and Private Equity, he has assisted Privado y Emprendedor. Un Modelo para Empresarios, Inversionistas companies in structuring crowdfunding schemes and technological y Administradores de Fondos” (2015) and is a member of AMEXCAP’s platforms for peer-to-peer lending and hosting services, such as Alive VC Legal Committee. In 2007, Mr. Eraña worked as a foreign Rentals and the Lenmi platforms. associate in O’Melveny & Myers, LLP, in Los Angeles, California.

Founded in 1995, SOLCARGO is a top-tier law firm in Mexico, with a highly qualified, internationally educated team with working experience in tier 1 law firms across the world. Our team is capable of implementing efficient legal solutions, while taking into consideration our clients’ business rationale. SOLCARGO performs corporate engagements for Fortune 500, large multinational companies, ambitious middle-market and emerging growth companies, and capital market participants including public and private investment organisations, investment banks, commercial lenders and other financial institutions. We are recognised as a leader in the private equity, venture capital, Chapter XI NAFTA Arbitration, litigation, mediation, bankruptcy, IP and pharmaceutical industries. SOLCARGO adopts a multidisciplinary approach in counselling its clients and draws upon the firm’s unparalleled resources, including the creation of firm-wide taskforces to address important industry and topical client needs.

iclg to: private equity 2019 www.iclg.com 175 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 25 Netherlands alexander J. Kaarls

Houthoff vivian a.l. van de Haterd

1 Overview added up to EUR 782 million, which is far below the peak of EUR 4.4 billion in 2017. This difference can be explained by the fact that there were no large Dutch buyout funds open for investors in 2018. 1.1 What are the most common types of private equity Finally, 2018 has been a good year for sales by both venture capital transactions in your jurisdiction? What is the current and private equity funds. In total, 86 Dutch companies, of which 24 state of the market for these transactions? Have you were bankruptcies, were sold by venture capitalists at a total price of seen any changes in the types of private equity EUR 141 million. The number of private equity sales in 2018 was transactions being implemented in the last two to above average: 63 buyouts and 51 former growth capital three years? investments were sold. 2018 was a good year for buyout funds active in the Dutch market, Although most PE deals in the Netherlands, by far, are private M&A where a record amount was invested in Dutch companies. Research deals, IPO and dual-track exits have become regular events for published by the Dutch private equity association NVP shows that larger portfolio companies, and we see an uptick in PE firms taking investors in private equity and venture capital together invested a a potential interest in publicly traded Dutch companies. total of almost EUR 6 billion in the Netherlands in 2018. EUR 5 billion was spent by private equity houses in 94 buyout 1.2 What are the most significant factors encouraging or transactions involving Dutch target companies, which has resulted inhibiting private equity transactions in your in a new record high since 2007, while the number of deals jurisdiction? remained more or less consistent through these years. The above EUR 5 billion amount includes the buyouts of Upfield and Nouryon, Private equity buyers and private equity deals have gained a which were the largest European buyouts of 2018. Nineteen of the (desirable) level of respect in the public eye. PE firms have buyout deals in the Netherlands had a value of more than EUR 150 successfully managed developing and utilising newer deal million, constituting another record since 2007. Fifty-nine of the techniques, including, for instance, the use of a dual-track exit buyout deals in the Netherlands had a value of EUR 15 million or processes. less, which is a slight increase compared to the 2017 numbers (i.e. Separately, foreign PE funds often choose Dutch holding companies 51 buyout deals). for their investment structure because of the extensive tax and Separately, EUR 418 million in growth capital was invested in 72 bilateral investment protection treaty network, the Dutch scale-ups and other fast-growing Dutch companies, and EUR 387 participation exemption and other tax facilities in the Netherlands. million in venture capital funds was invested in 293 young and fast- Furthermore, the Netherlands is typically seen as a (politically) growth companies in the Netherlands during 2018. stable EU Member State with a well-developed legal system and a liberal economy. Investments in growth capital saw a slight decrease in 2018 compared to 2017: EUR 481 million in 72 companies in 2018 as opposed to EUR 581 million in 90 companies in 2017. Despite this decrease, the 2018 1.3 What trends do you anticipate seeing in (i) the next 12 numbers are in line with previous years. months and (ii) the longer term for private equity transactions in your jurisdiction? In contrast, the abovementioned EUR 387 million in venture capital funds that was invested in the Netherlands in 2018 again constitutes a new record – the previous record was the EUR 349 million spent in On average, private equity funds have been holding their portfolio 2017. companies for a shorter period of time recently, as compared to earlier years, and now sell off their portfolio companies after only a New records can also be found in the amounts raised by Dutch venture few years. If not this year, we expect the hold period to somewhat capitalists, who raised an amount of EUR 1.3 billion in 2018 – the increase again over years to come. highest amount ever. Life sciences funds appear to be particularly popular. Remarkably, a record amount of EUR 613 million is Separately, warranty and indemnity insurance policies are becoming intended for early phase funding. This confirms the trend towards a increasingly popular; in multiple private equity transactions, the bigger interest in investing in the start-up phase of companies. seller has engaged a warranty and indemnity insurer upfront in an auction process or it was assumed that the purchaser would take on The amount of funds raised in 2018 by Dutch funds for all private a warranty and indemnity insurance with respect to the envisaged equity strategies (growth capital, buyout, mezzanine and general) transaction. For now (in the absence of major issues arising around

176 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London o isac, i a rs ofc fudto ( foundation office trust a via administratiekantoor instance, for level; – higher or – vehicle bid the at vehicle (management) single management will participate in a portfolio company through its own company frequently co-shareholders, of group broad a with deal to include typically need not do investor(s) equity private the that ensure effortto an In shares, preference and (payment-in-kind) notesandotherdebt. shares ordinary to target group’s fiscal unity. The structure may, therefore, in addition can lead to interest deductibility when such BV becomes part of the which financing, acquisition the of part borrow can vehicle bid The NV). of governance and equity structuring (more so than, for instance, in an terms in flexibility great allowing while personality corporate SA, ht eil wl hl te hrs n h cptl f the of capital the in shares the hold will vehicle the that by STAK, a managed typically is but portfolio company’s house, senior management itself. In case of the use of equity private the by pushdowns. debt effect to ability and protection IP licences, of transferability due the diligence investigation, of such as contractual change results of control issues, the on based made usually assets. is assessment of Such protection the and continuity business considerations, tax are structure transaction the of selection the in drivers Typical include targeted protectionsandupsidesharingmechanisms. that deals investment minority a of structuring take the including years, to willing recent in market be competitive a in investors approach creative and proactive PE seen customary. have less we investments, are they possible, minority to drawbacks potential course, obvious the be can there Although of are, deals asset Although entity. target the of capital the of cent per 100 acquire ordinarily will vehicle bid The level. – higher or – vehicle bid the entity. target Dutch a at participate vehicle, own Generally,its through will, management purchase will structure) fund non-Dutch a by held be not may or may Typically,(which vehicle bid Dutch a Whatarethemostcommonacquisitionstructures 2.1 softening publicmarkets). of case in picking” “cherry of level a (including markets public the to We also trend expect to see a somewhat increased interest by PE this houses in expect we insurers), continue. or policies insurance W&I Houthoff © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 aansprakelijkheid beperkte a be be will Dutch private limited liability company ( typically might vehicle bid alternatives the cases, Although particular in preferable structure). fund non-Dutch a indirectly via a Dutch bid vehicle (which may or may not be held by through invest the fund. typically The fund and will carried interests will typically investors invest institutional level, portfolio the At How istheequitycommonlystructuredinprivate 2.3 Whatarethemaindriversfortheseacquisition 2.2 StructuringMatters 2 adopted forprivateequitytransactionsinyour structures? jurisdiction? institutional, managementandcarriedinterests)? equity transactionsinyourjurisdiction(including or “ STAK , or “ or , ”), whose board could be nominated BV ”), which has full independent full has which ”), besloten vennootschap met stichting be granted (either) restricted stock, subject to a call option that – for may employees/management key one, day from basis unrestricted Apart from outright (senior) management equity participation on an the nominalpaid-upsharecapitalor thevotingrights. law, management would usually want to obtain at least 5 per cent of tax Dutch under exception participation the to view a With high. 0 per cent and 20 per cent, the latter being considered exceptionally The typical range of equity allocated to management can be between is notuncommon. a non-recourse basis) to finance the acquisition of such equity stake on provided be may (which management to loan a of provision The shares). preferred managers’ the to attached rights economic additional of of the investment) and sometimes even a ratchet (usually in the form expectations beyond success of case in increased is shareholder(s) remaining the to relation in equity management of value the which of result a as shares ordinary additional (e.g., equity sweet as such stimulate further to incentives to pursue (or exceed) a specific optimistic exit valuation, order in addition, management’s performance, management may In be offered economic equity’s private strip. the the to) institutional in similar invest (or with to along opportunity strip institutional the offered often is Management manner from a governance, management tools and tax efficientpoint of an view.in exit and capital on return and level), employee key fund investors (both at the fund management and portfolio company the of those with interests of alignment management, effective of Typical drivers in the selection of the equity structure are facilitation over preferred non-voting stockstructures. be to tend above) described (as structures receipt depositary result, a As instance). specific any in stock non-voting by complicate the action of holders the by cooperation of absence the in shareholder consent somewhat written block may (i.e., stock decision-making non-voting shareholder of presence the result, a As meetings. shareholder attend and for called by be to right the carry held (mandatorily) shares. still shares non-voting shares non-voting law, as the Dutch Under structured case, be that typically will in management However, (BV) portfolio itself. or also BidCo company the may in shares participants non-voting management hold directly sometimes, that, note We stock through stake that wouldholdsuchstake. (collective) their ownership in a senior management-controlled hold BV or other corporate companies). may key holding other employees and managements participants management via company Alternatively, indirectly or (whether directly management to receipts depositary issue and company . Inrelationtomanagementequity, whatisthetypical 2.5 Ifaprivateequityinvestoristakingminority 2.4 eoit cmot ih epc t) t lqiiy vn, n re to order in event, ensure thatitsinvestmentissafeguarded liquidity its to) respect with comfort negotiate (and structure specifically generally would investor equity private actions, the Furthermore, corporate rights. information and appropriate), material where seats, selected, of respect (frequently) proportionate board representation (including committee in rights veto Customary minority protection will typically be negotiated, including acquisition provisions? considerations? what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and position, aretheredifferentstructuring . www.iclg.com Netherlands 177 Netherlands 178 Netherlands isinbreachofmaterialgovernanceprovisions. ■ or of, becomes employee insolvent, subject of an application for a declaration of, director managing a be ■ to ceases commonly ■ are provisions acquisition triggered, inshort,whenamanagementequityholder: compulsory Common © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com Forwhatreasonsisamanagementequityholder 2.6 things – for customary drag and tag along provisions, as well as non- entered into with the private equity firm(s), providing – among other the case may be, will typically be party to a shareholders’ agreement Also, the management participation vehicle or direct participants, as fair marketvalue. against valuated normally against are shares even vested while or value, nominal discount a against valuated typically are shares Non-vested typical. most considered is years three to zero of range the whereby years, five and zero between occurs usually Vesting period, orstockoptionssubjecttoasimilarvestingperiod. five-year a over each cent per 20 of tranches in expires – instance Houthoff h triain y uh aaeet qiy odr f his of holder equity management such by termination the or ■ employee director, managing a be to consultant ofthecompanypursuantto: ceases it if leaver bad a deemed be will holder equity management a practice, common In h triain f h mngmn eut holder’s equity management the of termination the ■ exit process. PE-led smooth a ensuring at aimed commitments, encumbrance ■ release from or dismissal as a managing director,managing a as dismissal or or employee from release ■ an by determined is which company the by dismissal ■ or agreement employment his terminating company the ■ director, employee orconsultantofthecompanypursuantto: managing a be to ceases holder equity management such Usually, a management equity holder will be deemed a good leaver if tc otos n rsrce sok rn areet wl typically will agreements contain (internationally customary) good leaver/bad grant leaver provisions. stock restricted and options Stock a a iudtr pone t i, r eoe sbet to subject becomes or it, to insolvency proceedings;or appointed liquidator a has ( betaling payments of suspension or bankruptcy of consultant tothecompany; your jurisdiction? usually treatedasagoodleaverorbadin than for reasons of reasons for than other director, managing a as him by resignation or be), may case the (as agreement consultant or agreement employment as jsiyn smay imsa ( dismissal summary justifying urgent the an cause for or dismissed be terminated may be holder the equity may management which holder equity in management situation the the of i.e. position the governing agreement services cause, or employment for company the by be) may case the (as agreement consultant or employment such managementequityholder;or is notinbreach,norhasbeen ofhiscontract;o external consultant of the company in circumstances where he or wrongful be to appeal, in breach, ofhiscontract; to been has nor breach, right in not is he where no and constructive, is there which from jurisdiction, competent of court or tribunal, employment in been has nor in breach, contract) in breach, ofhiscontract; not that is of he terms where the circumstances with accordance (in notice external consultant agreement (as the case may be), by serving to themanagementequityholder. attributable Code), Civil Dutch the of 7:678 Section in meant

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a is he that writing in confirming investor equity private the ■ ragmns ad on n fr xml, or rls or rules board example, for in, shareholders’ down agreements. laid arrangements is no statutory requirement to file any – more detailed – governance laid down in the articles of association are publicly available. There arrangements governance general the result a as and commerce of chamber Dutch the of register the trade the with file association of articles to obligation statutory a is There association. of articles The general governance arrangements are typically laid down in the international other and UK U.S., to investors. familiar more be to tends structure the (ii) and developments, business day-to-day on handle direct access to all management/board information and a more direct house’s“representatives” PE the allows it (i) because transactions, PE in popularity in gaining is structure board single-tiered the that believe we However, board). “managing” sole company’s the of part form not – structure board single-tiered a in non-executive a to board structure (as a supervisory board member would – as opposed board two-tiered a structure in in comparison to a director non-executive director in a single-tiered supervisory a for limited more as perceived typically (still) is exposure liability director Prospective reflected intheDutchcivilcoderelativelyrecently. only was structure board single-tiered a in non-executives appoint was past, the two-tiered mandatory in for certain larger companies) as fact, the explicit Such possibility to in (and, popular particularly structure. was two-tiered structure a in board, supervisory done the on frequently individuals trusted more or one was of appointment the through this Historically, of “representation”. exercise board the through business shareholder rights, private equity the firms typically seek non-executive supervising from Apart a both supervisory board(solelycomprisedofnon-executivedirectors). of creation the a and directors) for executive of comprised (solely board management provide will association of articles non-executive and directors. In executive the case of a two-tiered board structure, the company’s both or directors, either executive of consist solely could board the structure, board single-tiered a board single-tiered governance structure, or a a two-tiered board structure. In the case of either of creation the for allows law Dutch o-xctv o a te hrhle lvl, h cmay will company the level), shareholder the at or non-executive the at it (be approval internal required the obtaining first without commitment a to company the binding by authority (internal) their Accordingly, should one or more executive board parties. member(s) third exceed of rights the affect directly not do rules such matter, company portfolio the and/or the of portfolio company board rules is customary. shareholders’ association As a general the of in articles matters the reserved agreement, of list a of Incorporation . Whatarethetypicalgovernance arrangementsfor 3.1 . Doprivateequityinvestorsand/ortheirdirector 3.2 GovernanceMatters 3 good leaver. in yourjurisdiction? position, whatvetorightswouldtheytypicallyenjoy? arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor iclg to: privateequity 2019 Netherlands ioiy rtcin il yial b ngtae, including negotiated, of respect in selected, materialcorporateactions. be rights veto and typically representation customary board proportionate will investments, minority protection of cases minority In be to tools. tend lists effective matters reserved Accordingly, thereto. relation Under Dutch law, a majority shareholder (such as a PE house in a in house PE a as (such shareholder majority law,a Dutch Under tends nottobearealissueintypicalportfoliocompanysituations. this mostly but situations, sensitive particularly in guidance legal seek may members board practice, In etc.). creditors, employees, also but shareholders, all (including company the in stakeholders that the director must seek to safeguard consist of the interests of all interests corporate The shareholder). particular a of interest the to opposed (as whole a as business its and company the of interest the duty,her or in his act of fulfilment the in must, – director other any (shareholder) particular own their like – director nominee a level, in board the at voting interests. When vote to free are be investors should that fairness and observed reasonableness of standards infringe not basic do shareholders as long as level, shareholder the At Arethereanylimitationsontheeffectivenessofveto 3.3 be may it association, of articles relatively easy company’sto establish director liability the of breach in so done have would executive an However,if bound. be generally Houthoff © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 and law, Dutch by governed be mandatorily will governance company’s provisions) the of number substantial a contain also case any in will (which company the Dutch a of association that of articles note We required. not and is law, Netherlands portfolio Dutch the than in jurisdiction other Dutch law a a by governed to be may respect company with agreement shareholders’ A while register, trade the shareholders’ agreementscanbekeptfullyconfidential. with file on publicly are association of in and form in substance. In addition, the full both content of Dutch companies’ articles agreements, shareholders’ than more restrictive are association of articles company Dutch However, well. certain down lay as association commitments of to articles company’s portfolio preferable the in certain commitments be may make it contract”), to of breach order In a “just creating potentially to opposed (as enforceable fully/directly content. of terms in flexible relatively are shareholders’agreements company Dutch Are thereanylimitationsorrestrictionsonthe 3.5 and fairness towards other shareholders and their Are thereanydutiesowedbyaprivateequityinvestor 3.4 n i de nt w ay iuir o smlr uy o n other any to duty similar or shareholder. fiduciary any owe not does it and the that, said Having overriding rule is that a manner.shareholder is free to act in its own interests abusive an in rights its exercise not should shareholder majority the that means essentially, This, portfolio company) should observe basic standards of the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) typically addressed? typically addressed? non-compete andnon-solicitprovisions)? (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements shareholders (or to minorityshareholderssuchasmanagement vis-à-vis other stakeholders in the company, private equity vice versa )? Ifso,howarethese vis-à-vis bona fide the company in reasonableness interests. to question10.5below. answer our to refer please companies, portfolio Dutch of boards to directors nominated have that investors equity private for liabilities and risks potential but) (limited certain of by description brief a For manageable and reasonable portfolio Dutch deemed international standards. a be of board should the company to investors equity private by to say that the potential risks and liabilities for a director nominated fair is it believe we out, taken been has coverage D&O appropriate and diligence, reasonable with fulfilled are duties director When reasonably a of that acting “businessperson”. is held are directors which to standard The duties and general good faith obligations (as developed in case law). statutory specific their of violations serious for U.S.-style – suits) no derivative (i.e., company the of behalf on shareholders its by not company,but the by – liable personally held be may Directors the shortcoming(s). of consequences negative the avert to action taking in negligent not was she or he that and board the of shortcoming(s) the for culpable board member may avoid liability by proving that he or she was not responsibility of the board may result in joint and several liability. A collective rule, general a collectively.As powers decision-making their exercise should board the of members the member, one than are members board more of consists board the if that the means which nature, in collective of duties the board, each of level the At board management a is person member. such if as company’s liability, potential of the on executive sit action, he or she exposes him or herself to increased levels cannot any takes member board supervisory a When board. management members board supervisory and action executive taking from barred are structure) single-tiered a in or structure two-tiered a in (whether directors Non-executive h Dth ietr ofit o itrs rls r relatively are rules interest of conflicts director Dutch The . Arethereanylegalrestrictions orotherrequirements 3.6 . Howdodirectorsnominatedbyprivateequity 3.7 and thegeographicalproductscopeofnon-compete. agreement shareholders’ the of termination the after shareholders’non-compete the the of duration the to related mainly in are and regulations and rules covenants EU by driven restrictive are restrictions The non-compete. the more is agreement the of One arrangements aswell. alternative see frequently we However, shareholders’agreements. their in jurisdiction and law Dutch for provide to happy been have Dutch investors equity private the non-Dutch as well of as Dutch many record courts, the recognising and therewith, In connection agreement. shareholders’ the in for provided jurisdiction and law governing the of irrespective courts, Dutch the in brought be disputes involving corporate duties under the law or the articles can portfolio companies? of otherportfoliocompanies? equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin party nominatingthem,and(ii) positionsasdirectors interest arisingfrom(i)theirrelationship withthe investors dealwithactualandpotential conflictsof www.iclg.com Netherlands 179 Netherlands 180 Netherlands © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com a As processes. bidding competitive see to tend we and auctions a into turned sellers’ market again. largely Accordingly, we now are seeing a good number of has and market, sellers’ buyers’ a a into from market turned market the crisis, financial the Following Havetherebeenanydiscernibletrendsintransaction 4.2 the competitionprocess,willtypicallydictatetimetable. For public-to-private transactions, the public bid rules, together with timetable. manageable and clear a set to parties for easy relatively to be quite cooperative and takes a constructive approach, making it Authority for the Financial Markets prospectus the of approval Fortunately, Netherlands timetable. the entire the dictates typically whose regulator, issue and the additional preparation with an prospectus dealings of market, consists regulated timetable a the on impacting could listed be opinion to the IPOs which at For transaction. the of the outcome process the on impact an have potentially transaction with the provided in be a stage at transaction should envisaged the on company opinion an form to a opportunity of council works works the of involvement Formally, clearance. competition and the transaction the in council the to relate mainly Netherlands the in transactions private for timetable the impacting issues major The Whatarethemajorissuesimpactingtimetablefor 4.1 shareholder level. the to raised be must it which of absence the in firm-nominee, PE a of affirmativevote the require case any in will resolution particular be will any that require to atypical not is It concerned level. shareholder the to raised matter the that ensure or interests, of conflict a of result a as process decision-making a from abstain nominees their of more or one when decision-making with comfortable feel to continue they that ensure to board the on nominees appropriate firms are well advised to monitor that they either have sufficient and equity private addition, In concerns. competition or confidentiality to rise give not do companies (portfolio) other at positions board arise. Moreover, parties should ensure that any particular directors’ positions in respect of whom conflicts of interest are overly likely to board for individuals nominate not do they that ensure to want may firms equity Private stakeholders. its of all and company portfolio relevant the of interest the in and independently acts she or he that ensure continuously should director each rules, interests of conflict Dutch the with compliance formal above-described the from Apart the boardaswell. on serves director the where company portfolio another or director case of a (potential) conflict with either the party that nominated the in process decision-making not board the from disqualified is necessarily director a law, Dutch under that above the from follows It decision-making processonthematterconcerned. of interests, the relevant board member cannot take part in the board financial substantial) (and stake in the outcome of the matter. personal In cases where a there is a conflict have not does director a if a Accordingly, a concerned. conflict of if interests matter is not the necessarily arises deemed to in arise interest only financial personal interests a of has director conflict a principle, In restrictive. Houthoff Transaction Terms: General 4 terms overrecentyears? disclosure obligationsandfinancingissues? and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust ( AFM ) has proven to be willing timetable. 2019 International Comparative Legal Guide to: Mergers & Acquisitions Group’s Legal Global in contribution Houthoff’s to refer We more onerous to a PE house than to a strategic bidder offering cash. its bid document with the AFM for approval. This is not necessarily files it when funds” “certain confirm must bidder the deal), private In the case of a cash bid (of serious course, likely in the case of a public-to- more be to buyers. tend strategic for period) bid extended an to leading (potentially respect this in issues actual purposes, review antitrust for considered be to needs portfolio house’sentire PE relevant the typically although fact, In bidders. strategic than situations bid public in challenges greater no face to tend firms PE management of the target company. The leverage ratio is dependent transactions other The in or more banks and U.S. partially by private equity prevalent funds together with the the one by partially and funded structure commonly are buyouts) UK straight (typically the the as to such jurisdictions similar is the in Netherlands transactions equity private for structure predominant The interests ofthecompanyanditsstakeholders. best the in is bid the that judgment, business reasonable exercising of assessment informed an determined, have basis that on and bid, the to made alternatives available have should board target the provisions, such to agreeing However,before protocols. merger in found commonly are outs) fiduciary to (subject provisions No-shop frustrate would they potential competingbids. if defence anti-takeover disproportional a may fees conflict with the target board’s break fiduciary duties and could qualify as excessive that believed generally however, is, It where foreign parties are involved, higher break fees may be agreed. the of cent per target’s 1 equity value around in a fully of Dutch deal is fee typical, but, in break particular A law. case definite there With respect to break fees, there are no specific rules in place, nor is minimum upon percentage, andmatchingrights. agreed an by price bid offered the exceeds case, out for the target board only in the case of a superior bid that, in any fiduciary a provisions, no-shop typical), less although fees, break reverse (including public fees break are in market Dutch the buyers in acquisitions to protection provide to commitments Typical . Whatdealprotectionsareavailabletoprivateequity 5.2 Whatparticularfeaturesand/or challenges applyto 5.1 are completedinrelativelyshorttimeframes. and terms seller-friendly quite on done are frequently deals result, . Whatconsiderationstructuresaretypicallypreferred 6.1 rnato em:Pbi custos Transaction Terms: Public Acquisitions 5 Transaction Terms: Private Acquisitions 6 for more extensive details on the Dutch public bid rules and rules bid public Dutch the on details extensive more for commonly dealtwith? on thebuy-side,inyourjurisdiction? acquisitions? investors inyourjurisdictionrelationtopublic transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private by privateequityinvestors(i)onthesell-side,and(ii) iclg to: privateequity 2019 Netherlands The They areinlinewithUKpractice. seller iswillingtoaccept. the comfort sought by the buyer and the exposure the private equity purchase price) the has increasingly become popular and can fill the gap from between insurance, deducted buyers’ sometimes is for premium the preference whereby a (with insurance indemnity and warranty that seen have we event, that In done. deal a get to indemnities and warranties effort an in etc., warranties, title and authority offeredstandard the beyond have sellers equity private an to limiting equal amount frequently an time, However,to time amount. from escrowed and years recent in to warranties and business any indemnities, to exposure and very warranties offering on insist limited to tend Netherlands the private in jurisdictions, sellers other equity in practice prevalent the with line In participants (whereby, alsointhisrespect,thetideturnedagain). the downturn due to the resulting increase in risk aversion of market during popular more became latter the although accounts, closing over capital) working the on (focused mechanisms determining locked-box (strongly) prefer to be regard With may purchase price, private equity funds in the Netherlands traditionally investors) demanded). local (or preferred. encouraged influential be instance, to tend for deals (including, cash sellers other certain and management by consideration, Reinvestment of terms In the tideappearstohaveturnedagain. private in the ratios leverage equity transactions has following clearly been lower visible, but in more recent years of conditions trend clear market a the crisis, financial to Due company. target on the current market conditions and the projected cash flows of the Houthoff © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Please seequestion 6.2above. Whatlimitationswilltypicallyapply totheliabilityofa 6.5 coverage. insurance depend on such the size of of the target companies costs and the desired The edge. competitive a bidder a giving valuation, on impact positive a have potentially – result a as – could and risks certain covering as seen is insurance the case which in situations, auction controlled in especially products, insurance indemnity and warranty the of use making in are buyers more deal-makers Currently, Netherlands. approaching actively are brokers Insurance premiums. insurance lower and matters) tax instance, for covering, also (now products insurance tailor-made and sophisticated more of result a as others, amongst Netherlands, the in importance and size in increasing is market insurance indemnity and warranty The To whatextentisrepresentation&warrantyinsurance 6.4 What isthetypicalscopeofothercovenants, 6.3 Whatisthetypicalpackageofwarranties/indemnities 6.2 equity selleranditsmanagementteamtoabuyer? team toabuyer? warranties, covenants,indemnities andundertakings? private equitysellerandmanagement teamunder the typicalcostofsuchinsurance? exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) undertakings andindemnitiesprovidedbyaprivate offered byaprivateequityselleranditsmanagement itrainly csoay et omtet n/r equity and/or commitment debt commitment letters. customary an of means (internationally) by comfort provide typically buyers equity Private security forthosewarranties. corresponding and warranties of set extensive more a seek to buyer equity private a for uncommon entirely not is it process, sale the of a of case strategic seller, depending on the sale dynamic and competitiveness in Still, members. team management continuing from recourse seek not will they that sellers from sought be can comfort security. seller-provided as desirable (“you don’t want to sue your new partners”), and to in fact alternative seen not frequently partial is team escrow management the from Comfort/security a as (limited) insurance warranties/liabilities, indemnity and warranty at look willing a take to tend houses equity any private buying, When time. to time from agreed are arrangements for providing on back push security to tend sellers equity private Although complete thepublicoffering andlisting. to order in necessary is whatever complete to house PE the allows truly framework) contractual other (and agreement shareholders’ before an IPO transaction should actually be implemented – that the far investment, PE the of stages early the in – ensure to key be may remains it that seen have we control, challenge sole have not may house PE a main where the perspective, legal preparing the target company to become a public company. In deals a from risks, listing. disclosure of and date market the from on Apart entirety its in stake its sell to opportunity the of firm equity private the deprive dynamics, market as well major as lock-up IPO, customary any obvious the in prevalent that arrangements, An fact the is exit deals. IPO the process of drawback exit dual-track good a of seen number have we Also, Amsterdam). Euronext performing window having been open for an extended period of time and a well- (albeit, markedly more popular in recent years as a result of the IPO market equity private Dutch the in rare relatively still are exits IPO private equitymarket,bothinpublicandtransactions. As mentioned above, reverse break fees are less typical in the Dutch . Howdoprivateequitybuyers typicallyprovide 6.7 Do(i)privateequitysellers providesecurity(e.g. 6.6 . Whatparticularfeaturesand/orchallengesshoulda 7.1 Arereversebreakfeesprevalentinprivateequity 6.8 Transaction Terms: IPOs 7 under anequitycommitmentletter, damages,etc.)? the managementteam)? exit? If so,whattermsaretypical? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and private equitysellerbeawareofinconsideringanIPO transactions tolimitprivateequitybuyers’ exposure? www.iclg.com Netherlands 181 Netherlands 182 Netherlands © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com Arethereanyrelevantlegalrequirementsor 8.2 but transaction, the on seems tobelesscommon. depending occur also may buyer) the of (i.e., where the seller pre-arranges an acquisition loan for the benefit funds and, to a mezzanine-debt lesser extent, by Dutch specialised or US/UK banks. from Stapled financing sourced extent large a to extent) from US/UK banks or German banks. Mezzanine finance is The senior debt is largely sourced from Dutch banks and (to a lesser extent, lesser a to filled withvendorloansand/orearn-outarrangements. and, being debt made commonly gaps senior funding/valuation largely with finance, of is mezzanine form deals the equity in private available Dutch for finance Debt Pleaseoutlinethemostcommonsourcesofdebt 8.1 that, said Having conclude withasaleratherthanthroughanIPO. to appear late privately. of processes exit sell dual-track the of most ultimately, to willing remained seller the while option leading the as IPO the seen have we cases, other In end. the until much pretty run were and detail great in prepared the years to come. In some cases, the dual-track exit processes were the dual-track exit strategy will continue to be reasonably popular in that expect still we strong), appears completed being deals secondary buyout on record the (while recently minute last the at pulled track process. Although we have seen a remarkable number of IPOs The majority of IPO exits in the Netherlands are preceded by a dual- Doprivateequitysellers generallypursueadual-track 7.3 This isinlinewithUKpractice. Whatcustomarylock-ups wouldbeimposedon 7.2 Houthoff rules with respect to public companies ( companies public to respect with rules assistance financial The regard. this in necessary is structuring deal private specific no Dutch and loans, acquisition for a liability limited with company by transactions assistance financial void renders that provision legal specific any longer no is 2012. there that October means This 1 of as abolished been have restrictions assistance aansprakelijkheid beperkte met ( liability vennootschappen limited with companies private to respect With hr pris o cur sae i sc publi such in shares acquire to parties third to loans providing in restricted are (ii) company,and public such in shares the acquire to used is that financing for guarantees or security provide to allowed not are (i) subsidiaries its or company public a remain in force. Succinctly put, the consequence of these rules is that Financing 8 through asaleorIPO? private equitysellersonanIPOexit? financing) ofprivateequitytransactions? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof bonds). for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare naamloze vennootschappen naamloze cmay Common company. c , h financial the ), besloten ) financiers alternative (business angels,creditunions,etc.). other and companies fintech via financing the Dutch market has, however, seen a marked rise in crowdfunding, for the small and medium-sized companies. For smaller financings, of corporate debt financing in the Dutch market, which is form also the case important most the remain bonds corporate and/or Bank a i te ehrad. oee, n ay ae te dividend tax the applicable to due cases cancelled or many reduced is rate in tax withholding However, Netherlands. the in tax withholding dividend cent per 15 to subject are payments Dividend and non-Dutch)qualifyingsubsidiaries. participation Dutch relation to income (dividend and capital gains) The derived from (Dutch exemption. in tax income corporate of exemption full a for provides exemption participation the benefit from can it that is structure Dutch a of features key the of One investors. equity private the of purpose business main the suits structure the enables private equity investors to invest in a tax-efficient manner if where private equity firms invest in the Netherlands or abroad. This Dutch Coop/BV or CV structures are generally used for transactions . Whatrecenttrendshave therebeeninthedebt 8.3 . Whatarethekeytaxconsiderationsforprivateequity 9.1 such shareholding or interest is attributable to an enterprise or ■ of respect in realised gains capital shareholding inaDutchBV ormembershipinterestinaCoopif: corporate and to income on subject tax only income generally are entities resident Dutch income tax unless certain anti-abuse provisions are triggered. Non- by either Coop/BVa Dutch or a foreign entity in are generally not interest subject to an corporate of sale the are on realised gains Coop Capital a by profits of generally notsubjecttowithholdingtax. distributions met, are requirements ray ae. n diin i srcue poel ad certain and properly structured if addition, In rates. treaty tttr mre ( merger statutory a into enters buyer the and buyer the to provided is (ii) or company; public the in public shares the the purchases then which buyer, by the to company upstreamed are loan the of proceeds the which after loan such for security provide subsidiaries, its with along can, which company targetpublic the to provided is (i) financing: acquisition the ways of addressing the financial assistance rules include ensuring that whether ornottoenterintofinancialassistancetransactions. on resolving when consider to important remain stakeholders its and benefit, fraudulent conveyance and board duties towards the company it of limited, therefore importance public is should be the noted that law general principles of Dutch law such as corporate to Dutch Although under respect rules assistance great. financial with not rules therefore is assistance companies financial of existence continued The the of transactions equity private for consequence practical companies. public of number the exceeds far Netherlands the in existing liability limited with companies private of number the that the which following acquired, merged been entity can provide security for the loan. Please have note, however, thereof shares the after Tax Matters 9 financing marketinyourjurisdiction? off-shore structurescommon? investors andtransactionsinyourjurisdiction? Are emnn rpeettv o te hrhle i the in shareholder apply tosuchshareholding orinterest; the not of does exemption participation Dutch the and Netherlands representative permanent uiice fusie juridische iclg to: privateequity 2019 wt te agt ulc company public target the with ) Netherlands

levying Dutchtaxonacarriedinterest. a double tax treaty which may prevent or limit the Netherlands from of applicability the observe to important is it managers, foreign For income interest lucrative annual the of cent per 95 least at (ii) or (Dutch a through indirectly held is interest lucrative the (i) Such treatment will be available if the following conditions are met: an cent). per through 25 of rate flat a (at 2 Box in taxation interest specific for qualify its structure may income and gains capital its that manner such in entity intermediate below, 9.3 question in acquisition the in mentioned as interest interest” “lucrative so-called a as qualifying structure carried certain a has who manager A provisions may applyaswell. anti-abuse specific Other threshold. million 1 EUR a tax of interest to 30 per cent of the (fiscal) EBITDA of a company, with the on party debt. Generally speaking, these provisions limit the deduction apply related as well as debt provisions third-party on both interest of deductibility anti-abuse specific Therefore, 2019. January 1 of as rule stripping earnings an contains law Dutch entity Dutch the in interest substantial a holds shareholder a ■ Houthoff © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 lucrative a as qualify interest if: instruments equity speaking, Generally to thecapitalinvested. that investment capital limited) a equity only (or the no requires (iii) instrument while performed, activities the for remuneration of purpose the with held is instrument equity such (ii) instrument, equity an owns taxpayer a (i) if apply rules interest lucrative The question 9.2). intermediate holding vehicle and some other conditions an are met (see through indirectly held is interest lucrative a such per unless 51.95 cent, to up rates progressive at taxed are interest lucrative a Dutch income tax purposes. Income and capital gains derived from for rules interest” “lucrative so-called the of scope the within fall will activities work Netherlands-based their to relation in structure Managers who obtain a qualifying carried interest in the acquisition Whatarethekeytaxconsiderationsformanagement 9.3 Whatarethekeytax-efficientarrangementsthat 9.2 due to gearing may result in a potential return that i apply. place legal take to to has longer no restrictions the that moment the distribution upon due immediately event, possible that In not is restrictions. “distribution this (the unless realisation of requirement”), year calendar the within taxpayer the to distributed is company holding non-Dutch) or (Dutch the by derived gains) capital and dividends (i.e., certain classofshares);and a of cent per 5 least at of interest an (i.e., interest substantial a holds taxpayer the which in company holding non-Dutch) on based not sound businessprinciples). artificial (e.g., ) genuine of not (series is/are a that of arrangement(s) result the is interest substantial such and person, another of tax withholding dividend or main tax the with income Dutch avoid held to purposes main the of one or is purpose interest or shareholding substantial cent such per interest), 5 indirect or direct a (generally shares, deferred/vestingarrangements)? investment intoanewacquisitionstructure? teams thataresellingand/orrolling-overpartoftheir equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate s disproportionate On 26 February 2019, the European Court of Justice ( Justice of Court European the 2019, February 26 On the Dutch Tax Authorities. Ruling Updated the under by obtained published be will ruling this of summary Policy,anonymised an is ruling a if Pricing that aware Advance be Ruling, Tax also should companies Advance Requesting ruling). another or Agreement, an (whether ruling a Ruling Policy will considerably complicate the process of obtaining policy,ruling Updated current the the to Compared rulings. border Policy Ruling Updated the enters into force. 2019, The Updated Ruling Policy July will apply to all cross- 1 of as that, envisaged is Apart from the earnings stripping rule, mentioned in question 9.1, it reporting requirements need to be met. A large part of the Dutch the of part large A met. be to need requirements reporting is company subject to registration with the AFM only. When registered, certain management Dutch a applies, level fund at leverage and basis, aggregate an on assuming that the funds are closed-end for at least five million years and no 500 EUR than less is this If to subject are registration or licensing depending on the companies size of all funds managed. management AIFMD, the to Pursuant holding structures. corporate sheer and important offices most family true the being apply, exemption exemptions Certain investment AIFs). alternative or (or funds funds and AIFMs) only or regime managers fund the as regime, this investment alternative (so-called companies management regulates by impacted are directly not funds are equity private of themselves investors equity Private regulation. to subject normally companies management this to regime, Fund Pursuant Investment AIFMD. or (2011/61/EU), Alternative Directive Managers the implementing regime Dutch the is equity private to applies normally that regime legal key The to respect regulation, otherthanassetoutinquestion10.2below. with expectations or changes significant no are There (i.e. benefits review lackssufficient substanceinitscountryofresidence. Directive under income on the of recipient rely the if exemptions), tax to withholding ability taxpayer’s ruling a ECJ The affects structures. equity private certain to applies law tax EU underlying principle anti-abuse general non-codified a that Havetherebeenanysignificant changesintax 9.4 01Havetherebeenanysignificantlegaland/or 10.1 or as alucrativeinterest. managerial other or business the qualifying instrument equity an as qualify also targetscan financial of turnover or profits the example, for on, dependent is that yield a bearing receivables Loan the equity instrument consists of preference shares bearing an (ii) subordinated is that shares of class a is instrument equity the (i) 0Legaland RegulatoryMatters 10 anticipated? anticipated? teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting annual yieldofatleast15percent. the of capital ofthecompanyconcerned;and capital paid-in the and subordinated class is less than 10 per cent of the total paid-in shares of classes other to www.iclg.com Netherlands ECJ ) ruled ) 183 Netherlands 184 Netherlands © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com in bidding for allow to or bidding emergency processes(e.g.,insolventseller). pre-emptive for allow to typically in an effort to contain costs (e.g., in competitive auction processes), are efforts substantial – efforts diligence can be undertaken and finished in short timeframes, whether needed when – due whereby weeks, Legal within undertaken reporting. based issues- in resulting exercise diligence due legal high-level focused, – own bidder/buyer’s the to confirmatory – due diligence). Many private equity buyers prefer a addition (in given an be that can uncommon reliance not which on prepared, is is report diligence it due vendor legal auctions, extensive controlled outside In by conducted counsel. commonly is process diligence due legal Compliance has become an increasing focus over recent years. The vary. diligence due legal of levels securities/regulatory), property, intellectual environmental, (e.g., business the to field legal certain Depending on the complexity of the business or the importance of a Howdetailedisthelegalduediligence(including 10.3 been has submitted to(andisdebatedin)parliamentatthistime. scrutiny government heightened to subject companies (tele)communications of ownership renders that law proposed A appropriate such safeguards of whether further measures will of be required. outcome the are on instruments existing the whether determined be will it analysis, Based industries. such within parties foreign by acquisitions of event the in security national to risks the of the vital sectors referred to above, with the purpose of identifying The Dutch government is currently conducting an analysis in certain similar completed prior tocompletionoftheacquisition. is process or approval an that shareholders) require may and regulator its (and acquirer arrangements. This will imply involvement of the competent Dutch the of screening prior require normally industries such in investments equity private result, a As petroleum). and electricity the gas, (e.g., and industry energy industry defence the industry, nuclear the industry, care health the industry, telecommunications the industry, financial the as such regulated (heavily) are industries certain grounds, security national on scrutiny regulatory formal general, no is there While Areprivateequityinvestorsorparticular transactions 10.2 regime licensing applies. this if impacted be a may As transactions PE shares. result, of repurchase and shares on repayment reduction, of targets of a particular size by means of dividend payments, capital votes) the of cent per (>50 control of acquisition following months 24 first the during stripping asset on prohibition a and thresholds, to duty a include disclose acquisitions of rules interest to the and AFM when surpassing These certain holdings companies. to non-listed relating of rules control and marketing) retail on regime Dutch the marketing, retail of case the in (and, AIFMD the by set requirements the meeting prospectus, a publish to requirement the certain ongoing requirements. Among such ongoing requirements is this a management company is subject to licensing and to compliance with subject is companies however,exceeded, is threshold aforementioned the If registration. management fund equity private Houthoff materiality, scopeetc.)? prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors jurisdiction (e.g.onnationalsecuritygrounds)? subject toenhancedregulatoryscrutinyinyour 8.1 billion over the full term of the loan). In France, income on income France, In loan). the of term full the over billion 8.1 (EUR rates interest high extremely to ground giving than use other no had which Hunkemöller of acquisition the for million 61.4 EUR of loan shareholder a used company investment equity private The sole purposeoftaxavoidance. 2011in Hunkemöller chain lingerie the of with acquisition the with laid down in the governance documentation, and documentation, governance the in down laid (for rights consent house and information equity of combination a private through instance, the by involvement intense is there If respect tendstobeinlinewithinternationalpractice. this in sought comfort Contractual and process. diligence rules, the of part anti-corruption and anti-bribery sensitivity to UK potential issues in this respect tends to form an integral and U.S. the of aware much very be to tend houses equity private Netherlands, the in investing when checks, compliance law Dutch from Apart ( law of misuse committed had company investment equity private French a that ruled Appeal of Court Amsterdam the 2019, May In portfolio another of liabilities company. the for liable company portfolio like, there is no particular basis under Dutch law that would make a the or debt other’s each for provided is comfort contractual no that held by the same PE fund) and, accordingly, assuming among others ultimately are they that fact the for (except ties other no Assuming have ramificationsforPEhousesactiveintheNetherlandsaswell. may obviously, which, manufacturer, the cable power a by of ownership liable severally and bank’sformer investment that to relation in jointly Commission largeEuropean a held of was arm PE bank the investment which in 2014) April 2 IP/14/358, (EC, case cartel cable power EC the to refer we above, the from Apart insolvency. in between activeinvolvementandrelianceonseniormanagement. balance up appropriate an end for aim to would helpful be may company it Accordingly, portfolio the – appropriate action its without – that known have should or knew house care of duty a to lead may involvement such company, portfolio a of operations and/or causing the PE house to exercise decisive influence over the strategy controls) and strategy management, company’s the in involvement 05Arethereanycircumstancesinwhich:(i)aprivate 10.5 Hasanti-briberyoranti-corruptionlegislation 10.4 11What other factorscommonlygiverisetoconcerns 11.1 misbruik van recht 1OtherUsefulFacts 11 the liabilitiesofanotherportfoliocompany? diligence, contractualprotection,etc.)? considering aninvestmentinyourjurisdiction? and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor ) by setting up a financial structure in connection vis-à-vis iclg to: privateequity 2019 the company’s creditors if the PE the if creditors company’s the Netherlands de facto de intense Houthoff Netherlands interest is not subject to tax. Pursuant to Dutch tax law, interest can It is expected that Hunkemöller will take an appeal against the be deducted from tax. The purpose of the aforementioned loan was ruling of the Amsterdam Court of Appeal to the Supreme Court. to ensure that the profitable Hunkemöller would be making loss on paper and that therefore no profit tax had to be paid. Acknowledgments Hunkemöller intended to deduct more than EUR 27 million over the first three years after the acquisition in interest from tax. However, The authors are grateful to their colleagues Sylvia Dikmans (tax), The Amsterdam Court of Appeal now ruled that Hunkemöller Michel Pannekoek and Richard Witvliet (PE transactions), Daan cannot deduct this amount. Horsthuis (fund formation), Jeroen Vossenberg (debt finance) and Bastiaan Siemers (regulatory) for their valuable input. The tightened restrictions on interest deduction make it more difficult for private equity companies to avoid tax, but not impossible. Netherlands

Alexander J. Kaarls Vivian A.L. van de Haterd Houthoff Houthoff Gustav Mahlerplein 50 Gustav Mahlerplein 50 Amsterdam Amsterdam Netherlands Netherlands

Tel: +31 20 605 6110 Tel: +31 20 605 6580 Email: [email protected] Email: [email protected] URL: www.houthoff.com URL: www.houthoff.com

Alexander Kaarls is a partner of Houthoff and head of its M&A Vivian specialises in mergers and acquisitions (including joint ventures department. He focuses on (cross-border and domestic) private and and other types of partnerships), and cross-border private M&A public M&A and capital markets transactions. He also regularly transactions in particular. She represents both private equity advises on corporate governance, joint ventures, securities laws companies and strategic parties. Her work involves advising on, compliance, and general cross-border matters. Before joining drafting and negotiating transaction documents as well as coordinating Houthoff, Alexander practised law with Skadden, Arps, Slate, Meagher M&A deals. & Flom LLP from 1994 until 2004. He is recognised as a leading M&A practitioner in The Netherlands by The Legal 500, Chambers Global, Chambers Europe, Who’s Who Legal – Mergers and Acquisitions, and IFLR1000. Alexander studied at Leiden University (School of Law) and Sciences Po (Paris). Alexander is a member of the Bars in Amsterdam and California.

Houthoff is a leading Netherlands-based law firm with over 300 lawyers worldwide. Focusing on complex transactions and dispute resolution matters, the firm typically advises domestic and international private equity houses, corporations, financial institutions and governments on a wide variety of matters, including those that may have key strategic impact or present the most significant challenges to the organisation. In addition to its offices in Amsterdam and Rotterdam, Houthoff has offices in London, Brussels, and New York, and representatives in Houston, Singapore and Tokyo. On cross-border matters, the firm frequently works jointly with leading New York and London-based firms, as well as major firms in other global economic centres. Houthoff consistently aims to identify client needs and market opportunities early on. Moreover, on a daily basis, the firm’s attorneys seek to deliver proactive, efficient and cost-effective advice of the highest quality in a timely manner. Houthoff has strong ties with clients in emerging markets, including China and Brazil. Houthoff is consistently top ranked by international client guides, including Chambers, IFLR1000 and The Legal 500. In 2018, Houthoff received the “Netherlands Client Service Law Firm of the Year Award 2018” by Chambers Europe. Also, Houthoff consistently ranks as a top-tier firm for deal volume in the Benelux.

iclg to: private equity 2019 www.iclg.com 185 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 26 Nicaragua rodrigo taboada

consortium legal andres caldera

1 Overview 2 Structuring Matters

1.1 What are the most common types of private equity 2.1 What are the most common acquisition structures transactions in your jurisdiction? What is the current adopted for private equity transactions in your state of the market for these transactions? Have you jurisdiction? seen any changes in the types of private equity transactions being implemented in the last two to Special purpose vehicles (SPVs) are commonly used to acquire three years? Nicaraguan companies in PE transactions. Whether these SPVs are constituted in Nicaragua or in another foreign country may vary The high influx of direct foreign investment received by Nicaragua depending on the complexity of the transaction. during the past few years has created an international private equity (PE) market where foreign entities own local companies and where these foreign entities sell their Nicaraguan companies to other 2.2 What are the main drivers for these acquisition foreign entities. Thus, PE transactions are commonly structured structures? subject to foreign laws (typically New York). Nicaraguan laws are very broad and all types of PE transactions are permitted, with the Tax considerations are the main drivers for these types of most common types being those that have the least tax impact, acquisitions. There are, however, other drivers such as solutions to which may vary on a case-by-case scenario. the agency problems, limitations of liability, asset protection, and Despite the socio-political crisis that began in April 2018, some PE regulatory compliance that advocate for this type of structure. transactions have taken place in the last few months, like the acquisition of Spanish telecommunications company “Telefónica”, 2.3 How is the equity commonly structured in private which operates Movistar by “Millicom” which operates Tigo. equity transactions in your jurisdiction (including However, for now the forecast of future trends is difficult to assess institutional, management and carried interests)? due to the political and economic uncertainty that the country is still experiencing. The equity is commonly structured through one class of shares in which the PE fund will be the majority shareholder through a SPV. It is common to have institutional investors as the main shareholders 1.2 What are the most significant factors encouraging or inhibiting private equity transactions in your of the assets. The structure is commonly defined according to jurisdiction? international standards which usually requires confirmation from local counsel regarding local regulatory aspects. Relevant PE transactions have remained generally inhibited by the socio-political crisis in Nicaragua which has negatively impacted 2.4 If a private equity investor is taking a minority the economy. However, there have been some successful position, are there different structuring transactions despite this. Foreign investors that have an appetite for considerations? opportunities in emerging markets may enter into Nicaragua in the next few months, as the price of certain assets has lowered in the last Yes, if PE investors are taking a minority position, there are relevant year. protections that need to be considered. A Shareholders Agreement subject to New York law is advisable to protect the rights of the minority shareholders, including rights of veto of certain decisions, 1.3 What trends do you anticipate seeing in (i) the next 12 months and (ii) the longer term for private equity termination rights in case of deviation of corporate purpose or transactions in your jurisdiction? traditional business, etc. However, it is uncommon for a PE investor to take a minority position in Nicaragua. Usually it procures a The trends may vary according to how the socio-political situation is majority stake in the newly acquired company. resolved. If a political solution is agreed this year prompt recovery should follow. Otherwise, the environment of uncertainty for foreign investment may prevail for some more time.

186 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London approval forthemtotakeeffect. for process judicial a require nor Registry Public the in registered be not will agreements these since published be to need not do they that are Shareholders Agreements having of advantages the of One specific by-laws oritsarticlesofincorporation. have company’s the to Shareholders’Agreements, in established typically obligated not are governance arrangements. Therefore, governance arrangements are companies portfolio PE Stock time oftheacquisitionandisusuallysubjecttoforeignlaw. the by governed the at and entered Agreement Shareholders the or Agreement Purchase defined usually is treatment Such Forwhatreasonsisamanagementequityholder 2.6 This policyvariesforeachcase. company.the in shares of acquisition the for options cases, some in Existing key management are usually offered retention bonuses and Inrelationtomanagementequity, whatisthetypical 2.5 consortium legal © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 laws ofthecompanyinordertofacilitate theirenforcement. by- the and/or in Incorporation stipulated of are Articles rights veto main the that advisable is it event, any In or incorporation. of articles by-laws company’s the or shareholders Agreement Shareholders the a upon through agreed ones the than other arrangements veto of effectiveness the affect that limitations legal no are There Arethereanylimitationsontheeffectivenessofveto 3.3 Do privateequityinvestorsand/ortheirdirector 3.2 What arethetypicalgovernancearrangementsfor 3.1 which couldbesubjecttothelawsofNew York. Agreements Shareholders through enjoy typically could nominees director their and/or investors PE the that rights veto some be may regulated in the company’s by-laws or articles of incorporation, there and quorum special having reinforced majority vote requirements to of take major corporate actions form the take typically rights veto these Although actions. from corporate major shareholder over rights any veto prohibit enjoying that provisions legal no are There GovernanceMatters 3 usually treatedasagoodleaverorbadin what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and in yourjurisdiction? your jurisdiction? acquisition provisions? typically addressed? the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) position, whatvetorightswouldtheytypicallyenjoy? etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such

have equalrights,unlessitisagreeddifferently. or in the Articles of Incorporation. Under local law, all shareholders o-opt ad o-oii poiin ae o sbet to subject not are provisions limitations orrestrictionsinNicaragua. non-solicit and Non-compete due totheviolationofagreement. liable be may agreement the violates that party the but valid be still will Agreement Shareholders taken a in action established corporate provision a a against Nonetheless, agreement. the of scope and extent the determine to free are they and Nicaragua in parties contracting the between only binding Shareholders are Agreements New York.of laws the by governed typically are agreements These minority to investors PE by owed duties legal no are There for the Board of Directors that specify that directors must abstain must directors that specify that Directors of Board the for Certain financial entities hold special conflict of interest regulations a ShareholderMeetingResolution. through given authorisation express an is there unless company the exercise any acts of commerce or industry like the ones exercised by problems. Generally, the directors of a company may not personally The Nicaraguan Commercial Code does not address specific agency of incorporation andfortheviolationofotherlegalprovisions. articles the of violation the for mandate, legal its of execution of lack the for parties third the towards or company the towards liable for liable jointly jointly and personally held nor be will but company severally the of obligations not are Directors of Board a of members The Directors. of Board the in representative person the natural their as of liabilities and not risks same the directors share they companies, the are be generally must that shareholders the directors Because have can entities shareholders ofacompany. regulated of types permanently represent them on the Board of Directors. Only certain to persons natural appoint may shareholders These shareholders. their among chosen be must company a of directors Generally,the . Arethereanylimitations orrestrictionsonthe 3.5 Arethereanydutiesowed byaprivateequityinvestor 3.4 . Howdodirectorsnominatedbyprivateequity 3.7 Arethereanylegalrestrictionsorotherrequirements 3.6 hrhles ad (and shareholders constituted by mutual agreements through Sharehold non-compete andnon-solicitprovisions)? typically addressed? of otherportfoliocompanies? portfolio companies? (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements shareholders (or to minorityshareholderssuchasmanagement party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin ie versa vice vice versa ohr hn h oe ta my be may that ones the than other ) )? Ifso,howarethese www.iclg.com Nicaragua ers Agreements 187 Nicaragua 188 Nicaragua © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com is price some buy-side, fixed the a On that agreement. preferred purchase the usually in is determined it sell-side, the On Whatconsiderationstructuresaretypicallypreferred 6.1 laundering anti-money regarding diligence provisions, etc. due indemnities, enhanced warranties, and representations as such of kind transaction, this in negotiated be can that provisions many are There Whatdealprotectionsareavailabletoprivateequity 5.2 local by issued titles banks orpublicinstitutions. debt are Exchange the at traded securities only a few local companies registered in the Stock Exchange. Most are There modernisation. of process the is as small, rather still is not are Exchange Stock Our laws. Nicaraguan under public considered be financing) their performed in (and Nicaragua as there are almost no companies that might transactions Public-to-private Whatparticularfeaturesand/orchallengesapplyto 5.1 assets approvals, corporatetaxes,etc. regulatory local include which rules, local the as well as transaction of the to company holding regulations foreign analyse to obligates This a abroad. incorporated of a interest of acquisition majority the by completed been have transactions Many Havetherebeenanydiscernible trendsintransaction 4.2 market, thetransaction,etc. the of complexity the on depending months, 12 to six between take prior may process This transaction authority. proposed antitrust the for a required is of approval result a as position dominant a of concentration a of post-closing case the regulator.In local the to notification a require only companies, prior insurance brokerage the like require institutions, financial approval of the local regulator (Superintendence of Banks). Others, like industries, Some Whatarethemajorissuesimpacting thetimetablefor 4.1 cause aconflictofinterest. potentially may decision Directors´ of Board the when voting from consortium legal Transaction Terms: Private Acquisitions 6 Transaction Terms: Public Acquisitions 5 Transaction Terms: General 4 disclosure obligationsandfinancingissues? on thebuy-side,inyourjurisdiction? by privateequityinvestors(i)on thesell-side,and(ii) acquisitions? investors inyourjurisdictionrelationtopublic commonly dealtwith? transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private terms overrecentyears? and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust one tothreeyears. of terms for provisions non-solicitation and non-compete include may covenants Other them. cover to granted be may indemnities process, diligence due the during liabilities undisclosed are there If the scopeoftheirrepresentations. limit usually sellers However, matters. business other and operate to licences current transaction, the into enter to company,authority sufficient the of incorporation to refer would warranties Typical The PE fund usually is responsible for the funding of the transaction price tosecuresuchevents. escrow accounts with third parties or have holdback on the purchase to warranties and liabilities. respond It is more common a practice to to negotiate security provide to sellers PE for common not is It Foreign policiesmaybecontractedinstead. Local insurance companies do not typically offer this kind of policy. . To whatextentisrepresentation&warrantyinsurance 6.4 Whatisthetypicalscopeofother covenants, 6.3 Whatisthetypicalpackage ofwarranties/indemnities 6.2 effective timeofclosing. the and agreement the of execution of time the between occur may that results financial or events certain upon depending variations some for allow that clauses adjustment price negotiate to try parties . Howdoprivateequitybuyerstypicallyprovide 6.7 Do(i)privateequitysellersprovidesecurity(e.g. 6.6 Whatlimitationswilltypicallyapplytotheliabilityofa 6.5 such aslabourandtaxaresubjecttostatuteoflimitationprovisions. often established for seller’sare liability (one to two-year term). Specific areas limits Time liability). overall for (limits caps and claims (minimum amount subject to indemnification); baskets for cumulative indemnities for threshold a establish that provisions find to common is It parties. the among negotiations specific the on depend will This equity selleranditsmanagementteamtoabuyer? team toabuyer? under anequitycommitmentletter, damages,etc.)? the managementteam)? warranties, covenants,indemnitiesandundertakings? the typicalcostofsuchinsurance? exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) undertakings andindemnitiesprovidedbyaprivate offered byaprivateequityselleranditsmanagement funding, righttospecificperformance ofobligations by thebuyingentity(e.g.equity underwriteofdebt sellers typicallyobtainintheabsence ofcompliance (ii) equityfinance?Whatrights ofenforcementdo comfort astotheavailabilityof(i)debtfinance,and warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and private equitysellerandmanagementteamunder iclg to: privateequity 2019 Nicaragua

customary lock-upperiods. This kind of transaction is not common in our market so there are no AML this governance, and small process willrequireaparticulareffort onthesellerside. very is statements, market Nicaraguan The etc.). (financial provisions, regulations listing the all with comply to need will company the public going Before will need to be hired, commissions will have firm to be brokerage paid, and a so forth. facilitated, and be to Legal need will information financial Banks. of Superintendence the and Exchange Stock the before register to need will a company The in transaction. than private higher significantly be may timing and transaction the If a seller goes public at the time of selling the company the costs of (usually claimed under foreignlawandcourts). be can damages agreement, the of termination Reverse break fees are not common in Nicaragua. In case of default Arereversebreakfeesprevalentinprivateequity 6.8 the of company holding the acquiring entityisalsorequested. of guarantee a transactions some In transaction. the secure to funds of availability and/or financing the of stats the regarding provision a include would warranties and with its own capital or with bank financing. A condition for closing consortium legal © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Pleaseoutlinethemostcommonsourcesofdebt 8.1 Dual-track processesarenotcommoninourmarket. Doprivateequitysellersgenerallypursueadual-track 7.3 Whatcustomarylock-upswouldbeimposedon 7.2 Whatparticularfeaturesand/orchallengesshoulda 7.1 buyouts. These may bewhole-sumloansorrevolvingcreditfacilities leveraged in loans bank-led through financed usually are transactions PE the local finance market has decreased. However,is it decreased. has market finance local the Nicaragua, in 2018 on April began that crisis socio-political the Given for PE investors to finance their acquisitions through bank-le through acquisitions their finance to investors PE for provided by off-shore financial institutions. Similarly, high-yiel Similarly, institutions. financial off-shore by provided is having evidence of payment of the purchase price Financing 8 Transaction Terms: IPOs 7 transactions tolimitprivateequitybuyers’ exposure? private equitysellersonanIPOexit? exit? If so,whattermsaretypical? bonds). for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin through asaleorIPO? and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare private equitysellerbeawareofinconsideringanIPO . Representations not uncommon not d loans d .

d od oeain ae sal hl i ohr uidcin t raise to jurisdictions enough capitaltoacquireaNicaraguancompany. other in held usually are operations bonds investors. local increased countryrisk. to credit granting Furthermore, the cost of financing in Nicaragua has risen due to the been not financial have local as institutions market financing debt the affected negatively has in 2018 Nicaragua April in began that crisis socio-political The tax may notacquiresharesoftheentitiesthattheyfinance. on institutions financial Nicaraguan that however, depend noting, worth is It largely will financing debt considerations. the of structure The Nicaragua. in transactions PE of financing debt of structure the condition that requirements or limitations general no are There share and asset transfers. Capital gains would be equivalent to the to equivalent be would gains Capital transfers. asset and share in gains the over applies tax gains capital purposes, tax income For purchase plans(stockoptions)deferredintime. The most common arrangements for tax-efficient purposes are stock Off-shore structures arecommoninPEtransactionsNicaragua. In Nicaragua,therearenodoubletaxationtreaties. subject toawithholdingtaxwithrateof20%. non- a to company company,local Nicaraguan a to services be rendering will for same resident the a by made payments of case In whether ornotthetaxpayerhadaphysicalpresenceincountry. Nicaraguan the in abroad, received are activity or accrue incomes of those when even territory, type other any and rights assets, Nicaraguan source revenues are those derived from goods, services, in obtained source, with otherjurisdictions. relations economic Nicaraguan their from comes a that or territory from Nicaraguan received income or to tax. applied accrued be income will tax for income law, tax applies the to principle According territorial the Nicaragua, In PE investorsarenotconsideredtaxpayersforincometaxpurposes. . Whatrecenttrendshave therebeeninthedebt 8.3 Arethereanyrelevantlegalrequirements or 8.2 . What arethekeytaxconsiderationsformanagement 9.3 Whatarethekeytax-efficientarrangementsthat 9.2 Whatarethekeytaxconsiderationsforprivateequity 9.1 Tax Matters 9 financing marketinyourjurisdiction? financing) ofprivateequitytransactions? investment intoanewacquisition structure? shares, deferred/vestingarrangements)? off-shore structurescommon? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof teams thataresellingand/orrolling-over partoftheir equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate investors andtransactionsinyourjurisdiction? Are www.iclg.com Nicaragua 189 Nicaragua 190 Nicaragua © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com Areprivate equityinvestorsorparticulartransactions 10.2 impact PEinvestorsorothertypesoftransactions. may that developments regulatory and/or significant no are there Hence, law. this to subject not are Nicaragua, in operating foreign funds However, offer. tender investment of types common most the are which funds, investment public a through capital raise The capital markets law specifically regulates investment funds that autonomy party and Code principles. Civil Nicaraguan the Commerce, of In Nicaragua, PE transactions are governed by the Nicaraguan Code Havetherebeenanysignificantlegaland/or 10.1 Establishmentofnewattributionsfortaxauthorities: Amendmentstootherlawsthathavetaxregulations. 6. Newregulationsforexemptionsandexonerationsof VAT. 5. 4. New regulations on transfer pricing using the method of non- Newtiminganddeadlinestosubmittaxesforms. 3. 2. Tax collection planbytaxadministration. 1. entered intoforceonFebruary28,2019. Tax reformsinclude: which reforms tax approved government Nicaragua the Recently, Havetherebeenanysignificant changesintax 9.4 between unrelated parties cannot be different from the market value. transfer asset and/or share a of price transfer the purposes, tax For The capitalgainwithholdingtaxrateis15%fornon-residents. and thetransferpriceormarketvalue. assets or (equity) shares the of value book the between difference consortium legal in Nicaragua. place take that transactions PE regarding scrutiny regulatory no to little been has there foreign, typically are investors PE most Since 0Legal andRegulatoryMatters 10 6.3. The timing to calculate terms to notify the determinative 6.2. anticipated? jurisdiction (e.g.onnationalsecurity grounds)? subject toenhancedregulatory scrutinyinyour anticipated? private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting 6.1. regulated comparableprices. Increasedtaxesapplicablebyindustries. 1.4. Increase on withholding tax for non-residents (individual 1.3. advance Increasedcapitalincomeandgainsrates. payment 1.2. minimum on rate tax Increased 1.1. teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities resolutions hasbeenclarifiedandspecified. of thesubmittedfilings. correction request (ii) or statements; new filing request and entities). applicable asincometax. of tax obligation. In that regard, th regard, that In obligation. tax of Extension of attributions in the scope of the determination euae h tase piig ehd throu method pricing transfer the Regulate administrative ortechnicaldisposal.

e authority may: (i) may: authority e

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US PersonsinvolvedinaPEtransactionNicaragua. designated US OFAC list has placed a higher level of scrutiny for all the to entities and persons Nicaraguan specific certain of entry The their PEinvestorstoacquireoff-shore entitiesinNicaragua. for standards higher have countries some since diligence due legal the affects also investors PE the of origin of place the Moreover, entity. industry the target, regulated the a is it if it affecting of regulations specific the and involved size the basis. on case-by-case depend a variations on vary These may diligence due the of aspects However, acquisition. any materiality,timeframes, other and scope Scrupulous legal due diligence is conducted by PE investors prior to process. diligence due a of aspects relevant other and litigation corporate, This might require more time for investigation regarding real estate, In Nicaragua, many public registries are still manual, not automated. price adjustmentsclauses,escrowaccounts,etc.). and provisions, (indemnity identify measures proper to with try risks those to mitigate recommended is why diligence is due That complete investor. PE the affect may target the of liabilities Hidden limitation. such of abuse in or fraud of cases in ineffective companies protect PE investors in most cases. in However, this limitation shareholders may be for liability of limitation of rules The special compliancediligencewillneedtobeperformed. a provisions AML to subject is company target the if hand, other the On transactions. PE in priority given (FCPA)is Act Practices Corrupt Foreign the as such legislation anti-corruption and bribery anti- foreign with However,compliance transactions. PE on effect no to little have legislation anti-corruption and anti-bribery Local rvsos my efr KC rcdr t te E investors entities arerequired. PE the to of types these of services the if, only procedure and if Nicaragua, in investing KYC perform may provisions, to according subjects, obliged other and institutions Financial AML 04Hasanti-briberyoranti-corruptionlegislation 10.4 Howdetailedisthelegalduediligence(including 10.3 11What otherfactorscommonlygiverisetoconcerns 11.1 Arethereanycircumstancesinwhich:(i)aprivate 10.5 1OtherUsefulFacts 11 materiality, scopeetc.)? considering aninvestmentinyourjurisdiction? the liabilitiesofanotherportfoliocompany? diligence, contractualprotection,etc.)? approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof iclg to: privateequity 2019 Nicaragua consortium legal Nicaragua

Rodrigo Taboada Andres Caldera Consortium Legal Consortium Legal Del antiguo Hospital Militar Del antiguo Hospital Militar 1 cuadra al Norte, Managua 1 cuadra al Norte, Managua Nicaragua Nicaragua

Tel: +505 2254 5454 Tel: +505 2254 5454 Email: [email protected] Email: [email protected] URL: www.consortiumlegal.com URL: www.consortiumlegal.com

Rodrigo is a Partner at Consortium Legal – Nicaragua, with more than Andrés is an Associate at Consortium Legal – Nicaragua, with Nicaragua 20 years of experience in the banking and financial sectors. He has experience in financial services and fintech, as well as insurance and experience in foreign investment, mergers & acquisitions, banking and insurtech. He has experience in corporate, tax, banking, and finance securities, and advising in relevant international and local transactions law with an interest in the legal implications of emerging financial that generate major impacts in the region. He provides ongoing advice technologies. He has collaborated in numerous projects in which he to financial institutions in the execution of guaranteed and unsecured has elaborated public instruments involving international financial credit lines and subordinated agreements, regulatory matters, among transactions and counselled investment funds in the acquisition of other financial issues. He has participated in syndicated loans of more local entities. than US$200 million, with the formalisation of documentation subject to local laws, including local guarantees.

Consortium Legal is dedicated to meeting our clients’ needs for legal services in the Central American region with our unwavering commitment to professional excellence, ethics, values, individualised service, and efficiency. Our legal team includes 200+ lawyers, seven offices strategically located in five countries spanning the Central American isthmus, providing services to the region’s main investors and companies, facilitating complex transactions and collaborating with businesses in diverse economic sectors. We remain permanently committed to our clients’ and collaborators’ satisfaction and wellbeing, through our years of practice, experience, broad knowledge base, integrity, dedication to service, communication, trust, and teamwork.

iclg to: private equity 2019 www.iclg.com 191 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 27 Nigeria Folake elias-adebowale

udo udoma & Belo-osagie christine Sijuwade

1 Overview 1.3 What trends do you anticipate seeing in (i) the next 12 months and (ii) the longer term for private equity transactions in your jurisdiction? 1.1 What are the most common types of private equity transactions in your jurisdiction? What is the current state of the market for these transactions? Have you The Federal Competition and Consumer Protection Act (FCCPA) seen any changes in the types of private equity was signed into law on 30 January 2019 and repeals the Consumer transactions being implemented in the last two to Protection Act and the merger control provisions of the Investment three years? and Securities Act (ISA). The FCCPA also establishes the Federal Competition and Consumer Protection Commission (FCCPC), Growth capital, venture capital, buyouts and mezzanine finance are which is vested with powers to approve and regulate mergers common in Nigeria, achieved via share subscriptions and transfers, (including amalgamations, business combinations and joint and quasi-equity instruments and debt. Following recent elections ventures), assuming a role that hitherto had been performed by the and its emergence from a “technical recession” deriving from Securities and Exchange Commission (SEC). In transactions various macroeconomic challenges including FX and oil price involving public companies, the SEC will continue to act as volatility, the Nigerian market is relatively resilient and increasingly securities regulator with oversight over such transactions. This diversified, with the overall outlook for 2019 remaining positive. development will mean greater regulatory scrutiny for PE Industry analysts report increased utilisation of convertible and transactions from a competition perspective. equity-linked notes, mezzanine finance and alternative capital Notably, the FCCPA applies to “all undertakings and all commercial structures. PE deal activity continues to be strong in consumer activities within or having effect within Nigeria” as well as offshore goods, financial services, energy, mining and utilities, TMT, transactions that result in a change of control of “a business, part of business services, pharma, medical and biotech, construction, a business or any asset of a business in Nigeria” the approval of the industrials and chemicals and transportation. FCCPC will be required for such transactions.

1.2 What are the most significant factors encouraging or 2 Structuring Matters inhibiting private equity transactions in your jurisdiction? 2.1 What are the most common acquisition structures Large population, young consumer demographics, cheap and adopted for private equity transactions in your relatively educated labour force, competitive company valuations, jurisdiction? sectoral restructuring and evolving policies aimed at enabling business in Nigeria are helping to boost PE activity and Nigeria’s Bilateral majority acquisitions and minority acquisitions of shares in ease of doing business rankings. The Central Bank of Nigeria Nigerian target companies are most common, often implemented by (CBN)’s introduction of an investors’ and exporters’ FX window Investor-controlled offshore-registered special purpose vehicles enables FX trading at market-determined rates, which boosts FX (SPVs). availability. Repatriation of proceeds from investments in Nigeria remains a relatively straightforward process. 2.2 What are the main drivers for these acquisition Analysts and dealmakers identify macroeconomic challenges, structures? underdeveloped capital markets and infrastructure, red tape and bureaucracy, challenges with navigating the existing legal and Control and direct influence are the main drivers for such regulatory framework (much of which is not PE-specific) and local acquisition structures. Majority acquisition structures confer these content requirements, among other reasons, as PE-activity attributes under applicable legislation while acquirers of minority inhibitors. Macroeconomic challenges have been historically stakes seek contractual and similar protections such as key executive cyclical, and do not appear to permanently inhibit PE transaction appointments to provide insight into financials, operations, etc. Other activity in Nigeria in the medium to long term. drivers include risk mitigation or diversification, flexibility, exit considerations, maximisation of returns and tax efficiency (share transfers are exempt from capital gains tax (CGT) and governance

192 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London and achievementofperformancemilestones. may determine equity allocations conditional upon length of service provisions Vesting shares. compulsory employee-held determine for acquisition/pricing that provisions leaver” “bad and leaver” “good include may documents Transaction 5%–10%. Typically, transaction a conditions precedent. as investors minority by documents in constitutional and contractually entrenched be to required be may strategies with the ultimate objective of attaining control and influence. Such chairpersons, board including members, board and executives key and to board relation in rights nomination and rights, participation committee board access and information support arrangements, and facilitate voting to aim will structures protection Minority basis. percentage-split agreed an on (BuyCo) company holding offshore an in equity with vehicle partnership limited offshore an vehicle: an through separate a through structured typically is interest Carried 5%. circa typically, participate being, interest management may with company, investment management and contributions. Shareholders capital reflect usually will structure equity Target Howistheequitycommonlystructuredinprivate 2.3 do sothroughNigerian-incorporatedentities. 1990 Act Matters Allied requires foreign companies intending and to “do business” in Nigeria to Companies The considerations. udo udoma&Belo-osagie © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 and/or documents constitutional company target in entrenched issues related and structures operational and organisational rights, veto and agreements voting recruitments, executive in participation and consultation participation, committee board and board matters, reserved prescriptions, quorum involve may and control investor augment or protection confer typically arrangements Governance Whatarethetypicalgovernancearrangementsfor 3.1 by employees terminatedforfraud). management terminated (e.g. leavers bad and is disability) or death employment retirement, whose (e.g. employees leavers” “good management envisage typically documents Transaction For whatreasonsisamanagementequityholder 2.6 Inrelationtomanagementequity, whatisthetypical 2.5 Ifaprivateequityinvestoristakingminority 2.4 GovernanceMatters 3 equity transactionsinyourjurisdiction(including acquisition provisions? considerations? institutional, managementandcarriedinterests)? in yourjurisdiction? arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such your jurisdiction? usually treatedasagoodleaverorbadin what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and position, aretheredifferentstructuring reasonable” choice of law (other than Nigerian law) that has “some has that law) Nigerian than (other law of choice reasonable” xt, hr cptl hne, or cmoiin significant composition, and othermatterssubjecttoCAMA mandatoryprescriptions. board changes, up winding documents, constitutional to amendments expenditures, capital share appointments, executive exits, arrangements, debt related transactions, plans, party business disposals, acquisitions, “reserved as specified such for matters” rights board veto and and supermajority (75%), negotiate resolutions special for decisions via majority. Investors acquiring minority stakes typically and prescribes vote) (CAMA) (50%+1 Act Matters resolutions ordinary as decisions specified for thresholds Allied minimum and Companies The urm Cut a afre ta a ra, eun, genuine, “real, a that affirmed has Court Supreme constitutional target’s a law.The foreign of choice a uphold generally will courts Nigerian to and CAMA, documents. the including law Shareholders’ agreements are subject to mandatory provisions of the a periodoftime,exceptwhereexemptionsapply. single a of course the over transactions of series a in acquired been has (b) or transaction, in acquired be to proposed is (a) interest 30% the where offerminorities tender to a make to requirement the investments in public companies above the 30% threshold to trigger minority shareholders. For instance, the ISA and protecting SEC Rules require documents constitutional and Rules)) (SEC ISA the to pursuant ISASEC the the CAMA, by issued regulations as well (as PE investors are bound by mandatory provisions of laws such as the have nominees any manner. Director in vote to discretion their fetter not may and obligations fiduciary unenforceable. arrangements such rendering documents, constitutional and contracts shareholder in the removal of a director, will override any conflicting arrangements for thresholds voting as such CAMA, the of provisions Mandatory . Arethereanylimitationsontheeffectivenessofveto 3.3 Doprivateequityinvestorsand/or theirdirector 3.2 . Arethereanylimitationsorrestrictionsonthe 3.5 Arethereanydutiesowedbyaprivateequityinvestor 3.4 target asacounterparty)mayberequiredtopubliclydisclosed. the with agreement shareholders’ (including price share target’s a affect materially could are that information targets, listed In (CAC). that documents Commission Affairs Corporate the constitutional at filed publicly be target to required in replicated be may but confidential generally are latter The agreements. shareholder position, whatvetorightswouldtheytypicallyenjoy? non-compete andnon-solicitprovisions)? typically addressed? typically addressed? the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements shareholders (or to minorityshareholderssuchasmanagement vice versa )? Ifso,howarethese www.iclg.com oa fide bona Nigeria and 193 Nigeria 194 Nigeria © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com Whatarethemajorissuesimpactingtimetablefor 4.1 from may notbemandatory. themselves this although recuse meetings, board at to decisions certain opt in participation may directors nominee this, to be disclosed to investee company boards for consideration. Subject or opportunity property, (mis)use information. to required are interest of conflicts potential or Actual to company not one duty a than including both, more of board the concurrently does not excuse a on director from such fiduciary duties to Sitting company. the from resigns he after even derived, so benefit any for company the to accountable is and benefit a derive to order in information corporate misuse company, the of affairs the the managing in of not, course may director A director. a as duties his with conflict The CAMA requires that the personal interest of a director must not Howdodirectorsnominatedbyprivateequity 3.7 Arethereanylegalrestrictions orotherrequirements 3.6 agreements withundertakingscontainingexclusionaryprovisions. the to be subject to be and competition of order also restraint in FCCPAagreements prohibits which will in provisions reasonable Non-compete be must enforced. but negotiation to subject are clauses non-solicitation and clauses Non-compete exceptions. limited to subject upheld, be generally will whole” a as considered relationship to and (is) … connected with the realities of the contract udo udoma&Belo-osagie eiiain (hr rves r entirel are reviews (where verifications approvals. Delays may arise during external due diligence regulatory regulatory no require and advisers, and parties experienced involve Transactions can be completed fairly quickly if they are not complex, rc-estv) nomto b nmne ietr my breach may directors nominee insider dealingprovisionsundertheISA andtheSECRules. by information price-sensitive) (unpublished, of Disclosure must process. statutory directors prescribed a of follow removals involuntary board; the from removal of termination The employment of an executive director does not result in his automatic ISA. the under a prospectus, in company misstatements or public statements untrue of result a as party third a by sustained damage or loss e.g. for, liability personal incur may CBN prescribes specific qualifications for bank directors). promotion, Directors the instance, (for the apply also may qualifications with Sectoral unsound. connected offence any company,mentally a or of bankrupt management be or or formation of Court High a restrictions, including that they must not be fraudulent, convicted by and qualifications director imposes CAMA The 3.3. question See Transaction Terms: General 4 portfolio companies? disclosure obligationsandfinancing issues? and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust of otherportfoliocompanies? party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin mna) i procuring in manual), y

termination terms,whichareusuallyrigorouslynegotiated. to reduce bid FX volatility exposure, a seek to include in cancellation and early investors, Certain perspective. fiscal and governance a from flexibility with investors PE provide to continue structures in response to economic and other challenges. Offshore transaction and debt equity, alternative structuring capital deal terms to diversify and mitigate risk exposure in creative increasingly are Parties buyer. time, same the the by required be at may indemnities and exit warranties comprehensive founder(s) target’s the and sponsor PE a Where capacity). and title to (restricted warranties minimal give to This is subject to negotiation. Exiting PE sellers will typically seek earn-out incorporating structures and arrangements. swaps share of number a been have there although preferred, typically are structures Cash isolate that structures include adopted mechanisms protection Deal and above, where negotiated,breakfees(althoughthisisnotcommon). outlined lines the along arrangements governance of and warranties insurance, the use of escrow structures, the adoption Whatparticularfeaturesand/or challenges applyto 5.1 Havetherebeenanydiscernible trendsintransaction 4.2 . Whatisthetypicalpackageofwarranties/indemnities 6.2 Whatconsiderationstructuresaretypicallypreferred 6.1 Whatdealprotectionsareavailabletoprivateequity 5.2 identified liabilities following detailed due diligence advisers toensurecompliancewithapplicablerequirements. may apply. PE investors and targets usually retain skilled professional target’s the affect share price. could FCCPA that approval and sector-specific changes reporting obligations involve companies, listed in reporting and disclosure requirements where such transactions impose exceed prescribed thresholds transactions or, and to companies apply public Governance involving Corporate the and of targets), Code listed (for mandatory Rulebook NSE Rules, SEC ISA, The raising. capital in and applicable, as (NSE), Exchange Stock Nigerian the and specific regulators, e.g. the CBN, the National Insurance Commission, regulatory approvals from, e.g. the FCCPC, the SEC and other sector- rnato em:Pbi custos Transaction Terms: Public Acquisitions 5 Transaction Terms: Private Acquisitions 6 commonly dealtwith? terms overrecentyears? team toabuyer? on thebuy-side,inyourjurisdiction? acquisitions? transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private offered byaprivateequityselleranditsmanagement by privateequityinvestors(i)onthesell-side,and(ii) investors inyourjurisdictionrelationtopublic

iclg to: privateequity 2019 , representations Nigeria

srw ragmns o u t to er ae o uuul unusual. not are investor- to years prescribed performancemilestones. subject tranches two in disbursed to be scenario. may up Consideration exit an for in arrangements fund/SPV the Escrow of expiration the to subject be may and negotiation to subject is This 6.2. question see Please and CommonLawlimitationsonliability. statutory by prescribed standard mandatorily be no may as is than other There practice negotiation. contractual to subject is This exclude or reduce on riskappetiteandtheextentofperceivedexposure. to insurance depend may insurance such of cost The liability. counterparty(ies) such procure mandatorily to requirements resist may Investors popular. increasingly is This To whatextentisrepresentation&warrantyinsurance 6.4 post-exit. activities their on restrictions resist typically will and 6.2 question at indicated those beyond undertakings of suite comprehensive a While this is subject to negotiation, PE sellers do not typically offer Whatisthetypicalscopeofothercovenants, 6.3 udo udoma&Belo-osagie © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 buyer non-compliance. for damages and performance specific of remedies confer capacity financial appropriate warranty. an Seller enforcement terms are subject to negation and may by backed suffice, may the seller and company target the both to addressed letter commitment equity an case which in standing, and reputation good of is buyer the where required be not may evidence Such above. 6.6 question concomitant met, are means via which such comfort may and be provided. Please see account escrow being conditions specific to subject disbursement for an arrangements in held funds acquisition Evidence of funding in the PE investor’s designated account, and of How doprivateequitybuyerstypicallyprovide 6.7 Do (i)privateequitysellersprovidesecurity(e.g. 6.6 What limitationswilltypicallyapplytotheliabilityofa 6.5 exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) undertakings andindemnitiesprovidedbyaprivate the managementteam)? warranties, covenants,indemnitiesandundertakings? the typicalcostofsuchinsurance? equity selleranditsmanagementteamtoabuyer? under anequitycommitmentletter, damages,etc.)? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and private equitysellerandmanagementteamunder rsrbd iiu o yas otivsmn. E elr will sellers PE usually seektoavoidorminimisesuchrequirements. post-investment. years of minimum prescribed a for restriction a be may there and negotiation to subject is This may price have tobedisclosed. share on impact potential a with agreements Material parties. third to by/issued up taken not shares of underwriting the and capital, share in changes following shares seller’s the the of value IPO, the effecting of cost the of aware be should seller PE A a on case-by-case basis. negotiated be may but prevalent not are fees break Reverse oeg las tlsn te fiil X akt sbet ny o a to only subject certificate of capital importation having market, been obtained from a CBN- FX official the utilising loans foreign on interest and principal of repayments profits, and divestment dividends, on capital of remissibility free guarantees law Nigerian uncommon. not debt are bonds, and bills treasury alternative including instruments high-yield and relative in investments and loans instruments, support credit structures, non-convertible and Convertible the pathtoexit. in flexibility require may challenges process regulated and timing exit, on valuation share buyers, trade of dearth illiquidity, market capital environment, macroeconomic The uncommon. not is This . Whatcustomarylock-upswouldbeimposedon 7.2 Whatparticularfeatures and/orchallengesshoulda 7.1 Arereversebreakfeesprevalent inprivateequity 6.8 . Arethereanyrelevantlegalrequirementsor 8.2 Pleaseoutlinethemostcommonsourcesofdebt 8.1 Doprivateequitysellersgenerallypursueadual-track 7.3 Transaction Terms: IPOs 7 Financing 8 private equitysellersonanIPOexit? exit? If so,whattermsaretypical? financing) ofprivateequitytransactions? bonds). through asaleorIPO? private equitysellerbeawareofinconsideringanIPO transactions tolimitprivateequitybuyers’ exposure? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare www.iclg.com Nigeria 195 Nigeria 196 Nigeria © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com long of granting dividends; on tax DTAswithholding has reduce to Utilisation of SPVs incorporated in jurisdictions with which Nigeria Whatarethekeytax-efficientarrangementsthat 9.2 Whatarethekeytaxconsiderationsforprivateequity 9.1 ease thetrackingprocessforsuchtransactions. as well as transactions process to easier it made also has (e-CCI) importation capital of certificate electronic the of introduction The emerging in growth boost to companies. sub-nationals Nigerian DFIs which in in invest loans syndicated and (DFIs) institutions finance development through financing debt in increase an been has There Whatrecenttrendshavetherebeen inthedebt 8.3 by prescribed to specifically apply related partytransactions,whichmustbeatarm’s length. restrictions pricing unless Transfer documents. ratio constitutional debt-to-equity any thin no currently capitalisation rules in Nigeria; targets are are not generally restricted by There thresholds. prescribed above target prohibited generally is where there would be a resulting impact targetson the net asset value of the Nigerian by assistance Financial fixed bytheCBN. longer no are rates applicable as rate, exchange market-determined convert can investors other capital brought into Nigeria for investments into Naira at a (mostly) and PE that meaning transactions, eligible such for market interbank the to access have also Investors was inflowedintoNigeria. capital loan or investment original the when bank dealer authorised udo udoma&Belo-osagie f)tx netvs eg 25 ddcin n ihodn tx on tax withholding on deduction 2.5% (e.g. incentives tax shareholder (for regulations ) (f pricing transfer applicable applicablerateofcorporatetaxandotherrelatedtaxes; (e) (d) (c) applicable taxes on income derived from the investment (e.g. investment the from derived income on taxes applicable (c) on and investment the making of time the at taxes applicable vehicle the (b) and investment the of nature the of analysis an (a) include: Nigeria in transactions and investors PE for considerations tax Key Tax Matters 9 shares, deferred/vestingarrangements)? equity acquisitions(suchasgrowth shares,incentive typically consideredbymanagement teamsinprivate off-shore structurescommon? investors andtransactionsinyourjurisdiction? Are financing marketinyourjurisdiction? withholding tax on dividends, interest on loan an tlsd o Ngra P ivsmns n db finance debt and investments PE transactions. Nigerian for utilised is It be to in TreatiesTax Double has Nigeria residents which with BuyCo’scountries period). for grace common and increasingly becoming moratorium a including loan, agreement tax double (DTA)), a and exemptions (e.g. in % depending has on the tenor of the Nigeria resident which investors with for countries royalties and interest dividends, loans/related partytransactions);and fees, etc.); security documentswhereapplicable); and transaction on fees filing and duty stamp (including exit through whichtheinvestmentwillbemade;

d management investment inNigeriathelastyear. the or legislation practices of the tax Nigerian tax authorities which specifically affect in PE changes significant no been have There such that require usually however,transfer mustbeatthetaxwrittendownvalueofassets. will, which authorities tax may avoid CGT if they obtain clearance and direction from Nigerian CGT. Where the asset rollover is between related entities, no investors i.e. relief, over roll to entitled are business same the for assets related to the seller. Proceeds from asset sales used to acquire other not is buyer the where exempt so however, not, are disposals asset from realised Gains acquisition. share new a into over rolled are Share sales are CGT-exempt even where the proceeds from one sale iein a pris 0% oeg onrhp f Nigerian of ownership foreign 100% permits law Nigerian FCCPA andestablishmentoftheFCCPC. the of enactment the to relation in 1.3 question to refer also Please determine thearm’s-length natureofintra-groupcharges. to assessment price a to addition in administered be to required are tests activity shareholder and benefits specific services, intra-group and to relation “arm’s-length”In the with principle. compliance ensure parties related 12 between transactions on regulate Service to Revenue 2018 March Inland Federal the by introduced were Income TaxThe (Regulations) 2018 (TransferRegulations Pricing) legislation. federal this LLPs, and the constitutionality of that framework has been debated. of framework Currently, only Lagos State provided a legal framework the for LPs and within limited registered for and recognised be to possible funds, PE by it adopted usually structures are make will Bill which (LLPs), partnerships liability limited and (LPs) partnerships the form, current its Bill The innovations. remains subject to Presidential assent which law is pending. If passed in company notable contains and 2018 May 15 on Senate the by passed been previously had which (Bill), the passed Representatives of House and Companies Matters Bill Allied Re-Enactment) and (Repeal Act the 2019, January 17 On . Havetherebeenanysignificant changesintax 9.4 Whatarethekeytaxconsiderations formanagement 9.3 0% are that achieve structures CGT-exempt. to sale share above of use and interest; years on tax seven withholding to up of loans tenured 02Areprivateequityinvestors orparticulartransactions 10.2 Havetherebeenanysignificantlegaland/or 10.1 0Legal andRegulatoryMatters 10 anticipated? investment intoanewacquisitionstructure? jurisdiction (e.g.onnationalsecurity grounds)? anticipated? teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities teams thataresellingand/orrolling-overpartoftheir subject toenhancedregulatory scrutinyinyour private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting iclg to: privateequity 2019 Nigeria fund managementandtransactionarrangementsinNigeria. structuring, fund funds, PE in prevalent generally are agreements laundering anti-money (AML) requirements and under legislation and international treaties and (ABC) corruption and Anti-bribery searches remainlargely manual. where courts, and registries public in held information and targets by of provided quality and availability as such factors to subject weeks, six to four be can review detailed a The for timeframe target. typical the of profile litigation the and property intellectual portfolio, debt due and contracts material legal liabilities, employee-related Typically, negotiation. compliance, regulatory structure, corporate the cover will diligence counterparty to subject be may timelines and inquiry,materiality the of scope The timelines. investors’and negotiation to subject is This and budgets objectives, Howdetailedisthelegalduediligence(including 10.3 or militaryandparamilitarywearaccoutrements. shipping, substances; psychotropic and drugs narcotic ammunition; and arms as such of: production the in invest cannot sectors nationals foreign and Nigerians certain in security, private gas. advertising, and broadcasting, oil and aviation than other businesses udo udoma&Belo-osagie © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Hasanti-briberyoranti-corruption legislation 10.4 prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors diligence, contractualprotection,etc.)? materiality, scopeetc.)? approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ A factor to consider is the strategic importance of choosing partners the on 3.6 question see potential liabilityofnomineedirectors. also Please company. liability limited Nigerian a in investor the by any) held shares (if any of respect amount in unpaid the to limited generally is liability Shareholder Uthmann; andOmoruyiGiwa-Osagie. Olakunle Okolie; Chisom chapter: this preparation the in persons The authors wish to acknowledge the contributions of the following Acknowledgments local advisers. regulatory interactions and timelines; and working with experienced and ESG arrangements; having a pragmatic and realistic approach to Whatotherfactorscommonlygiverisetoconcerns 11.1 Arethereanycircumstancesinwhich:(i)aprivate 10.5 aligned with the PE investor’s outlook and objectives of: objectives and investor’soutlook PE the with aligned 1OtherUsefulFacts 11 considering aninvestmentinyourjurisdiction? the liabilitiesofanotherportfoliocompany? should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof www.iclg.com Nigeria compliance 197 Nigeria udo udoma & Belo-osagie Nigeria

Folake Elias-Adebowale Christine Sijuwade Udo Udoma & Belo-Osagie Udo Udoma & Belo-Osagie St. Nicholas House, 10th, 12th & 13th Floors St Nicholas House, 10th, 12th & 13th Floors Catholic Mission Street Catholic Mission Street Lagos Lagos Nigeria Nigeria

Tel: +234 1 462 2307 10 Tel: +234 1 462 2307 10 Email: [email protected] Email: [email protected] URL: www.uubo.org URL: www.uubo.org Nigeria Folake Elias-Adebowale is a corporate/M&A team Partner and head of Christine Sijuwade is a Managing Associate and a core member of the the firm’s private equity and oil and gas teams. Her specialisations team that advises several local and international private equity firms in include cross-border and domestic equity and asset acquisitions, connection with the structuring and establishment of their funds as well disposals, joint ventures, strategic alliances, restructuring, investments, as their equity investments in various Nigerian companies including financing for energy, manufacturing and industrial projects and companies in the telecommunications, financial services, food and employment matters. She headed the legal and regulatory sub- beverage, healthcare and manufacturing sectors. She has also committee of the Federal Minister for Industry Trade and Investment’s advised on international lending transactions including syndicated Nigerian Private Equity and Venture Capital Development project loans and has been involved in a diverse range of financial and capital established to make recommendations for boosting private equity and markets transactions including private placements and, as part of her venture capital activity in Nigeria. She represents the firm on the legal Asset Management and Collective Investment practice, the and regulatory councils and committees of the EMPEA and the African establishment of mutual funds. She also advises on issues relating to Venture Capital Association and the Private Equity and Venture the Nigerian bond market. As part of her corporate advisory practice, Capital Association, Nigeria. Christine supervises due diligence reviews, in the course of which she evaluates regulatory compliance practices and credit portfolios to assess the viability of targeted businesses for merger, investment and financing transactions.

Udo Udoma & Belo-Osagie is a full-service commercial law firm headquartered in Lagos, Nigeria. Its private equity team advises funds, managers, institutional investors, financiers and targets on structuring, tax, investment and compliance and is committed to regulatory advocacy initiatives for private equity. The firm participates on the legal and regulatory committees of the African Venture Capital Association and the Emerging Markets Private Equity Association (EMPEA) and is a founding and board member of the Private Equity and Venture Capital Association of Nigeria. All three private equity partners are recognised in international independent rankings publications including Chambers Global, The Legal 500, the IFLR1000 and Who’s Who Legal (Nigeria), and are commended in The Lawyer’s ‘Africa Elite’ Private Equity Report.

198 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 28 Norway

aabø-evensen & co ole Kristian aabø-evensen

1 Overview 1.2 What are the most significant factors encouraging or inhibiting private equity transactions in your jurisdiction? 1.1 What are the most common types of private equity transactions in your jurisdiction? What is the current state of the market for these transactions? Have you The most significant features encouraging PE actors to transact in seen any changes in the types of private equity Norway are access to relatively inexpensive capital as well as a transactions being implemented in the last two to highly educated workforce, innovative technology, natural three years? resources and a well-established legal framework for M&A transactions. In respect of the latter (see further in section 3), those Although the Norwegian private equity (“PE”) market ranges from familiar with M&A transactions and methodology in most other seed and growth investments by angel and venture capital funds, to parts of Europe will find the Norwegian landscape quite familiar, leveraged buyouts (“LBO”) and secondary transactions by PE funds both in respect of private and public acquisitions. Most EU- (herewith public-to-private acquisitions and IPO exits); in 2018, regulations pertaining to M&A transactions have also been LBO transactions of private targets dominated the transaction implemented in Norwegian law through membership in the volume, representing 60.8% of the total PE transactional volume for European Free Trade Association (“EFTA”) and the European that year. Economic Area (“EEA”). In 2018, the total Norwegian M&A-market experienced a decline in Historically, an important factor, viewed by many investors as volume and total reported deal value compared with 2017, and so sheltering Norway against international financial turmoil, has been did the Norwegian PE market with a 9.7% decline in reported a high oil price. The decline in oil prices witnessed at the end of volume compared with 2017. For deals involving PE Sponsors in 2014 and throughout 2016 was, in this aspect, serious, but never 2018, (either on the buy- or sell-side) the average reported deal sizes dissuaded PE actors from transacting in Norway. Declining oil also took a significant dive from €567 in 2017 to €249 in 2018. The prices in combination with a somewhat aggressive approach by market continued to be driven by new investments and add-ons, but Norwegian tax authorities against LBOs (herewith principles of PE in 2018 we witnessed a decrease in the number of exits and a slight funds domiciled in Norway) could in the long term potentially increase in the number of new investments. frustrate international PE funds’ appetites for Norwegian targets, but As mentioned above, the Norwegian PE market spans the width of given all the positive counterweights combined with improved oil all transaction types found in any mature market, but the typical club prices witnessed over the last couple of years, we do not see this as deals have, save for a few exceptions, for all practical purposes been a likely scenario, at least not in the very near future. outside the realm of the Norwegian PE market. The main reason for this is that most Norwegian transactions are of a size that normally 1.3 What trends do you anticipate seeing in (i) the next 12 does not require a major international PE fund to spread its equity months and (ii) the longer term for private equity risk in order to avoid exceeding investment concentration limits in transactions in your jurisdiction? its fund. The foregoing notwithstanding, sell-downs or syndication of minority equity portions subsequent to buyouts also occur in the We anticipate that, in relative terms, we may see a slight decrease in Norwegian market. more traditional buyout transactions compared to a slight increase in Deals related to the oil, gas and supply industry have traditionally other approaches, such as buy-and-build strategies and alternative dominated the Norwegian PE market. In 2018, the oil and gas investment structures, including minority stakes, corporate control segment became more volatile than in 2017; PE funds also transactions, club deals (including PE and trade combinations) and continued to show interest in this sector in 2018, but much less than growth investments. This trend has been observed in other for 2017. However, by share number of PE transactions, TMT, the jurisdictions for some time, and currently we’ve already started Services and the Consumer sectors dominated the Norwegian seeing a few Norwegian funds applying some of these strategies in market in 2018, each with 31.5%, 17.8% and 16.4% of the buyout Norway. We expect that this trend will continue in the years to come investment volume respectively, followed by the Industrial & since many funds wants to move away from the auction races that Manufacturing Sector and the Energy Sector, each with 13.7% and are typical for the more traditional buyout transactions. 9.6% of the total deal count respectively.

iclg to: private equity 2019 www.iclg.com 199 © Published and reproduced with kind permission by Global Legal Group Ltd, London 200 Norway eiet pca proe eil (n P o “ or SPV (an vehicle purpose special resident foreign holding the structure through a Norwegian incorporated and by tax made be will company target Norwegian the in shares the Netherlands or (occasionally) Cyprus. Cyprus. (occasionally) or Netherlands the Luxembourg, in typically – Norway of outside resident tax and offshore holding structure of one or more private LLCs incorporated a private limited liability company (“ company liability limited private a u tee ud’ iie prnr hv otn rtcsd such criticised often have partners limited strategies. funds’ these but companies, listed in investments minority out carrying Sponsors of examples seen also have we years, three last the over Occasionally other and financing debt commercial reasons. subordinated obtaining in for flexibility allow to BidCo Norwegian the and structure holding foreign the between structure the into added be Norwegian could companies Additional holding company. target the acquires eventually the “ (“ PE funds typically create a special purpose shell acquisition vehicle the generalpartner. the Manager sponsoring the fund will very often drive the choice of of structure internal and status tax domicile, The purpose. this for y dpig tote srcue irsetv o wehr the whether of irrespective structure, Manager is foreign or domestic. two-tier into a investing adopting by jurisdiction foreign acquisition the structure usually will a companies target Norwegian under organised Funds investing throughasetofNorwegianholdingcompanies. into Norwegian target companies, normally adopt a one-tier structure by investing when will, jurisdictions. law Norwegian foreign under organised under Funds or law is Norwegian fund under respective organised the whether on depend normally will market final The Norwegian the in closing. funds PE at these by SPV adopted structure acquisition the to equity of amount specified a © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com and identity the on depends normally therefore, Europe, into entry-jurisdiction of choice The all exit). upon for stakeholders rate relevant tax effective the minimising tax (i.e. little possible as as with leakage exit, partial a or exit an either in with investor-base connection fund’s the to back funds repatriating efficiently for flexibility greatest the provides structure which upon depends investments their for funds PE by used entry-route Typically,the structural subordination(seebelow). for bank’sdemand financing the including requirements regulatory required and administration of ease general vehicles, applicable the of use by and holders, liability to exposure Sponsor’s) equity the (and holders’ equity of type number structure, governance the desired issues, structuring dictate tax others, among including, SPV, the of considerations organisation deal-specific Various Whatarethemaindriversfortheseacquisition 2.2 “ the following the (in institutional manager fund the wherein and the wherein partnership, limited investors participate as direct or (normally) of indirect limited partners, type some as Virtually all national and international PE funds are today organised Whatarethemostcommon acquisitionstructures 2.1 aabø-evensen &co SPV StructuringMatters 2 Sponsor ”) to effect an investment or acquisition, and commit to fund to commit and acquisition, or investment effectan to ”) developed (e.g.minorityinvestments)? structures? jurisdiction? Havenewstructuresincreasingly adopted forprivateequitytransactionsinyour ”) acts as the general partner, normally owned through Firstly LLC Secondly , the PE fund establishes an ”) specifically organised specifically ”) , the acquisition of acquisition the , BidCo Manager ) that ”) ” or ” f ois xrce fo te o Nrein odn company holding Norwegian (“ top the from extracted monies of invest (“ an provides usually transaction opportunity and/or a requirement for PE the target’s management to co- any in structure equity The instruments (or “institutional strip”) as the Sponsor. The detailed The Sponsor. the as strip”) “institutional (or instruments same the in invest to allowed be also occasionally may members senior Management’s Investing The rights). preferential no with Investing Management mainly invests in ordinary shares (i.e. shares the while of shares, ordinary and combination shares preferred a loans, shareholder in invest Investing typically will the Sponsor that the investors, achieve to order In Management invests at the same price per shares as the institutional gains). capital on tax Norwegian law otherwise may be subject to income tax under (rather than participation as value”, market fair and “full at acquired is participation equity Management’s Investing the that Management valuation a Investing the and From fund PE the both for imperative is it perspective, holding-structure. foreign the in invest must structure. Management Investing the company that insist holding may fund PE foreign the However, the into of instead TopCo these may prefer to structure their co-investment into the Norwegian If the Investing Management mainly consists of Norwegian citizens, price atanaffordable level. share a with small relatively normally is it but transaction, the of size the on depends Management Investing the for strip equity The level. company holding foreign the the at or at TopCo-level, Norwegian place takes typically co-investment The group. acquiring opne bten h frin odn-tutr ad the and In both instances, PE funds must consider holding-structure holding foreign of the number Norwegian BidCo. the between drives often companies a that is structures reason financing flexible commercial for need The acquisition. the of financing layers from different stakeholders in order various to be able to carry use out to necessary be can it transactions, large in cash flow and debt subordination); see sections 8 and of 9. Particularly control for demand bank’s the (i.e. financing the of structuring investors’ (and particularly the number of holding companies involved), is the such structures acquisition relevant upon choosing when driver main Another depending all geographical location. investors, respective different in up set their for structure optimal most the achieve to order in jurisdictions feeder-funds) (or sub-partnerships of forms various through investment the structure Sponsors that uncommon the various other jurisdictions involved, including Norway. It is not the the majority of the fund’s investor-base between and the tax treaties between treaty tax the for jurisdiction home the and entry-jurisdiction European proposed investors, fund’s the of geography . Howistheequitycommonlystructuredinprivate 2.3 eurmnsrsrcin (.. rhbto aant financial against stripping rules, anti-asset new the and prohibition regulatory debt-pushdowns, and capability; assistance (i.e. service debt companies’requirements/restrictions group its and target’s the compensation; employee and management to relating must Sponsors structure, issues tax including: typically issues, additional numerous acquisition consider final the deciding Before monies flowingupfromthetarget anditsvarioussubsidiaries). herewith TopCo, to up BidCo from extracted monies of (taxation distributions; VAT; and corporate liability and disclosure issues, etc. and debt shareholder on tax withholding interests; of deductibility TopCo institutional, managementandcarriedinterests)? equity transactionsinyourjurisdiction(including cf Investing Management ”) to the foreign holding-structure) and holding-structure) foreign the to ”) qeto 1.) rls n hncptlsto and thin-capitalisation on rules 10.2); question . iclg to: privateequity 2019 ”) together with the PE fund in the upstream downstream issues (taxation Norway issues aabø-evensen &co © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 offeringManagement group acquiring the in shares for subscribe to Inrelationtomanagementequity, whatisthetypical 2.5 If aprivateequityinvestoristakingminority 2.4 taxation ofCarry, seequestion9.4. For gains. capital than rather income as taxed be should Carry the arguedthat have authorities tax Norwegian the where years, few last the in Norway in topic much-debated a however,become has, Carry a regular return on investment and taxed as capital gains. Taxation of such, Carry has traditionally, under Norwegian law, been perceived as from the underlying investments of the fund’s limited partnership. As Investors in the fund, namely a share of the income and gains derived distribution delivered principle, this way should In be the same for the Institutional partnership. limited fund’s the in interest company’s SLP, or in the fund itself by way of partial assignment of the offshore participant’sthe in interest an through delivered is Carry the of share either case becomes a partner in the fund’s limited partnership. Each in which Manager, the of professionals investment relevant the by (“ partnership limited separate a using structured be may arrangements Carry such fund’sthe into invest and money partnership. Today,own limited its Institutional Investors, where the Manager as a precondition must risk the alongside risk to obligation an by accompanied always almost is as annual fee, hurdle rate, catch-up, etc.). The Manager’s right to Carry (such Investors Institutional the and Manager the between split is investments fund’s the from profit the how for factors key other where the PE of fund is irrespective located, although variations same exist with the regards to be less or more will Norway in domiciled h crid neet ragmns te “ (the arrangements interest carried The voting rights). simplify large number of shareholders (e.g. meeting attendance and exercising to a having by vehicle complicated be pooling could otherwise which separate administration, a into Investing the invest that holding common Management more become separate also has In it through years investments. their recent over invested rolling those are team these and companies management the of trigger principle, in members the unless proceeds Management, Investing will, the for tax gains capital rollover sale such their on gains of Any proportion (rollover). a reinvest must Management Investing the that condition a commonly is it buyouts, secondary In individual and14.1%payrolltaxfortheemployer). the for rate marginal (46.6% charge tax employment an to rise give law,Norwegian under could, this shares the of value market the than less pays Management Investing the If benefit. any of treatment tax the on depend will package incentive management the of structuring anti-dilution rights/pre-emptionrightsonanyissueofnew securing be and exit of will route/timing exit an securing there on focus particular addition, In stake. controlling a taking than position minority a taking when protection of level lower a obtain likely will are, normally the desires to control and incentivise, but the PE investor structures equity the and terms equity behind its drivers The for investors. value creating in interests stakeholders’ various the align using to are they if balance right the find to and stake) (particularly minority their acquire to leverage above 2.2 questions in mentioned In such situations, a PE investor will focus on the exact same issues as acquisition provisions? what arethetypicalvestingand compulsory range ofequityallocatedtothe management,and considerations? position, aretheredifferentstructuring SLP ”) or offshore company, held directly or indirectly or company,directly offshore held or ”)

Carry ) o Managers for ”) shares. eadn croae oenne sus Te blt t appoint to ability The issues. provisions governance contain corporate normally regarding will agreement shareholders’ The European orglobalPEfunds. by deployed structure governance the to compared funds domestic be to tend companies relatively detailed, but there could be substantial variations between portfolio their over control management gain to funds PE by used commonly arrangements governance The being employee the or discharged for “cause”relatedtotheemployeehim-/herself. misconduct), (typically employee the of dismissal summary the justifying circumstances in leaving exit, usually will to prior position his/her terminates him-/herself employee the mean leaver” “Bad him-/herself. employee the not to “cause” related for discharged being or disability death, retirement, “Good leaver” will usually mean leaving employment on grounds of . Whatarethetypicalgovernancearrangementsfor 3.1 Forwhatreasonsisamanagementequityholder 2.6 much push-backintroducingvesting how correspondingly, in and, Management, has Investing fund the PE to the relation “leverage” much how of transaction each in least of path the question a choose also course, of is, There vesting. foregoing by resistance to seem funds PE domestic matter, the as capital gains). Nevertheless, as there is no firm legal precedent on classified (i.e. equity institutional the from derived revenues as way same the in taxed and treated be speaking, strictly should, therefrom s h Isiuinl netr ( Investors Institutional the as subscribed for at “fair market value” or and at the same acquired price per shares been has equity the if that is assertion an such against argument obvious The gains. capital (in than rather part) income in or whole personal as co-investments Management’s Investing from profits classifying for argument an as used be may provisions vesting that fear advisors Carry,some on authorities tax Norwegian the from approach aggressive years’rather recent the lower Given a value. at redeemable be only may vested not has that equity the of part the whereas investment, ensuing anniversary each at value” “fair at redeemable is equity the of part vested the only that means model vesting a Such exit. on vesting accelerated with used, often is model vesting time-based five-year to three a introduced, When where international Sponsors are involved, vesting is more common. the buyer is a domestic or Nordic PE fund. nor However, in transactions time- neither Management’s participation in Norwegian PE transactions, at least if variations, individual Investing the for common very been has vesting performance-based to subject Although “bad a as classified is leaver” andmustsellthesharesforlessthanmarketprice. person the reasons, good without resigns person such if or cause, with terminated is employment If shares. the for value market receive will reasons, and leaver” “good a is acceptable person the to due is cause, without termination termination involuntary or disability death, typically If leaver). “bad” or (“good” termination for reason the on depends transfer compulsory such of transfer compulsory shares if his/her employment terminates. accept The financial terms of such to required be typically will GovernanceMatters 3 in yourjurisdiction? your jurisdiction? arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such usually treatedasagoodleaverorbadin cf qeto 23, hn revenues then 2.3), question . provisions willreceive. www.iclg.com Norway 201 Norway 202 Norway udmna tascin wih rtc ter wesi interest ownership their protect certain which that ensuring transactions and fundamental seat), observer or board (i.e. business be ensuring that they have visibility of the day-to-day conduct of the less hold to likely protection than is on taking a controlling stake. The position priority areas will minority a holding investor PE A and thoserequiringSponsorconsent atshareholders’ level. consent director requiring those between may vetoes Sponsors of list Some the divide proceedings. liquidation or litigation into employment major entering naturally, and, schemes; charges; bonus and pensions or like matters liens obligations, any creating or partnerships any into entering distributions; dividend of respect in recommendations and plan/budget business annual of acquisitions; adoption major capital; share issued to changes thereof; part substantial any of disposal or business the of nature the in changes © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com includes, This action. corporate important any and company portfolio the over control have requirements) consent mandatory or majority board (through nominees director their and funds PE that so drafted normally is agreement shareholders’ The Doprivateequityinvestorsand/ortheirdirector 3.2 Enterprises andarethuspubliclyavailable. Business of Register Norwegian the the in registered be if must articles especially articles, Such fund. the PE international an by controlled is company portfolio in provisions protective certain include also to common more become nonetheless has it years, few last the For of reasons. flexibility and confidentiality for agreements articles also have companies’ funds preferred to keep these types of provisions only in the shareholders’ PE domestic portfolio most protective Traditionally, of Norwegian associations. set detailed in a include to provisions common not is it US), the or UK the (e.g. jurisdictions other in common is what Unlike publicly available. agreements shareholders’ such with making for Sponsor requirement the no provides is There company. the about information to agreement access appropriate shareholders’ the that governance strict a From ensure to is Sponsor the for requirement important the perspective, provisions. shot-out and tag- drag-, budgets, and plans and other restrictive covenants, management of exit, and customary confidentiality instruments, business financial and shares remuneration, of transfer/issue and audit rules about contain further may agreement shareholders’ the Sponsor), directors the meaning meeting, general of the from consent appointment/dismissal to subject (always Besides etc. plan, business the of outside investments new budgets, annual and plans business over control have important decisions like new acquisitions usually and disposals, approval of will directors and/or Sponsor-appointed rights the veto Through agreement, shareholders’ the in afforded rights voting preferential Management. Investing the and strategic provide to chairman Sponsor the between bridge independent an create to and oversight independent an appoint the to which want on directors of funds PE some that uncommon board not is It represented. are Sponsors single a companies have portfolio only normally Norwegian board, management separate a representatives. implement also funds international some Although employee any and executives the with disagreement of event the in board the flood to order in directors additional appoint to right a the Sponsor will ensure is put in place in such agreements, including that tool key the necessary,is if board the control to and directors, aabø-evensen &co position, whatvetorightswouldtheytypicallyenjoy? etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor inter alia inter : material : o at (n atclr h drcos odn sae) a any has shares) therefore that it will not be necessary with any further enforcement. holding and agreement, shareholders’ the directors of terms the breach the to incentive particular (in party no well-tailored that ensure to sufficient considered be situations, most in therefore, and appropriate will itself an agreement shareholders’ the in Normally, mechanism enforcement elected. is board new a before party third a the with arrangement binding a into entered that risk the remove eliminate board’salready the company,has of portfolio resolution, result a as completely and cannot remove meeting to members right the board Still, general board. the extraordinary from directors disobedient an convene to right their in comfort seek principle, in can, meeting general the in votes sufficient controlling Sponsors Consequently, shareholders. as capacity their in powers be their bind to must free are they that it assumed company, the in shareholders also are directors the If articles. Inacademiccircles,theviewisalsodivided. problem, or if it is necessary to include the relevant text itself in the such topic as to what extent such a reference in the articles will solve the to the on decision accede court clear no shareholders is There new agreement. shareholders’ to that consent its require for shares, condition a transfer as may, board the that state then will clauses Such etc. rights, veto shares, of transfer on restrictions have entered into a shareholders’ agreement regulating, agreement shareholders’ a into entered have company the and shareholders the that stating companies’articles, portfolio the in provisions implementing by risk alleviate to seek otherwise set out in the company’s articles. As a result, some funds and judgments relating to individual matters put in front of them, unless discretions duties, exercise shall future the in board the how dictate cannot company the Therefore, shareholders. the appointing to party owes board a fiduciary duties to the company trumping those owed to a director’s the that company being be reason relevant The cannot agreement. risk the shareholders’ This making by force). in eliminated remain may as agreements such invalid of portions deemed valid (other discretion be their of fettering will a constituting law, Norwegian under agreement, their in the that risk legal a is there shareholders), not (and such as capacity directors the bind to considered is agreement adherence such if of but agreements, shareholders’ “risks the to agreement the adherence for cater to order disobedience”, each director could be required to In sign some form of appropriate. find majority the as question in matter the resolves and this disregards board the a if even that over certain important board resolutions, means there is always the risk that This CEO. shareholders’veto Sponsor-appointedto grants directors agreement the nor body) governing a Vetoshareholders’a (as in board rights the neither binds agreement enforcement appropriate mechanisms (seequestion3.5). contains agreement shareholders’ the to Consequently, ensure that shareholders respect such veto rights, it is important that agreement. shareholders’ a contractual of under breach obligations in voted have shareholders some of regardless whether valid is meeting general the from decision a that certain is over rights more veto or decisions at the general meeting. Nevertheless, the traditional view have one that shall agree representatives can designated shareholders starting-point, a As transactions, etc. key assets; borrowing of monies; and any form of debt restructuring are: changes to the company’s constitutional documents; disposal of cannot be taken without their consent. Examples of such veto rights . Arethereanylimitations ontheeffectivenessofveto 3.3 typically addressed? the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) iclg to: privateequity 2019 Norway inter alia inter , investment vehicleinwhichtheSponsorholdscontrollingvote. minority separate a the through company pooling portfolio the by in investment investors’ achieved be can same The apply. will rules so that the principles of the shareholders’ agreement in general protection minority these of some of impact financial the limit least good introducing by at extent some and to may Sponsor a etc., provisions, leaver leaver/bad rights, voting and with financial classes share different several implementing By 3.5). question (see question in provision particular the or agreement entire the of either validity the affect could agreement shareholders’ overzealous under law.Norwegian an and uncertainty from, deviated be cannot rules the of Many legal substantial to subject is them, minimise) aim the that in and if so, how far and for how long it is possible to limit (or at least provisions rules introducing protection (directly or indirectly) to limit them. To by what extent minority this is possible, agreement statutory shareholders’ these of certain address may Sponsors, foreign particularly Sponsors, Sometimes, and/or votes. capital share the of percentage certain a representing shareholders minority to rights specific provides also Acts Companies the and are rights these of rights, voting of irrespective shareholder individual each to granted Some etc. articles, company’s the or statute the basis of it being unlawfully adopted or otherwise in conflict with disclosure certain on resolution corporate a void to actions legal bring to rights rights, meetings, general at speak and attend to protections right minority statutory Companies the the in including rules Acts, certain of set detailed a through have also Shareholders receiving equityreturnsasshareholders. not interest shareholders’ minority the through annual compensation, but through growing the align business and to being purpose towards undertakings have limited) minority shareholders (such addition, as (but management shareholders), the main detailed in of will, set a Sponsor undertaken the particular, in investments third party at the cost of the of cost the at party third a or shareholder a to enrichment unjust cause to likely manner a in exercised at board level, management level or at the general meeting ne te owga Lmtd iblt Cmais Acts Companies Liability Limited Norwegian (“ the Under agreement. an in law,company’sor in the articles out set explicitly is otherwise unless interest best own her or his in act to free is and shareholders minority towards duty controlling any have not a does shareholder that is law Norwegian under principle general The Arethereanydutiesowedbyaprivateequityinvestor 3.4 in Norwegianportfoliocompanies. more implementing for move detailed articles, in a particular when UK or been global funds are investing such have to seems on there years rely few last the to over this, said Having articles. lengthy seem implementing funds Norwegian enforcement mechanisms in the shareholders’ agreements most instead of practice, In aabø-evensen &co © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 and law, Norwegian under valid considered are agreements such articles, company’s relevant the or Acts) Companies the (e.g. laws Insofar as the shareholders’ agreement does not contravene statutory Arethereanylimitationsorrestrictions onthe 3.5 Companies Acts Companies shareholders (or to minorityshareholderssuchasmanagement typically addressed? non-compete andnon-solicitprovisions)? (including (i)governinglawand jurisdiction,and(ii) contents orenforceabilityofshareholderagreements ) hwvr a otoln ifune ant be cannot influence controlling a however, ”), vice versa company )? Ifso,howarethese or another person. For PE For person. another or a case-by-case basis. Also note that for public LLCs (irrespective of The nationals. EEA Norwegian or Ministry of Trade and residents Industry may grant exemptions Norwegian on are how them of of irrespective many it, fulfil directors deputy solely that suffice not will it requirement; residential the fulfil must directors ordinary EEAan in reside who state. Withthe of half least at this, to respect nationals EEA or Norway of residents be either must LLCs public The CEO and at least half of the directors in Norwegian private and Legal restrictionsonnominatingboardsofportfoliocompanies . Arethereanylegalrestrictionsorotherrequirements 3.6 of provisions non-compete of enforceability shareholder agreements. the on impact Under certain special circumstances, the new rules may also have an the enforceability of non-compete clauses in employment contracts. January 2016, Norway implemented certain statutory limitations on 1 Norway.from in As enforceable are awards arbitral Convention, New the to YorkPursuant shift. this for credited be may costs) and efficiency,non-publicity,expertise (i.e. upsides perceived the with combined influence International Nordics. the of rest the in than Norway in common more decidedly now is mediation) alternative sponsored that noted court- be and arbitration both (including general should in resolution dispute court it regular and from arbitration, shifted to decade, hearings last the over has, funds PE for approach of avenue preferred the resolution, dispute of terms In enforcement and remedies effective mechanisms (seequestion3.3). and appropriate itself agreement contains the unless help, little of be sometimes may this However, breach. in party the against enforced be can but parties, Typically, shareholder agreements cannot be enforced towards third most in therefore, will situations, beconsideredeffective towardssuchparty. mechanisms such itself, Provided agreement the 3.3). in agreed question are mechanisms enforcement (see and remedies shareholders appropriate of capacity the in must be assumed that such shareholders are free to bind their powers shareholder, and as such is a party to the shareholders’ agreement, it a also is director the if Nevertheless, 3.3). question (see it to party a itself company the making by agreement certain an of such of force provisions binding the extend to possible not is the it that towards note enforced be cannot and company itself nor the director in question (see question 3.3). Also, invalid is agreement the directors in their capacity as a director, there is a risk that this part of Further, note that if the shareholders’ such agreement attempts to bind the to regard with least provision (seequestion3.4above). at enforceable, being not agreement company’sthe in the in result also could this association, of articles are conflicting with statutory minority protection rules or provisions shareholders’a that that provisions event contains the agreement In claimed beforethecourts. that assumed be remedies other than injunctions agreed in such an agreement can be must it Nevertheless, injunctions. by is enforced agreement shareholders’ the if binding, there are still some uncertainties as Even to what extent it can be parties). third not (but against thereto parties the among enforced be principle, in can, section 10below)? more generallyunderotherapplicablelaws(see portfolio companiesundercorporatelawandalso equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin www.iclg.com Norway

203 Norway 204 Norway © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com takes that to duties company their owe Directors the him. appointing shareholders to the to owed duties duties over precedence fiduciary owes portfolio a company of director Sponsor-appointed a directors, other Like Risks andpotentialliabilitiesforthedirectorsappointed representation arefulfilled. such for conditions the and employees the by requested if rejected representation is of not mandatory under Norwegian law, but cannot be number board Employee members. the board regular as rights voting same the with have representatives employee of all but varies company, the number in employees exact representatives The board employees. employee the among from members board the of one-third to up and one between elect to entitled are employees the circumstances, such Under 30. exceeds company a in public LLCs, provided the number of full-time employees in such and private in both representation, board to entitled are employees for law, requirements to boards. According Norwegian on representatives employee the consideration into take also must funds PE directors electedbyandamongtheemployees(ifany). to apply Exceptions gender. each of members two than fewer be cannot there directors five of board a Consequently,on 40%. least at rule) main a (as by board the on represented be shall gender each that dictates law Norwegian not), or listed being companies such aabø-evensen &co y h gnrl etn i te osdrto fo te company the from consideration the if meeting general the by that in order to be valid, related-party transactions must be approved aware be to important also is it note, general a On peril. of out stay “whitewash” shall directors respective the of if formalities strict with type compliance a and consideration introducing careful needs that area an still is this procedure), (by of ban assistance strict previous the financial eases somewhat that rules acquisition of set any new of a from guarantor implemented now has Norway though Even facilities. or financing companies co-borrower target as Norwegian participating prevented previously in has assistance assistance financial against prohibition This company). financial parent its upstream target (or company target the in a shares of acquisition providing the with connection prohibiting rule from general the company of aware particularly be should directors parties. Also, third to or Sponsors the to company of that directly or indirectly aim at distributing funds out forms of a portfolio Other transactions be may category same the parties. within falling transactions such between etc. fees, of forms management various of payment or group, target the and companies acquiring the between loans intra-group and/or loans, shareholder on rates interest the fixing to relate typically may transactions such investment, PE a In basis. arm’s-length at concluded its are directors and/or shareholders its company, portfolio a between any) board’s (if the to relate of transactions related-party all that controlling in scrutiny heightened aware particularly be should directors Sponsor-appointed that liabilities and risks potential of Examples board member. only one liability than more to several a attributable omissions or and actions collectively,such to Joint applies acts board personal. is the liability although director’s and, standard fault or employee-elected directors) are subject to the same standard of care of ancillary regulations. result As a general principle, all directors (including a as liable criminally intentional or negligent contravention of the Companies held Acts and/or be can directors addition, In omissions. or acts wilful or negligence by caused parties third become liable for damages suffered by the company, shareholders or member. other Under Norwegian law, any directors or executive officers may as liability director nominating personal potential same the be shareholders subject will directors nominated of the office, assuming group Upon him/her. or shareholder individual all h saeodr, o ol the only not shareholders, the disqualified from participating in discussions or decisions on any on decisions or discussions in participating from disqualified is company portfolio Norwegian a in director a or law, to According agreements shareholder through from constitutional documents. (principles) departed rules these be and board, cannot the on director other any as are, directors upon assuming Sponsor-appointedoffice, subject to the same corporate fiduciary duties 3.6, question in mentioned As . Howdodirectorsnominatedbyprivateequity 3.7 to beaparticularlyeasytask. considered not is law Norwegian under veil corporate the pierce to can arise for the Sponsor if something goes wrong. Having said this, the business. Under these circumstances, consequent liability issues the Sponsor might be considered a “shadow director” or manager of that theoretically,mean least at could, this Sponsor, the consulting carry out its day-to-day business in the ordinary course without first to able longer no is team management the that company portfolio company. the the over vetoes many so reserved in has Sponsor the Consequently,if interest controlling a held through act be wrongful a may to shareholder controlling a independently liable for its subsidiary’s or liability if it has contributed company parent a company.However,portfolio a to directors nominating/appointing of virtue by simply liability additional any to exposed be or assume In terms of liability, the general point is that a Sponsor itself will not Risks andpotentialliabilitiesfortheSponsors entail therefore they and creditors, the substantial risksofliabilityforthevariousdirectors. of behalf on these trustee or that event the in attempts transactions, later fail, may be challenged by such other creditors, the receiver that uncommon not to contribute additional cash or converting debt into equity, etc. It is the business to a stakeholder against such stakeholder being willing of parts or assets off selling involve interests. could attempts of types These financial stakeholders’ various the the salvage reorganising to or business restructuring of attempts prior of type some to or proceedings involve often very composition situations distress Such company. the court liquidate for file and trading cease to obligation under come stage some at will directors its distress, Further, note that in the event that a portfolio company is in financial in – Sponsor’s breachingofsuchanti-assetstrippingprovisions. directors for the to contribute liability they if Sponsor personal the by appointed those in particular result to likely also are the 10.2) by question AIFMD implemented (see rules Act stripping such rules are returned to the company. Note that the new anti-asset responsibility/ personal liability for ensuring that any funds/assets distributed in to violation of herself or him- expose worst, at may, into implemented above described requirements formal the of any violating Directors be will changes Norwegian law(seequestion11.1). proposed these whether related-party and when such unclear currently is of it now, for approval However, transactions. meeting general to regard with o sc areet. lo oe ht eea aedet for amendments several that note were, Companies Acts the simplifying Also agreements. such for customary are that terms other and price market at business normal company’s the of part as into entered agreements typically apply, requirements these from exemptions Certain agreements. such of process approval the for apply will requirements formal additional that Note company. the of capital share the of companies) (public 5% and companies) (private 10% exceeding value real a represents of otherportfoliocompanies? party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof iclg to: privateequity 2019 inter alia inter , proposed in 2016 in proposed , Norway ■ If filing with competition authorities is necessary, the time the necessary, is authorities competition with filing If ■ with transaction the file to necessary is it that event the In ■ to Time necessary for financing discussions. The time required intends buyer the that exercise diligence ■ initial The ■ for timetable the impacting private transactionsinNorwayare: issues major The however. will apply, legislation competition relevant to pursuant periods waiting timeframe the with Standard timetable. set no is there i.e. accordance – parties the by upon agreed in completed be can purchases require not consent from Norwegian authorities, do which means that regular transactions share corporate private point, starting a As have a that nominees PE for valve safety a providing as viewed be could it sense, a In company’scounterpart. the contractual is that company portfolio another in director also is he because just disqualified be circumstances must be present – i.e. a director will not automatically any at evaluation particular most that assumed be However,must it crossroad. given individual board an remaining on depends the matter, while the down resolves step to director a demanding play, into comes provision this not or Whether CEO. company’s or special financial interest in the matter. The same will apply for a his of personal strong a have to deemed is director the that parties, related any or him, to importance personal such of are that issues aabø-evensen &co © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Whatarethemajorissuesimpactingtimetablefor 4.1 Manager and thereby entitled to parts of the Carry,the of parts to entitled thereby and Manager board ofdirectors(boardworkanddecision-makingprocesses). the and administration) and operations (daily management both for have rules companies procedural and instructions PE-backed comprehensive quite introduced more increasingly nominees, and nominators between arising interest of conflicts potential Toavoid conflicts ofinterest)relatingtootherportfoliocompanies. any avoiding thus (and matters board handling from withdraw to Transaction Terms: General 4 o 5 okn dy t mk is nta assmn o the of assessment initial its proposed transaction. make to days working 25 to After transaction. obligation the receipt of the filing under cleared the standstill new rules, the NCA now has has up a NCA the but until NCA, applies the with notification a filing for deadline no is There schemes. approval regulatory such under periods waiting standard of expiry the for wait to requests for additional information from such authorities, and including reviews, authorities’regulatory such for necessary Merger ControlRegimeinstead. the million, (“ Authorities 100 Competition Norwegian the NOK with filed be exceeding must transaction Norway in turnover annual an have each concerned undertakings the of two least at and more, or billion 1 NOK is Norway in target the and acquirer the of turnover group combined the that provided transaction, control of change a of event the In authorities. such to submitted be to disclosures necessary the prepare to domestic or foreign competition authorities, the time required mezzanine debt,issuingdebtinstruments,etc. available. If it is necessary with options bank financing syndications, financing preferred of type and deal the of size the for such discussions will normally be heavily dependent upon undertake. disclosure obligationsandfinancingissues? and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust personal financial interest NCA ”), unless filing takes place under the EU the under place takes filing unless ”), (by virtue of being a partner of the cf . question 2.3) question . ■ The application process for delisting the target in the event the in target the the delisting for process application of The squeeze-out the conduct to necessary ■ time The ■ least at be must period offer,the mandatory subsequent a In less ■ no be must period offer the offer, tender voluntary a In the evaluate to board target’s the for ■ necessary time The ■ be must issues additional accounted for: following the however, companies, target such For same. the in less or more be transactions general in will take-private Norway for timetable the influencing Issues within operating is company target the if that note Also ■ merger, statutory a through conducted is transaction the If investment desired the ■ establish to necessary time The ■ co-investment relevant implementing for necessary time The ■ the inform to obligations with comply to necessity The ■ pwn i te ubr f nta pbi ofrns bt i the in both offerings, public market this to Due Scandinavia. of rest initial the and market Norwegian of number the an to in led upswing again This markets. capital equity international the to Throughout 2013 and at the beginning of 2014, confidence returned very strongnegotiatingposition. damage from business disruption; and (iii) the PE fund feels it has a who the most logical buyer is; (ii) an auction involves a high risk of of sense clear very a has fund the (i) unless: route exit preferred a fund looking for an exit will never go for a bilateral sales process as for prospective bidders to compete against least each other. Conversely, a different at PE invite to attempt often – will advisors financial seller’s the market Norwegian the transactions smaller in Also, in million. €100 exceeding transactions exits PE for preferred option the be to continue processes (auction) sales Structured . Havetherebeenanydiscernibletrendsintransaction 4.2 h sae ad oe f h rmiig hrhles ie an file objection againstdelistingthetarget company. shareholders remaining the of some and shares the that the bidder has not managed to acquire more than 90% of minority shareholders. four weeksandnomorethansixweeks. than twoweeksandnomore10weeks. initial proposalforthetransactionandanyalternatives. influence thetransactiontimetable. heavily insurance, could approvals and permits banking, public such obtaining are for need the and industries and etc., fisheries, and permits hydropower petroleum, These public for requirements approvals). as (such consider to requirements sector-specific are there industries, certain be may merger the which of effectuated. expiry the upon begins, period creditor six-week a RBE, the by published been has announcement the Once alike. LLCs public and private to applies this announcement; public for RBE the with filed be thereafter must merger the meeting, general the by approved (“ Enterprises the and Business of Register the with filed meeting, be also must plan merger general the to notice prior the month merger, one a is period such in involved are LLCs public If general the upon. decided be to have will merger to such which at meeting prior weeks two than later no shareholders the to available made be to have will documents supporting with plan merger the involved, are LLCs private only where complete thetransaction. vehicles and special purpose vehicles in order to execute and arrangements withInvestingManagement. and relevantcollectivebargaining agreements. law with accordance in effects potential its and transaction the of employees the and/or representatives union employee terms overrecentyears? RBE ) mnh eoe h meig If meeting. the before month a ”) www.iclg.com Norway 205 Norway 206 Norway © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com (“ Exchange Stock Oslo the from delisted important since it will be a straightforward process to also have the targetis threshold 90% This shareholders. minority remaining any of squeeze-out subsequent a out carry to order in rights) voting and target’sthe of more or 90% (i.e. support shareholder of level shares sufficienta secure to fund PE the for is companies, listed of private The main challenge in any acquisition, albeit more relevant to take- consideration of type on offered, etc. limitations consultations, periods, offer employee of length documents, offer of approval and regulatory filing documents, financial offer for other limitations and content disclosure instruments), shares of thresholds, ownership offer (regarding mandatory obligations rules, dealings insider detailed set of rules and regulations, which among others comprises companies. a observe must targets’boards private the and buyer of prospective the Both takeovers are than law Norwegian under Takeoverregulation more to subject is company listed publicly a of Whatparticularfeaturesand/orchallengesapplyto 5.1 get ridoftheaforementionedescrowmechanisms. (“ agreement purchase and sale the in indemnities and warranties of insurance commercial (i.e. insurance PE market, there has been a significant uptick in the usage of M&A to buyers for uncommon request escrow structures. In terms of new trends in the Norwegian not parties’ is it the positions, on not bargaining depending relative are but, adjustments sellers among price popular purchase normally and warranties in of claims contractual respect making for basis the as structures Escrow price purchase a uphold to willing longer corresponding totheadjustedenterprisevalueofitsinitialoffer. no is it any if to entitled coverage be seller not will apparent buyer the the that prescribing of by liability much alleviate stealthily that include provisions regularly they caution, of note a on but, variations, great money spent in an unsuccessful auction. These for arrangements are subject to cost-coverage of form some bidders attractive certain offer to willing been have universe, bidder greater a accommodate to order in that, sellers of examples increasing seen also have We sellers arepursuinganexitviadual-trackprocesses. the which in deals the larger the in for particular re-emerge in market, to Norwegian started again have offers financing Stapled oil andgassector. In transaction volume fell due to volatility in although the market resulting from a declining 2018 strategies. through growth continued future trend pursue this Norway, to order in equity raise to needed company relevant the and limited be might buyer-universe in particular for some of their largest portfolio companies where the popular among PE funds looking to exit their increasingly portfolio investments, became processes “dual-track” and IPOs sentiment, aabø-evensen &co Norwegian Securities Trading Act (“ TradingAct Securities Norwegian the of 6 Chapter in found is companies listed publicly of takeovers under regulating private rules and legislation principal The company shareholders. the to listed publicly a offertender voluntary a launch to is which of one – law Norwegian taking to desirous houses PE for approach of avenues several are there principle, In complex. more far be could target the delisting for process the not, etrs ih vlnay fe i ta, n eea, hr ae no are there general, in that, is offer voluntary a with features Transaction Terms: Public Acquisitions 5 commonly dealtwith? transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private STA SPA ”). One of the beneficial the of One ”). OSE ”)), which is also used to used also is which ”)), ”) or Oslo Axess. If Oslo or Axess. ”) icsig tkoe o a egr ad h cnet f such of content the is (and company merger a listed or a takeover that a fact discussing the However, confidentiality. maintain to able are parties the provided bid, a launch to intention bidder’s the of announcement the to prior constraints, certain with Confidential possible, are board. stage initial target’san at target’sboard the the with negotiations of discretion the at made thus is information divulge to and transaction take-private potential a to PE a fund. The decision to engage in for discussions with a PE fund relating as well as bidder, any for concern particular of issue an related financial instruments (so-called insider information). This is likely to have a notable effect on the price of the target’s shares or of are that nature precise a of occurrences or facts new on information offers takeover on an other as same requirements the company.listed publicly a involving targetlisted a of board The is, and to subject issues are disclosure Norway in transactions Take-private not participateinthehandlingofissuesrelatingtobid. must and incompetent is bidder,director first such a of competition in bidder a in or the bidder, potential a in interest in specific a has target assist should or can they the in director a If interest. of conflict a have they if or transaction, extent, what to and if, assess of a listed company considering a take-private transaction must also director Each transaction. combination business a with connection in bidders alternative seek actively or alternatives of itself inform law to what extent this duty of care requires the board to reasonably Norwegian under clear not currently is entity.It independent an as reasonably continuing of alternative alternatives the including corporation, the to available other to compared transaction proposed proposed offer or business combination in the a light of risks and benefits evaluate of the must directors the reasonably Consequently, is available. that information material all a making of to decision, prior business itself, inform to board the for duty a care includes of duty The loyalty. take-private of duty a and a two care; of include duty a reviews which elements: duties, company fiduciary its listed uphold must a it proposal, of board the When binding proposalandseekduediligence. take-private a non- and for indicative confidential, written, a target the to submit will appetite target’s external the fund the discussion, that of outcome the on Depending transaction. acquirer’s the of by adviser) or financial acquirer the of executive senior a or chairman the (by sounding-out informal verbal, a is customarily target the control with a contact first In acquirer’s prospective the context, board. target’s the from recommendation upfront a that surprising prospective not acquirer (particularly PE funds) will therefore almost always seek is It a diligence. to due admitted confirmatory be normally will bidder the offer, the recommend to prepared is board target’s the that Provided significantly. vary will target listed a of context the in reviews such of structure and from restricted not is scope the but bidder, a target by investigation diligence due a The facilitating takeover. public a in due hurdles main to bidder’s the admitted of one be access diligence to makes This right diligence. a listed have a not for offer does tender target public Norwegian a launches who bidder a rule, a the bid target’s of board at some point recommendation in public the process. The favourable reason being that, a as and co-operation launching the by without transaction take-private a conclude A potential bidder will quite often find it challenging to successfully a to subject made be financing condition,althoughthisisrare. also can offer voluntary A shareholders. and the bidder can also choose to make the offer to only some of the A voluntary tender offer may be launched at the bidder’s discretion, precedents. conditions required and consideration of type price, to respect with flexibility,e.g. of deal great a fund PE the affords this contain; may offer an such conditions what to as law in limitations ad hoc basis and on its own initiative, required to disclose any iclg to: privateequity 2019 Norway seek support for a possible upcoming bid. Such agreements can take to shareholders key with agreements into enter to attempt also can fund the shares limitations, such to target Subject process. of bidding the outside acquisition preventing standstill bidder, impose a can on target obligations the and bidder potential a between into entered agreements confidentiality However, stake-building. governing restrictions few generally are there below) (see rules bid Except for the insider dealing rules, disclosure rules, and mandatory must person years. such the so, of Breaches disclosure rules are fined, and such If fines have grown larger over the OSE. the and company the circumstances. notify immediately other or acquisition, disposal of result a a as or votes, capital, the share of the proportion of corresponding 90% or ⅔; 50%; ⅓; 25%; 20%; 15%; their 10%; 5%; thresholds: if following the of any below falls Axess), or exceeds reaches, Oslo company such in shares or to rights or shares of (OSE proportion market regulated Norwegian a on listed are securities whose company a in shares owning person any by triggered are requirements disclosure The process. building pay particular attention to disclosure requirements during the stake- insider of must bidder a rules, dealing possession insider the to addition In in information. is bidder the if prohibited be may offer an outside shares Purchasing shares). outstanding remaining the the increase (i.e. thereby company entire the for bid subsequent and successful a of chances leverage gain to order in target public a in shares purchasing gradually of process the is Stake-building a ensure stake-building. is which to of one transaction, tactics take-private successful different several use to want may fund PE A of treatment bid equal possible terms foralltheshareholders. best of the achieves it requirements that ensuring the thus shareholders, with comply to care particular exercise to board the requires further Practice of Code The exclusivity. of form any to agreeing in caution great exercise optn ofr ta ae u frad Te foregoing The forward. Corporate put for Governance (“ Practice of are Code Norwegian the that superior notwithstanding, or alternative offers any match competing to to offer and offer revised its a amend announce to right a including exclusivity, limited of type some bidder the granting clause non-solicitation a include which agreement, terms for the bidder’s offer. Such transaction agreements also often transaction main the detailed and support target’s the for terms a the out sets (typically) into enter to to parties support target’s the obtains bidder offer,tender “negotiated” a recommend the for practice normal is it the If the without consent. target target’s the in stocks acquiring from period specified a for bidder the preventing clause “standstill” a include often will target, the about information additional or diligence due to access Confidentiality bidder the allowing target, the and situation. bidder the between agreements takeover a in approach co-operative Under Norwegian law, a publicly listed target can take a more or less a bid,thiswillinitselfnottriggeranydisclosurerequirements. launching of intentions potential the regarding approached is target a agreement if notwithstanding, forgoing non-disclosure The access. a diligence due allowing into enters target the time the from possibly stage, the early an that at view triggered is the disclosure for takes requirement OSE the where situation be a must for board target’sprepared the and fund) PE a (like a bidder Consequently, potential price”. share target’s the on impact immaterial an have to not assumed be “must conversations such that provided launched, being offer an of probability high a is there before even requirements, disclosure target’strigger the could and board bidder potential a between negotiations confidential that ruled previously must be disclosed to the market. The OSE’s that Appeals information Committee has inside constitute point some at will negotiations) aabø-evensen &co © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Code of Practice ”) recommends that a target’s board “soft” or “hard” irrevocable (“ irrevocable “hard” or “soft” a either as drafted typically are Pre-acceptances bid. potential a of agreement, purchase some form of letter conditional of intent, MoU, etc., or a form a of pre-acceptance SPA, an from forms, various ne sc arneet ae iey o e emte ad upheld and permitted be to likely are arrangements such under provided entitlements target, the in executives senior or for directors terms severance such regarding agreed be with can what connection on constraints in legal accept explicit no are there not As company. the in may position member’s or may company a rules and regulations pertaining to what considerations a member of of violation in or conduct, and practice business good to contrary upon agree and whatever terms desired, provided, of course, that such terms are not target the of employee an approach limitations, may,without fund PE the to outset, the At options target. the in have shares hold) (or hold that employees with agreed be can that terms the on constraints and some imposes voluntary situation a offer in mandatory equally treated be must shareholders all principle that the arrangements, co-investment management of relevant structuring with connection In above). 2.3 question (see fund possible as the with together co-invest to required often are persons these since early as team management target’s the from support seek also should target public a private take to desirous fund APE any conditions thatarenoteffectively withinthebidder’sinclude control. not does it that so basis, funds” “certain a on agreed debt any since financing the offers, bidder relies on in mandatory these situations must, in to practice, be comes it when particular also in may place in arrangement represent a major hurdle for a bid dependent finance on significant leverage; necessary in the Getting business conduct to authorised Norway). case each insurance (in an or undertaking bank a either by guaranteed unconditionally be must offer mandatory a under offered consideration The demand. upon available always is cash in payment favourable less no and complete that provided means, alternative by or cash in offered be offer mandatory and must encompass all shares of the target. the The consideration may time the at higher obligation was triggered). A was mandatory offer must be unconditional this (if shares the for paid is price market that demand also may listed) are securities relevant takeover supervisory authority (i.e. the exchange where the in the target during the last six months. In special circumstances, the paid, or agreed to be paid, by the fund for shares (or rights to shares) price share the price highest the than lower be that cannot offer mandatory a in offered is funds, PE to concern particular Of rules. offer mandatory the to relation in votes controlling as considered that certain derivative arrangements (e.g. total return swaps) may be note Please apply). rules (consolidation rights voting the of 50% (then) and 40% (first) passes it when repeated is shares ⅓ remaining initial the the for offer mandatory passing a make to obligation fund’s After the threshold, shares. outstanding remaining the ownership offerfor mandatory a make to obligated exceptions) limited certain for (save is it of target, the in votes the of ⅓ than more consolidation acquired has through or (following a stake-building process or one or more voluntary offers) indirectly directly, fund PE a if that is transactions take-private in challenge Another being unencumbered. shares the and shares to title besides warranties and representations extensive grant to reluctant are shareholders that experience will also fund PE a transactions, take-private in directly with shareholders dealing When requirements. disclosure the trigger not will Irrevocable “soft” drafted properly a that theory, legal Norwegian in assumed is It forward. put is bid competing higher subsequent latter the whereas a whether of offerregardless the accept to shareholder the made, commits is bid competing higher no if offer the accept to Irrevocable the gives who shareholder the commits only Irrevocable ”) – the former normally former the – ”) www.iclg.com Norway 207 Norway 208 Norway © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com its shareholders. According to the recommendations, any agreement targetand the of interests shared the on based evidently and clearly for be should fees, break including difficultcommitments, Such bids. such any more it hinder may makes or bidders third-party from made be to bids that competing commitment any to in caution agreeing great exercise must board target’s a that recommends be also In relation to the above, it should be noted that the Code of Practice must arrangement fee break financial considered carefully. Potential a of members. aspects board assistance the for liability personal consequently,and, unenforceable in deemed result be may to likely the target in financial distress if the break fees become effective, are the limiting ability of agreements a target’s fee board to fulfil its Break fiduciary duties, or that may put assets. target’s the of misuse for liability trigger case, worst the in may, and interests corporate the target can raise issues in relation to compliance with the target’s public-to-private Norwegian in transactions compared to other jurisdictions. Break fees payable by common less decisively is fees particular contain regarding corporate rules governance and fiduciary responsibilities, strict not the use of break to due However, does that it. sense prohibiting provisions the legislation in available takeover are fees Norwegian break point, starting a As Whatdealprotectionsareavailabletoprivateequity 5.2 requirements oftheSTA. recommendations of the Norwegian Code of Practice go beyond the offer. the Exemptions apply in accept situations where a competing bid to is made. The not or whether on recommendation its forms of Code basis such on board the that and expert, independent an by bid each the the to According to why.for valuation a arranges board the that recommended, is it Practice, reasons recommendation the for account a to is make to shareholders on whether they should or should not accept the bid, it unable itself consider offer.the of disadvantages and advantages the on board the Should and issue a statement to its shareholders describing the board’s view offer the of terms the evaluate to obliged is board the shareholders, the to offer mandatory or voluntary a in materialises that proposal take-private a of subject becomes company Norwegian-listed a If amount. offerthe having offerthe higher in such price to adjusted document part of the offered share price, thus exposing the bidder to the risk of as considered be treatment, equal of principle the with accordance may,in shareholder such of employment the to related exclusively not are that benefits and terms upon agreed that aware be bidder should a target, the in shareholders also are who employees with be conferred upon any such individuals. Furthermore, when dealing made, herewith including any special benefits conferred or agreed to was offer the before target the of bodies governing or management bidder a must disclose that in the noted offer document be what contact he also has had with should the it foregoing, the to relation In the to of assignmentsonbehalfthetarget. pertaining from anyone outside the target in connection with their performance specifically law remuneration accept Norwegian to directors’employees’right and the restricts not that note particular take Although please general aforementioned, target’s the by meeting. approved schemes remuneration other employees limitations no or salaries that of such fixing on declarations board possible the assuming from follow naturally give is foregoing The not target. the in do shareholders other of expense arrangements the at benefits unreasonable the as insofar aabø-evensen &co acquisitions? investors inyourjurisdictionrelationtopublic practice depending on what they expect is the most likely “buyer- likely most the is expect they what on depending practice a same the apply of to attempt company,may portfolio they Norwegian exit an attempting are Sponsors such when that means This if and, diligence team. target’s will management the due by provided warranties by possible, own sellers its on rely these buyer the Instead, make to attempt etc.). documentation, of execution assets, etc. financial target’snet group’s target the on the based adjustments e.g. industry, on depending proposed are mechanisms adjustment level “ a assuming time same the SPAat the but in price purchase the from the fixing deviation by methodology,e.g. this of variations different propose any (ii) also may and Aseller completion. at level capital working normalised completion, at group target the of position cash/debt net the (i) both reflect to adjusted value target’senterprise the on price purchase the of calculation the base to common is it fund, PE a by proposed are accounts completion If refers to“work-in-progress”items. capital is expected; and (iv) a large part of the target’s balance sheet (iii) substantial seasonal fluctuation in the target’s need for working group; larger a from out carved be to is sold being business the (ii) transaction; the of completion and signing between an delay expected is there (i) if: feature common a remain accounts Completion date. closing expected i.e. transaction, the of timing the and year, the throughout fluctuations cash-flow other or variations seasonal to susceptible particularly is it whether i.e. in, engaged is target the mechanics is normally decided on the basis of what kind of business completion preferred of choice the this, said Having mechanism. the sell-side, however, the same funds tend to propose a locked-box on When accounts. completion on based transactions prefer buy-side often the on funds PE that seems it observation, general a As ald called which warranties, so- to package warranty the limit to try will fund PE the that means and representations business provide to want rarely Sponsors be UK many that fact also well-known a example, extent, for is, some to can, market influenced from market practices in the fund’s home jurisdiction. It Norwegian the in seller The typical packages of warranties and indemnities offered by a PE then amoreextensivewarrantycataloguemaybeobtained. limited warranties will be given, and if the target is less sought after, only target, bargaining a for competition to great is there down if leverage; and comes power less or more it where transaction, to transaction from significantly varies buyers prospective to offered The catalogue of vendor representations, warranties and indemnities . Whatconsiderationstructures aretypicallypreferred 6.1 deals, andacostcoverfeeofaround1.18%wasagreedinanother. these of one for agreed was price offer the of 4.66% of fee break a market-cap. Of the seven public M&A offers launched during 2018, Break-up fees occur, often in a range of 0.8% to 2.0% of the target’s bid. the making in bidder the by incurred costs for compensation to limited be principle, in should, bidder the to payable fees break for . Whatisthetypicalpackageofwarranties/indemnities 6.2 Transaction Terms: Private Acquisitions 6 o db ad okn cptl O rr ocsos other occasions, rare On capital. working and debt of ” on thebuy-side,inyourjurisdiction? team toabuyer? by privateequityinvestors(i)onthesell-side,and(ii) offered byaprivateequityselleranditsmanagement udmna warranties fundamental iclg to: privateequity 2019 ie onrhp o hrs valid shares, to ownership (i.e. Norway target idns a otn e f uh aue ht nuig t s rather is it insuring that nature such of be often may findings diligence some but claims, liability potential all insure to attempt liability.potential also might vendor ToPE the possible, extent the such for deadlines and caps special introduce time same the at but indemnities, for requests buyer’s on accommodate PE to tried have the funds solely Instead, relies team. buyer management a the that by provided insist indemnities to common been not has it Nevertheless, as long as the PE fund selling is Norwegian or Nordic, indemnification clausesintheSPA. of form any limit or resist to seek normally will funds such place, and, depending on at what stage of the fund’s lifetime the exit takes all PE funds are looking for a complete exit with cash on completion addressed as a “to be fixed” issue agreements. or by a price reduction. In general, purchase been not have that and diligence due during revealed has buyer the asset that and liabilities or losses claims, potential cover mainly Indemnities agreements purchase share in common are indemnities However, risks. identified specific for indemnities provide instead and approach an such resist normally will seller a and US, the in like basis” indemnity “an on warranties In a Norwegian transaction, it is not customary for a buyer to require non- and non-compete and solicitation clausesbetween12and24monthsareseen. exit, the secure to order in “policy” their adapt respective to willing are the funds investments. most and position, bargaining future party’s conditions, for market on investment depending the However, of lifetime acquired the knowledge use during to ability the restrict may clauses such that being reason the provisions; confidentiality wide same for The applies covenants. restrictive any provide not do they that be often will point fund’sstarting PE a jurisdictions, other most in As such provide Management Investing warranties inlinewithwhatiscommonotherjurisdictions. the may that and strange insist the practice a therefore with such unfamiliar find Sponsors often market International Norwegian scope. in limited in warranties team provides such management warranties, the warranties are often management separate providing Management common that Norwegian or Nordic Sponsors insist on the Investing historically,that, note should very Sponsors been Foreign not has it seller mayproposeinitsfirstdraft. strategic a what differentfrom too look may,not but glance, first at limited, fairly be will market Norwegian the in vendor PE typical In general, the representations and warranties packages offered by a fundamental of warranty andindemnityinsurance. set limited very a on completely situations rely to a had buyer the where and (only), warranties some with in away vendors get to PE managed that witnessed also we tracks, dual- through sold assets apply,attractive extremely some For did position. exceptions However, especially in particular sectors, depending contracts. on the parties’ bargaining information the of in type some warranties including by example, for warranty the coverage; of scope the broadening in succeeded often buyers catalogue warranty the and remained at least as market, extensive in 2017 and 2018. During this Norwegian period, the in succeed to deal a wanted they if warranties and representations of set broad fairly a accept to had general in sellers 2016, and 2015 Throughout a is seller the if least at Norwegian orNordicPEfund. market, Norwegian the in seen rarely universe” for the relevant assets. This being so, such an approach is aabø-evensen &co © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 What isthetypicalscopeofothercovenants, 6.3 connection with their co-investments or rollovers. If the equity selleranditsmanagementteamtoabuyer? undertakings andindemnitiesprovidedbyaprivate management il yial b i te ag fo aon 08 t 18 o the of 1.8% to 0.8% insured amount. around from range the in be typically will but involved, parties the and itself target the requested, coverage insurance of type the operates, target the which in industry the on and excess/policy on obligations; more depends insurance such of below.cost 6.5 The question see limits, For tax penalties. or secondary fines civil uninsurable anti-bribery; issues; pricing transfer projections; underfunding; pension comprise: will policies the of escrow clause rid in the SPA.get to Typicalorder carve-outs/exclusions in under such fund PE the for tool a as used been also selected bidders in structured sales processes. Such insurances have to started to available now made be to have insurance W&I buy-side “stapled” funds arrange Such exit. clean a seeking funds PE The W&I insurance product has become particularly popular among we type ofinsurance. 2018, this used For Norway in deals M&A all of 20% process). to close that bidding estimate a in advantage competitive a SPAthe (or, alternatively, achieve to order in buyer a by introduced under liability on agreement reach to way a as insurance W&I use number of transactions in which the seller or the buyer attempted to the in growth substantial a witnessed market Norwegian the 2018, throughout and 2013 during However, landscape. deal Norwegian the in feature common a been not historically has insurance W&I also start off with proposing a relatively high “ high relatively a proposing with off start also A PE vendor will typically (but depending on the market conditions) very littlepricedifference comparedtoshorter limitationperiods. a at warranties tax on years seven and five between and warranties, general the for period limitation 24-month a offer to able is market insurance the that is reason main The SPA. the of draft first their in offered periods limitation the of length the with generous more slightly become to funds Norwegian the of some led has product the tax warranties. However, the introduction of the W&I insurance for months 24 and 12 between of period a and warranties, general the for period limitation 12-month to six a proposing with off start often very would it sell-side, the on was fund PE a if Historically, position, thetarget’s industrysectorandindividualcircumstances. bargaining parties’ the conditions, market the on depending covenants, apply obligations, its will variations Significant and thereunder. SPA indemnities and warranties the of breach for liability potential its on limitations several include to attempt normally will vendor to PE a 6.3), subject question see (please normally regulations liability special are which covenants, restrictive specific of breach or leakage locked-box for liability vendor of respect in Save limitation provisions. PE funds exiting their investments today may what traditionally has been considered “market” in Norway for such loss) threshold combined with a basket amount in the upper range of in theNorwegianmarket(seequestion6.4below). popular increasingly become to started however, have, insurances, (“ indemnity it is better to negotiate an appropriate price reduction. Warranty and that high so also is premium insurance the cases, some In difficult. . To whatextentisrepresentation&warrantyinsurance 6.4 . Whatlimitationswilltypicallyapplytotheliabilityofa 6.5 the typicalcostofsuchinsurance? warranties, covenants,indemnitiesandundertakings? exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) private equitysellerandmanagementteamunder W&I ) nuacs icuig pca claims special including insurances, ”) www.iclg.com de minimis de Norway ” (single ” 209 Norway 210 Norway © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com buyer’s final bid must be fully financed (i.e. expressly state that it is The sellers’ process letters to PE buyers will normally instruct that a Howdoprivateequitybuyerstypicallyprovide 6.7 to rolloverpartsofitsinvestments. has team management the and fund PE international an is buyer the if however,seen are, arrangements such 6.5, question in to alluded 6.3). question As (see warranties and representations separate with fund the provides agreement agreement/shareholders’ investment co- the in Management Investing target’s the that request to funds PE Norwegian among practice common been not has It bargaining positions. relative to parties’ down the and comes conditions this market however, prevailing other transaction, most given a with in As elements warranties/liabilities. sellers’ as SPA for the into security provisions escrow include to insist may buyers PE circumstances, the on Depending necessary. absolutely accounts unless escrow like arrangements security accept rarely issues, post-closing similar or clawback any without exit clean a seeking As mentioned in questions 4.2 and 6.4, PE vendors will, by virtue of Do(i)privateequitysellersprovidesecurity(e.g. 6.6 agreement/ co-investment the in Management an Investing is the buyer the the for that of its investments, such international funds may want to request that rules event limitation the of in international PE fund and the management team has to set However,rollover parts different a management. also thereby and for the PE fund and the target’s management team (see question 6.3) exit funds PE international investments, to propose a when different set of warranties and indemnities seen sometimes as funds, PE Finally, note that it has thus far not been tradition among Norwegian by example proposing anoverallliabilitycapof10%thepurchaseprice. for market, is what of end lower the at liability total the parties involved. A PE vendor will also normally propose of to cap its position bargaining the and conditions market on depends for responsible SPAfinal the in result The only amount). basket the of excess in is losses seller the (whereby basket” “deductible a propose may fund PE exiting an amount), basket the exceeding those just not and losses all for responsible is seller the the (whereby basket” in “tipping deals a with the done are of traditionally majority market Norwegian the While amount. excess policy the as value enterprise the of 0.5% offer to willing are insurers of number increasing an currently Norway,but in basket-amounts the the by is which offered value, for value market considered been has what of level historical above enterprise amounts of 1% excess normally is policy industry insurance standard The policy. the underwriting is provider insurance which and market insurance the on depending target’svalue, the enterprise of 1% to 0.5% from amount an means typically This “excess insurance. policy W&I the under amount” with amount basket the align to attempt also aabø-evensen &co representations andwarranties(seequestion6.3). hrhles areet rvds h fn wt separat with fund the provides agreement shareholders’ under anequitycommitmentletter, damages,etc.)? funding, righttospecificperformance ofobligations by thebuyingentity(e.g.equity underwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and the managementteam)? warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and

e the for in range of1%to2.5%transaction value. amount matter fixed a a at agreed are largely fees the is however,Typically, fees transaction. individual each break in vary therefore will reverse and negotiation a of amount The last fewyears,enquiredaboutitsfeasibility. reverse break fees a few years ago, our PE clients have regularly, included during the market Norwegian the in transactions M&A no virtually whereas and slowly), very (albeit rise the on is fees break reverse of use the that observed have we years, few last the Over but out market, today’s sellers tendtoresistthesetypesofconditions. financing in disappeared Such not have conditions/clauses positions. bargaining parties’ respective the and situation market the on depends normally conditions such accept to willing are sellers extent what To sellers. the to fees of form any pay to having without financing, required receiving upon conditional transaction the consummate to obligation their make to sought rather have funds PE and transactions, PE Norwegian in prevalent been not historically have fees break/termination Reverse itself. fund PE the against directly letter commitment equity the enforce to right limited a require often 30,000). will NOK seller careful is a Consequently, LLC (in a capital for capital share share its minimum besides the Norway funds any have not does which BidCo, normally against enforceable be only will BidCo) to notes issued promissory of form other or letter commitment a of copies of way (by BidCo by exclusively seller a furnished that guarantees corporate veil through application of the alter ego doctrine. As such, the pierce evasion) of tax or fraud of charges legal with connection in court Norwegian (e.g. circumstances a exceptional in only will jurisdiction competent and promises/guarantees, company’s a for liability incur not thus will parties Related owed. is it credits of solely person, legal responsible for its own debts and promises, and the separate sole beneficiary a as personhood, treated Norwegian corporate is company that of a concept whereby note the should to seller adheres a law corporate above, the of respect In designated a at capped committed amount. events, all in is, letter the under liability holding fund’sPE the of and conditions, of a set a upon qualified often string most is to the (or in letters BidCo commitment equity such of enforceability The down companies). owns further that HoldCo companies subordinated holding of string the TopCoin the to addressed be often will letters commitment equity vehicle (“BidCo”) immediately prior to completion. However, such purchasing the fund to obligation its backstop to letter commitment to the transaction). A PE fund is often required to provide an equity warranties regarding the equity financing commitment (if applicable It has become common that sellers insist that the SPA contains buyer a seller’s representativemaycontactthem). providing institutions relevant financing (the the buyer is often requested to inform of the institutions that details contact the as well such financing arrangements (including any commitment letters), as all of status and terms the provide also must bid external final the by sources, provided be be to must is thereof financing If sources identified. the reasonably that and financing), to subject not . Arereversebreakfeesprevalentinprivateequity 6.8 If so,whattermsaretypical? transactions tolimitprivateequitybuyers’ exposure? iclg to: privateequity 2019 Norway stoppages) and,of course,theadditionaladvisorcosts. prematurely of risk inherent deviating from the dual-track (which may cause internal the friction and timelines, prolonged streams, and flexibility,of the other. On the reverse comes added and often concurrent work increased universe, reduction of transactional risk – each investor/buyer track is effectively the fail-safe and value of initiating a dual-track process is a better understanding of market advantages obvious the notwithstanding, preference of process The timeline). IPO the by dictated is progress and preparation routes’ both (where hybrid” “IPO-led an or bids), round second of receipt after made process is decision M&Aultimate the and process the IPO the front-runs (where “staggered” stages), final to deferred is decision “true ultimate and a private parallel be run a routes either both may (where or parallel” process structured a Such a process. either sales with (bilateral) exit IPO – the process dual-track combining a initiate to smarter is it whether or basket, IPO the in eggs its all place to prudent is it whether consider must that all elements above have undergone careful scrutiny, the PE fund and listing for suitable deemed is target the of assuming Thirdly,and terms in company public a governance, reporting,policyimplementation,etc. of the into requirements insight and limited dynamics very have frequently whom personnel, pertinent investor other documentation, and training management and and key financial preparing requirements, listing and standards the household tasks of getting procedures and regulations up to STA traction and attention. From an internal point of view, there are also a such both get to severely struggle likely most will newcomer in a situation, and, saturated, be simply may sector industry relevant public. Irrespective of excellence, the public investor market for the go to able and ready,willing is target the whether of is make must exit IPO an contemplating fund PE a deliberation main second The new and equity new upon thelistingitself. both spread the take raise to and equity new to raising for just or order shareholders, an in case, in either placement the private – is a advance out that carry to If be can approach conditions. alternative market prevailing to due of also is Timingessence, and sometimes the window of opportunity is simply closed companies. portfolio PE-backed for relevant accentuating expectations of low appreciation and high dividends is normally not perspective, value the – potential appreciation high a on focus with perspective, growth a the in target highlights the of story sides equity strong the funds, PE For share. the up pick should investors why reasoning and sales-pitch the is essence, in sales price will be the formulation of a powerful equity story, which, price. share the best the achieving of terms in element key Another on pressure negative substantial of put will periods) lock-up expiry relevant upon (typically sale planned/impending shareholder’s larger a that considering especially imperative, thus is ownership continued for strategy clear A shareholding. its of 100% to offload manages seldom fund PE the and that price, trading requires regular the on often IPO successful A 15% and 10% between of discount a receive shareholders investing level. acceptable an to its for (shareholding) exposure its reducing time same the at price while shares, possible best the achieves exit IPO an through fund PE the whether is model, the PE the of nature very guide the to goes which considerations main three first, The choice. right the is exit IPO an whether of determination perspective, PE a From Whatparticularfeaturesand/orchallengesshoulda 7.1 aabø-evensen &co © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Transaction Terms: IPOs 7 private equitysellerbeawareofinconsideringanIPO exit? h cmays neto t fot (“ float to intention company’s the launching of ahead time exit short a resolved be should M&Atrack the Dual-track maximise IPO. help potential visibility,on maximum decision sellers the the and allow processes a to de-risking flexibility, for maintain and valuation to used are processes exit dual-track circumstances, such Under clear. lead less the is where buyer(s) and valuations, LBO to close be could IPO valuation an where but alternatives) M&A to valuation superior generally offer are processes dual-track subject to equity market momentum (i.e. for that the capital market may preferences sellers’ PE imposed, tendtorangeintheregionof360days. if but, common, less somewhat are management co-investing for years we have seen examples as high as 360 days). Lock-up periods of couple last (the listing from period lock-up 180-day a to subject normally are apply,Managers may variations significant Although this change has been the development of a very buoyant Norwegian market for new transactions. One of the more important reasons for six Norwegian the last in seen been the rarely to has financing mezzanine Over years, started expensive. Sponsors too many financing mezzanine and consider prices, reasonable at financing during and after the credit crunch, it became difficult to obtain such faced investors mezzanine hit severe the to due However, target. the in equity purchase to warrants with combination in issued also was debt mezzanine the circumstances, certain In agent. security a to granted is security whereby facilities, mezzanine and facilities senior of combination a use to common quite was it Historically, debt. of layers several contain target, the of size the on depending may, structure PE used leveraged typical A forms Association. Market Loan the the by developed by forms standard the influenced particular in internationally, normally are used agreements loan senior the transactions, syndicated such In syndicate. lending credit by Norwegian or English law, with revolving one bank acting as an agent for a a and loans term facility. of In large transactions, the senior form loan will be governed either the in financing for source main the as debts bank involve generally LBOs Norwegian . Doprivateequitysellersgenerally pursueadual-track 7.3 Whatcustomarylock-ups wouldbeimposedon 7.2 . Pleaseoutlinethemostcommonsourcesofdebt 8.1 last fewyears,oftenmaterialisedinasale. the during have, deals these but markets equity the in momentum the on depends IPO or sale a through realised ultimately are deals dual-track Whether IPO-track. the under launch roadshow before the under shortly taken often is track winning IPO-track. the on decision The drafting research to parallel run normally will process M&A round second a Consequently, announced. is track winning focus during pre-deal investor education sessions until clarity on the Financing 8 through asaleorIPO? private equitysellersonanIPOexit? bonds). and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin ITF ) ic ivsos o not do investors since ”) www.iclg.com Norway 211 Norway 212 Norway © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com the with registered be ( Enterprises also Business of must Register Norwegian report the and LLCs, public for and meeting general the for summons the to attached be shall report This target. the in shares) to rights (or shares the for price assistance on the target’s liquidity and solvency; and (v) the buyer’s the not or that relate to the completion of the transaction; (iv) the impact whether of the conditions (iii) (ii) benefit; corporate target’s the to assistance; be will assistance financial for proposal the target’s the addition, board must prepare In a special report that contains information on: (i) requirements). voting stricter contains of the shares and votes represented, unless the articles of association ⅔ (i.e. association of articles the amend to needed as majority same the at approved the requires which resolution, be special a by target’smeeting general must assistance assistance such the deposit repay Furthermore, must to received. obligation buyer its a for and security” “adequate conditions, and on terms provided be commercial must assistance financial granted, If dividends. the within only but limits of what parents, such target otherwise legally their could have distributed as of themselves in rights) share (or shares of acquisition an with connection in security grant and arrangements to loan/credit offer (subject funds, now provide can conditions) certain targets public and private both procedure, “whitewash” of type a introduced which 2013, of rules the Under post-takeover throughrefinancingofthetarget’s existingdebt. as considered breach of the (not prohibition) to achieve at ways least a partial of debt pushdown number co- a were there practice, as in but, participating from facilities, acquisition-financing any under guarantors targets or borrowers such prevented this outset, prohibition the From parents. the their or with themselves connection of acquisition in assistance financial upstream from providing prohibited generally were alike) private and (public approved targets Parliament Norwegian the when amending the previous strict ban on financial assistance, Norwegian 2013, July 1 Until Arethereanyrelevantlegal requirementsor 8.2 improved significantly, atleastwithincertainselectedindustries. has market bond high-yield Norwegian the 2018, throughout and 2017 of beginning the since However, 2016. of most throughout high- yield bond market took Norwegian a severe hit from the October 2014 and onwards 2015, and 2014 during prices oil in decline that the bond debt cannot be sold prior to completion. Due to a rapid event the in loans “bridge” provide to agrees provider mezzanine a involve typically “bridge-financing commitments” pursuant to which either a bank or would transactions Such facilities. mezzanine traditional the substituted largely which market, bond high-yield aabø-evensen &co otne o use et uhon b rfnnig h target’s the refinancing by pushdowns debt pursue to continue parties the cases, most in Therefore, transactions. LBO PE in least impact on how LBO financing is structured under Norwegian law, at little had Consequently,have rules deals. the such practice, with in connection in requirements M&A collateral banks’ financing senior with the direct obtain connection to impractical in quite financial assistance from the target in is most LBO transactions, targetdue to it that a means transactions, by financial upstream provided any assistance repay to obligation borrower’s target’s the for security” “adequate depositing for requirement rule’s The party the on report rating credit receiving theassistance. a obtain to required finally is target’sthe purposes, governance For provided. is assistance board financing) ofprivateequitytransactions? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof “RBE” bfr the before ) ne al icmtne ms b apoe b sc company’s such by approved shareholders. be must circumstances all under therefore, and, financing such receiving company respective the of often must be considered to fall outside the normal business activity M&Awith very connection transactions in into entered agreements loan intra-group that argued been however, has, it theory, legal In and activity business agreements. such for normal are that terms other and prices of contain course ordinary subsidiaries’ relevant the of part as into entered are loans such unless necessary be to out in the various group companies in order to be valid. This could turn LBO transactions, could also trigger a need for shareholder approval in guarantees intra-group various inter-companyby supported debt, and loans shareholder of forms various of use funds’ PE Finally, direct no benefit totheindividualgroupcompanyissuingguarantee. is there if even guarantee, intra-group an issuing when iacn fr netet, liaey iacd rm capital from financed ultimately contributions fromthelimitedpartners ofthePEfunds. investments, for financing “subscription facilities”, bridge call short-term provide to facilities” bridge “equity or “capital facilities” so-called funds PE offer to willing seems also banks of number increasing an addition, In facilities, unitrancheloans,etc. B loan term include typically offering are lenders these products The to loans. bank offering secured senior traditional are supplement or which replace funds and lenders (alternative) non-bank For the last few years, we have started to see increased activity from . Whatrecenttrendshavetherebeeninthedebt 8.3 2013 now seems to indicate that a group benefit group a that indicate to seems now 2013 such (iv) Companies the from to However,Acts amendment an and propitiation. fees; guarantee of guarantees and securities are type not in breach of the financial assistance any receives guarantees cross company such that group arguedrelevant the that or exist company Norwegian the be benefiting can it such (iii) by cross-stream transgressed transactions; not are and objects corporate its upstream (ii) Norwegian existence; provide that to continuing its assumed jeopardise not will this (i) that: provided guarantees, able been has are it companies Previously, a providing or guarantee security. a granting company group the individual to such benefit with connection no in is example, for there company; group when individual sufficient is benefit group the a if by limited be also situations, law,Norwegian Under benefit. uncertain corporate is of it doctrine some in may, guarantees or security grant to entity Norwegian a of power the that note Further or revenues target’s the of balance sheet. size of the number and the target non-listed), the or in (listed employees target the of status the on depending pushdowns, debt conduct to ability Sponsor’s the limit may rules These 10.2). question (see Managers Fund Investment Alternative on Act the in out set is that regime stripping anti-asset the observe they that ensure also must Sponsors 2014, July 1 From financial acquisition financing. buyer’s receive that for security to of form the buyer in target the from a assistance for possible be become will transactions by adopted proposal finally is the Parliament proposal as originally proposed, it Ministry’smeans that it whether will also for the LBO- If and is implemented. It when security. unclear adequate for currently requirement current the amend to proposed Fisheries and Industry Trade, in of Ministry the that 2016, early Note adopted. previously as way same the debt, existing financing marketinyourjurisdiction? iclg to: privateequity 2019 may Norway be sufficient be eain o custo o sae i gnrl s o recoverable/ not is general in deductible for VAT shares purposes. of acquisition to relation in fees VATadvisory input on that argue now will authorities tax The authorities. tax Norwegian the from scrutiny increased attract to started has that area difficult a is This fees). advisory to relation in its (particularly target maximise the to acquiring in VAT seek incurred of addition, recovery in will, vehicle acquisition The the Norwegian interest-deductionlimitationregime(seebelow). to subject The become however, may, amortised). costs (i.e. such expense of interest deductibility an as loan the of period the over spread be must but deductible be will fees) advisory/legal associated and charges bank debt, maintaining and obtaining with In principle, costs of arranging the financing (i.e. fees in connection deductible fortaxpurposes. longer no are diligence) due to relating expenses (typical company which expenses broken-deal another in shares of acquisitions failed with connection in incurred that clarifying implemented was rule a 2016, January 1 from purposes effect Taking tax law. Norwegian corporate under for basis current a on deductible be may etc.) costs, restructuring costs, financing costs, marketing planning, and work strategy administration, and management corporate for costs (i.e. shares/subsidiaries of ownership the with connection in Notwithstanding the above, not certain expenses incurred by a company will share-deal a with effectively bedeductibleunderthecurrentNorwegiantaxregime. connection in costs acquisition the and BidCo used by the PE fund will be LLCs domiciled in Norway, companies target the both normally foreign Since tax-deductible. not or are realisation domestic such to related Losses in states. member EEA and EU in shares domiciled of, realisation the on gains capital and from, received dividends on tax from exempt generally are participation shareholders) (corporate entities Norwegian similar certain and the to companies limited being according shareholders Norwegian rule, exemption that, Note rules). exemption participation Norwegian the by covered not is disposal any capital gain arising upon a subsequent disposal (to tax the extent the corporation for be added to the tax base cost of the shares and may therefore reduce non-deductible are costs purposes. Instead, transaction costs related to the acquisition should the that means This shares. acquired the with purposes tax and accounting both for capitalised be in should shares directly of acquisition an incurred with connection costs transaction all principle, general a As are these financing costs. whether on depends classified as costs costs for acquisitions/disposals, operating costs, or debt transaction of treatment fees apply in connection with a governmental share sale under Norwegian law. other The or tax taxes transfer share duties, stamp No acquisition tax-efficient Costs ofacquisition a achieving structure. for structures Most offshore group. target use commonly quite market the Norwegian the in of operating Sponsors management the to compensation tax-efficient (iv) and exit); partial a (including planning exit (iii) group; target the of charges tax of management (ii) acquisition; the acquisitions PE Norwegian with associated costs tax the of quantification (i) to include: typically relating considerations tax Key Whatarethekeytaxconsiderationsforprivateequity 9.1 aabø-evensen &co © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Tax Matters 9 investors andtransactionsinyourjurisdiction? Are off-shore structurescommon? neet ad o rltd ate” Ti nw mne rl only rule amended new applies This if the annual net interest expenses exceed NOK 25 million parties”. in “related to paid interest as other regime limitation deduction interest same the to and subject become facilities bank also now have companies on group consolidated within debt payable external interest 2019, January 1 Withnon-deductible. effectfrom be will rules limitation the above excessively leveraged from a tax point of view, any interest over and is vehicle acquisition the where situation a in Consequently, rule. are not deemed as security within the scope of the interest limitation not is pledges provided by a related-party in favour of a third-party lender it borrower, the Negative company. parent a by towards owned is claim such that claims required of form the in security For company. borrowing the towards claims related- outstanding party’s that over charge or pledge a (ii) or company, related-party borrowing such if the in related-party’sshares that over company pledge a (i) either is security borrowing the of related-party a by secured party third a from loans on applies exemption same The company. borrowing the by controlled or owned subsidiary company,borrowing a the is of related-party related-party such and the from guarantee a is security the if rule limitation interest the to Finance, of Ministry subject not is related-party a by secured the loan a under paid interests by adopted regulation a to According by theselimitationrules. (both internal and external) of NOK 5 million or less are not affected expenses interest total with Companies rules. these under coming loan intra-group an as considered be also will guarantee), company parent a (i.e. company group another from guarantee a by secured nevertheless is that bank) a (typically party unrelated an from loan a that note Please creditor. or debtor the of year) fiscal the during and the minimum ownership or control required is 50% (at any time “related-party” covers both direct and indirect ownership or control, term The companies. group Norwegian the to allocated been has as a result of tax planning within international groups where the debt to aims eliminate, or rule reduce the risk of, The the Norwegian base being excavated amortisations”. and depreciation, tax, interest, before earnings “taxable borrower’s the of 25% to parties related from loans on deductions interest the caps broadly rule limitation the then From 2016. in implemented were rule this to restrictions Additional force. into entered also parties related to paid interest of From out the income year 2014, a new rule limiting the deduction of net distributions structures, non- debt. shareholder on interest of deductibility tax the and liquidation of leveraged company substance holding the challenging an challenging Norwegian by taken in particular have in approach structures, authorities tax aggressive Norwegian increasingly the years, recent the quantum and terms of the debt was arm’s length in nature. Over that extent the to purposes tax for deductible considered was debt related-party on arising law,interest Norwegian Historically, under and Sponsorsinsomeformofphantomincome. investors fund’s the on generate imposed not are liabilities may tax current that which loans, shareholder way a in structured be can this provided of deductions, tax additional form the in made target be also may fund’sinvestment the PE the of Parts manage charge. group’stax to used be also may techniques minimisation tax Additional taxes. withholding as such costs tax additional of imposition the without activities profitable has that jurisdiction the into down” “pushed be can costs such that desire also will fund the multinational, is group target the Where the group. target the of profit maximise operating the against offset to be can that costs established financing of amount normally the Consequently, is structure profit. acquisition taxable group’s target operating the are funds PE against debt acquisition rate, the on costs tax interest the offset effective to desirous buyer’s the reduce to order In Target grouptaxmanagement www.iclg.com Norway 213 Norway 214 Norway © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com its with do to what decide conduit to pure autonomy a any or without dividends) company the of owner economic and legal a (not shareholder real another for nominee or agent an considered jurisdictions relevant the the in involved will apply. for rate Also note, if such a foreign holding company tax treaty is withholding double-taxation the then applicable met, not are criteria such If same. the be not will company a holding a of and company assessment trading the that assumed is it and question, in company tax purely not is establishment motivated. the The assessment will differ according to the to nature of the that and performed motive be business a must assessment an context, determine whether the company is this genuinely established pursuant to In LLC. Norwegian a to comparable be must shareholder corporate resident shareholder, corporate business activity in the relevant jurisdiction. Furthermore, EEA-resident the EEA- an real conducts and established genuinely is shareholder the provided to a by LLC paid dividends Norwegian liquidation or dividends on imposed is tax withholding No companies. holding Norwegian the in percentage ownership shareholder’s foreign the on (typically) and treaties tax The considered. be respective the on depends rate tax to withholding applicable potential need will dividends on tax Norwegian withholding exit, to prior required are structure exits. company holding partial Norwegian the fund’s from potential distributions any that of PE event the respect in However, a in except during period structures investment company holding Norwegian foreign to LBO, it will not be envisaged that any dividends dividends will be made by the typical a Normally,in liquidation regime. tax current the to changes expected on to regard with below 9.4 question see nor Nevertheless, shareholders. to lenders, payments interest on foreign tax withholding levy not does Norway the and year,returns forthesamefiscalyear. fiscal subsidiaries’ the and companies must make full disclosure of the contribution in their tax parent’s the of end the at indirectly) or directly (either subsidiaries the of rights voting and contributing ultimate parent company the must hold more than 90% of the shares and contributions, an Norway, in taxable group entities corporate be must entities receiving enable to order In form the limit for total group contribution and dividend distribution. reserves distributable The recipient. the for taxable be not equally grantor,would the for deductible not is which amount, excess This amount. excess the deduct to able be not will company grantor the but income, taxable than contribution group more grant to possible is It entity. Norwegian another in losses tax against profits taxable offset to order in contributions group through possible is entities a but Norwegian of group affiliated unities, an within income taxable of fiscal transfer form or returns tax consolidated file cannot companies Norwegian target’s the operations. by generated profits structure to be able to offset its interest expenses against the possible acquisition the in companies holding Norwegian the for critical is have to unlikely it Therefore, is deductions. interest its offset to itself which against profits vehicle acquisition the that note Also question 11.1). under below (see rules limitation interest Norwegian the challenge to resolved has EFTAAuthority Surveillance the that note Further rules may be introduced for enterprises within the petroleum sector. government has indicated that separate interest deduction limitation Norwegian the that Note by individual). group an is lender consolidated related the paid where (typically the of interest outside lender to related only a to but enterprises apply tax- still be will old should the rules rules, still new the scheme of implementation evasion Following tax deductible. any of not parties part third from forming loans on payments interest that ensure to At the same time, two escape rules have been implemented that aim total for all companies domiciled in Norway within the same group. aabø-evensen &co Executive compensation achieve suchobjectives. uebug odn cmais ( companies earlier, holding described Luxembourg As management. and holders where carry for gains investors, and, capital as leakages taxed be can tax proceeds exit other any that possible, or tax withholding any trigger not does it that way such in structured be can exit any that critical distributions arising from an exit. Having said this, interest it is carried nevertheless of respect in taxation of basis remittance the from benefit to able thus are holders interest carried domiciled Norway Non- entity. resident non-Norway a be often quite will structure acquisition the in company parent ultimate the above, described As a fullexit,partialIPO,etc. acquisition structure. This means that the advisors need to consider scenarios are anticipated and planned for when formulating the final In general, it is of vital importance to PE funds that all potential exit Exit planning 2019) (givinganeffective taxrateof0.66%). January 1 per as 23% from (reduced 22% of rate tax a at income corporate 3% of such dividends are subject to Norwegian taxation as ordinary foreign such to which such shareholdings are allocated. Under such circumstances, Norway in to business out carrying or subject participating shareholders companies, from Norwegian dividends receive that Norway in establishment permanent a having shareholders corporate foreign to as well as shares the of dividends received by corporate shareholders holding less than 90% corporate shareholders. However, a 3% claw-back rule will apply to exempted from Norwegian corporate tax on the part of the receiving also are EEA the inside 90% than more with indirectly or directly held EEA the within on subsidiaries company group in Norwegian shares business-related a by received dividends that note Also structures whenconductingduediligence. holding prior any of reviews tax include and structures acquisition Foreign protection). buyers of Norwegian assets should treaty thus be cautious when setting up accept not (i.e. rate tax withholding 25% default the apply may authorities tax Norwegian the income, uhrte imdaey fe te rnato i te eeat tax relevant the period. in transaction the after immediately authorities obtaining shares at a discount must be reported to the Norwegian tax Management Investing of because arising taxes employment Any the of result a as Investing Management’s equityinvestment. arising obligations tax employment potential any cover to agreement shareholders’ the in indemnity appropriate an accept Management Investing the of members that require funds PE foreign particular that uncommon not further is It acquisition. post- out carried valuation a by confirmed is shares Management’s Investing the of value the that normal fairly is it market-price, than lower price a at shares their subscribe to allowed were Management Investing the that accusations avoid to PE order In fund’sIRR. desired the generates business acquired the if significantly appreciate to potential the with but value, market initial low a have normally invests in ordinary shares. As a result of this, the ordinary shares will ordinary equity and between preferred equity or debt, while the investment Investing Management its split will fund PE the Normally, lower. be should employer the for rate effective the deductible, are under above (see charge tax 2.3). question employment employers’As tax security social the to contributions an to rise give this shares, could such of value market the than less pays Management Investing the that extent the To (the BidCo. in shares team for subscribe to management target’s the Investing Management) will normally of also be offered an opportunity members way, the in normal contributions insurance national and is tax law income Norwegian to subject under which salaries, receiving to addition In iclg to: privateequity 2019 “LuxCo” ae fe ue to used often are ) Norway aaeet ut lo osdr f n rsrcin t the to restrictions any if consider also must Management Investing below). such 9.4 question (see shareholder individual such of to (or individuals part the on dividends private as taxed be will shareholders’parties) related being shareholders indirect or 1 from that direct its of any to company Norwegian a from loans 2016, January Note lender? the by waived or off written are loans such if due be contributions security social and Will tax equity? of fund makes a loan to members of the team to facilitate the purchase PE- the or target the if tax to subject be team the of members any will extent what to are: considered be to need that issues key Other Exchangingsharesforloannotes: ■ Rolloverrelief: ■ include: rolling over part of their investment into a new acquisition structure, The key tax considerations for Investing Management selling and/or for suchreliefduetotheircurrenttaxdomicile. qualify would team management investing the of members future or existing case in relief such for conditions the meet to companies portfolio Norwegian in programmes investment management their under exist ” relief structure to “entrepreneurs’want still may PE-funds International law. UK Norwegian the to rules similar No to socialsecuritytax. subject be will and rate employee’stax relevant marginal the at tax or acquired income to chargeable be will discount such discounted, considered were acquired when subscribed shares at their fair market value. If, however, such such securities are provided sold, and are shares such when arise only will security,liability this although shares social and tax income growth employment to subject be will gains capital any as of parts that risk a such entail may arrangements deferred/vesting arrangements law, Norwegian Under rule. exemption participation Norwegian the from benefit by considered the managements’ structure equity participation via private to holding companies to is arrangement companies portfolio PE tax-efficient in teams management common most The Whatarethekeytax-efficientarrangementsthat 9.2 aabø-evensen &co © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 What arethekeytaxconsiderationsformanagement 9.3 If the selling management team’s investment is structured for ■ qualify not will this shareholders, individual For ■ rollover- a fulfilled, being conditions certain to Subject ■ separate a through invested has Management Investing If ■ no point starting a as shareholders, individual For ■ equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate investment intoanewacquisitionstructure? shares, deferred/vestingarrangements)? teams thataresellingand/orrolling-overpartoftheir xhnig hrs o la nts il udr the under starting a will, as point, nottriggeranytaxcharges. notes rule exemption loan participation Norwegian for shares exchanging vehicle, pooling a or companies holding separate through rollover relief,andwillattachataxcharge. for individualshareholders. also transactions cross-border in achieved be could relief structure acquisition new a without triggeringcapitaltaxcharges. into investment such of Norwegian part the over rolling allow will vehicle, rule exemption participation pooling or company holding tax charge. be capital a to of crystallisation shares without shares for allow exchanged that exists relief rollover statutory aae’ tre e eeuie ad liae hrhles (the shareholders ultimate “ and the executives and key Capital three Herkules Manager’s called Manager a authorities, tax the taxation between than process legal a in culminated This gains). capital for rates higher is (which taxation income to it subject thus and income ordinary as Carry treat to seeking by view above the In the past few years, Norwegian tax other authorities started to challenge in interest the Norwegianexemptionmethod. shares/ownership on with accordance in taxation from exempt be also would companies gains and dividends shareholders’corporate of such form LLCs, organisedin as income such capital insofar gains and taxed at capital gains rates, and if that the Managers are recently, until was, managers invest capital into regarding the funds, the Carry must be view considered prevailing regulations the tax and Norwegian explicit distribution of Carry to the managers in exchange for their services, no are There aig ae mvd hi tx oiie u o Nra. Even Norway. of out domicile to considered be shall abroad registered and established companies tax their moved but later Norway having in registered and established previously companies on apply also will rule This result. different a to leads with states other treaty a unless domicile, tax Norwegian have be to shall considered the general in Norway reduce in registered to and established entities proposal previous a possibility for on treaty shopping by implementing rules stating that all elaborating rule, new a proposed Finance of Ministry the 2019, for Budget Fiscal the in example, For reform. tax proposed the in proposals previous the of some on up follow to continued government the 2018, during Also, As such,therecouldneitherbeaquestionofpayrolltaxes. Executives. Key the for income income salary an as considered such be not that could but 22%), then (now the 28% of at rate income tax prevailing corporate ordinary as considered be should assessment. The Supreme Court concluded that Carry (in this case) Court Supreme Norwegian the of Court authorities’the tax overturned the invalidated and Appeals 2015, November In top. on tax tax. payroll penalty 30% to pay to Executives subject Key the ordered court was the Finally, accordingly Executives Key the to Manager, distribution the that that and Executives, the Key the for income salary for income corporate as considered be must Carry that i.e. assessment, tax authorities’original tax the upheld Appeal On appeal, the decision was overturned and the Norwegian Court of 22%). (now 28% of rate tax prevailing then the at Manager the for Court District The Carry is subject to Norwegian taxation as ordinary corporate income (14.1%). tax that claim authorities’alternative tax payroll the with however, concurred, to subject be must Executives authorities’Key the to tax fund PE the a from distributions rejected that argument also court The taxation. income to primary authorities’ tax subject labour from income as considered be must Carry that claim the rejected Court District the 2013, In the KeyExecutives. attempt authorities’to reclassify Carry from capital tax gains to personal income the for rejected Court Supreme Norwegian the when more issues,pleaseseequestions2.3and9.1above. For instruments. such from income/gains the of re-characterisation shares/financial such instruments. Too new close links to the employment can lead to the which at instruments will be acquired may affect the income tax treatment terms of other and transferability . Havetherebeenanysignificant changesintax 9.4 Key Executives anticipated? teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities ”), which in November 2015, found its conclusion www.iclg.com Norway 215 Norway 216 Norway © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com Havetherebeenanysignificantlegaland/or 10.1 of group same the within individual company companies, providessecurityforsuchthird-partyloans. such another to and/or shares lenders third-party owns borrower such which in company the provided shareholders, from granted on loans apply also will rule This shareholder. individual such of part such shareholders’ to related parties) shall (or be taxed as dividends on individuals the private being shareholders indirect or 7 direct its from that note of any to company also Norwegian a from granted loans 2015, October should teams management on of Members rule exemption be, participation will granted taxdeductiononsuchdistributions. or been, has Norwegian which entity an from received the distributions apply to of effectsshareholders corporate denying the by arrangements neutralise mismatch hybrid to attempts which law Norwegian into Further note that, from 1 January 2016, a new rule was implemented during thecourseof2019. to regard this in Parliament by adopted government be to bill a propose to the is aim The allowing payments. royalty rule and interest on a tax withholding introduce adopting of proposal the also government for 2018 the in later paper consultation a issue to intended it that stated Budget, Fiscal 2019 the for proposal its In companies time, such from that is registered inNorwayshallneverbeconsidered“stateless”. aim the and 2020, 1 than January later no but 2019, January 1 after starting year fiscal first the from or 2019, January 1 from effect with implemented now are companies (in reality) is carried out from Norway. These such new rules of management the provided domicile, tax Norwegian have aabø-evensen &co is disclosure of control in non-listed companies, and stipulates tha stipulates and companies, non-listed in control of disclosure is ubr f netr prun t a eie ivsmn strategy investment defined a to (alternative investmentfunds(“ pursuant investors of a number from capital call that funds) UCITS not albeit structure, legal of applies to managers of all collective investment vehicles (irrespective was implemented in Norwegian law on 1 July 2014 (the “ (the 2014 July 1 on law Norwegian in implemented was the Act stipulates the following points of particular interest: the interest: particular of points following the the stipulates Act market, Norwegian the in operating actors PE for obligations (new) to respect with particularly and view, of point transactional a From obtain above, the fund’s portfolio,herewithconductingitsownriskassessments,etc. requirements market and manage reporting to FSA Norwegian the the from authorisation to addition in must, manager the thresholds, these exceeds AIF an Where investment. of years five first the for rights redemption have not do investors its an (b) where and or million, €500 exceeding capacity investment unleveraged million, €100 exceeding capacity investment leveraged a (a) either have that funds to fund’sapplies only below) (see adherence of the and manager’s the on activities. ban The foregoing applies to temporary all AIFs, whereas the a second level impose to or rectification, immediate demand to FSA Norwegian the induce may requirements reporting these with comply to Failure management. its under concentrations and engagements largest the and in; invests it instruments of category main the strategy; investment fund’s the regarding: basis, regular a on information, with agency the provide FSAand Norwegian the with the AIF-manager register to obligation There are two levels of adherence under the Act. The first is a general h lentv Ivsmn Fn Mngr Drcie (“ Directive Managers Fund Investment Alternative The 0Legaland RegulatoryMatters 10 anticipated? private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting AIF ”)). Act AIFMD ”), and ”), first t if t ”)

In a structured process, PE investors tend to limit diligence scope diligence limit to tend investors PE process, structured a In has notbeenveryprevalentintheNorwegianmarket. to subject become could future enhanced scrutiny by the Norwegian government, even if this so far near the in sectors such within PE that expected therefore is investors’transactions particular or sectors such within investments It perspective. security national Norwegian a from vital considered sectors in investments holding by company a in shares investments, of acquisitions stop and intervene to direct powers foreign of on implementing a new National Security grip reviews Act, granting the government its tightened security countries, other national many in as has, Norway 03Howdetailedisthelegalduediligence(including 10.3 Areprivateequityinvestorsorparticulartransactions 10.2 conduct debt-pushdownsinconnectionwithLBOsgoingforward. stripping provisions” could, to an extent, affect a PE fund’s“anti-asset- ability to so-called The targets. listed such for sheet balance or target listed of revenue of size employees, of number the of irrespective companies acquisitions fund’s such to apply will provisions anti-asset-stripping above the that note Also, regulation. statutory to subject funds restricted to allocated be must that losses/amounts plus any subsequent earnings/amounts allocated to the fund, year less any fiscal previous the for profit target’s the exceeds distribution such (b) or regulation; statutory to subject distributed would be cannot that distribution reserves such plus capital subscribed of following amount the than lower or become, are, accounts annual last target’sthe the to (a) pursuant either: assets, if net applies foregoing capital (portfolio company) (the so-called “anti-asset-stripping” rules). The distribution, any instructing reduction, share redemption or acquisition of own or shares of the target supporting facilitating, from prohibited is less or more acquisition, following period month the manager,through 24- a legislated the that interest, during is Act, r al eo 1% 2% 3% 5% r 5. Te The 75%. or 50% 30%, 20%, 10%, below fall or fund’sthe exceed when targetreach, and a either if in shareholdings SFANorwegian the inform to days duty business under 10 is within sheet. balance and revenues Secondly employees, of number company’s hrhlig ad oig ihs f h tre, n planned acquired, any target, was planned and strategy the interest communication control of conflicts of potential avoid how rights to undertakings voting and and when shareholdings include must about notification The information or property. ownership real is or purpose administration sole whose companies of are acquisitions forgoing the from Exempt SFA. Norwegian the inform days, business 10 within must, manager the million, €43 more exceeding sheet or 250 balance with a or million company €50 exceeding revenues non-listed either and employees a in votes) of 50% than (more control acquires AIF,another with together or alone fund, a itd agt opn, repcie f of, irrespective company, target a of control listed acquires AIF an requirements, if apply disclosure also rules, same the to the according that note Please employees. fund’saffectpotentially may acquisition the how and plans strategic the about informed be also shall shareholders residual its and target in-house? jurisdiction (e.g.onnationalsecuritygrounds)? legal /complianceduediligence orisanyconducted engage outsidecounsel/professionals toconductall materiality, scopeetc.)?Doprivateequity investors prior toanyacquisitions(e.g.typical timeframes, compliance) conductedbyprivateequityinvestors subject toenhancedregulatoryscrutinyinyour , and ensuing an acquisition described above, the manager the above, described acquisition an ensuing and , iclg to: privateequity 2019 vis-à-vis netr ad mlye. The employees. and investors ne alia inter third sc target such , Norway on of point

iiec rpr, fe as acmaid y separate a by accompanied also often environmental, social and governance (“ report, diligence regular the supplement to reports anti-bribery separate prepare to For some of these exercises. funds, it has diligence become standard to request their legal advisors in risk compliance and regulatory about concerns and on focus their increased years, few last the in have, funds global and Pan-European particular experience, our In and independent advice. qualified impartial, of basis the outside on decisions informed counsel, make in-house can committee investment has fund’s the that fund so engaged is the expertise if Even transactions. also be a requirement from the senior banks in order to finance such conduct to expertise normally will This LBO-transactions. with connection in diligence outside engage always normally funds PE diligence the reflects catalogue warranty process), andsoforth. the extent, some (to M&Amarket prevailing the target, the of history liability and debt equity,the investors, the to familiar otherwise or reputable is target exclusivity,the obtained whether has fund the whether like factors, associated certain on depend will etc. materiality, scope, of level complete more The 10.4. question see compliance diligence, compliance on Further, a matters. and commercial prepare financial, legal, to on report advisors diligence its ask normally funds PE and up, opened is field diligence the contest, in remain bidders few only provided and process, “auction” an of round bid final the to be an uninteresting or too costly object. If the fund is invited into target more intimately without “burning cash” on what may the turn out know to get (cash-saving) and interest economic show to fund an the allowing simply approach, is This target. the on report only and interest) of issues/areas request a very limited and preliminary key “red-flag” legal due diligence only (i.e. timeframe and aabø-evensen &co © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Hasanti-briberyoranti-corruption legislation 10.4 e xetd ti cets dsamn i P de iiec ( diligence due PE in disharmony a creates this expected, be compliance with and absence of anti-corruptive behaviours. As can some exemptions, refuse coverage for with any seller warranties assuring will, of process, underwriting (impossibility) own its difficulty through facts inherent examining the and potential damage great of virtue by probably normally, insurance W&I of providers (SPA)contractual a From view,of point that noted be also should it money launderinglaws. become have more aggressive in pursuing enforcement of bribery, general corruption and in regulators because compliance legal on focus continuing a see we side diligence the on and change, slowly not was Now,to seems reports. this special it such request to practice market and relaxed more were funds Norwegian Previously, and anti-briberywarrantiesintheSPA. anti-corruption separate provide sellers the that require also funds the buyerreluctantlycanappreciate). but where the vendor cannot abide for and the sake of a clean exit representations (which relevant for warranties in relation to anti-bribery/anti-corruption open being included, are principle) (in parties SPAensuing or concurrent the and above) both where negotiations, diligence, contractualprotection,etc.)? approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ ESG ”) report. Some of the cf . oncin ih with listed connection publicly of respect private In or exits IPO to relation in relevant thus prosecution. and companies, criminal of risk potential the carries portfolio which doing, from refrain or a do may company that anything falls category liabilities criminal the In “civil liabilities”. and liabilities” “criminal into divided be can liability such purposes, practical For 3.6). question (see company the in interest controlling a or controlling a through act wrongful a to contributed has it if liability subsidiary’s company its for liable independently parent held be may a shareholder that namely exceptions, From this general point of basis flows certain limited, but important exceptional in veil corporate the circumstances. pierce competent only of court will Norwegian jurisdiction a i.e. – omissions and acts own personhood, whereby a corporate portfolio company alone is held accountable/liable for is its law Norwegian under rule general The manager/advisor must, for tax purposes, be allocated between the between allocated be purposes, tax for must, manager/advisor its to fund PE a by paid fees management that concluded court the 2018, February from Court Supreme Norwegian the by ruling a In managers Tax treatment of management fee paid by private equity fund to its netr il e dniid ih t prflo opn (.. the (i.e. company portfolio its shareholder PE with the identified that be risk in will tangible investor a transacts is company) there thereby, portfolio affected securities another through or company and its PE investor (either on its own, through the violating portfolio offerregulations, such violates company portfolio a If documents). in information certain of omission or misrepresentation wilful (e.g. Arethereanycircumstancesinwhich:(i)aprivate 10.5 11What other factorscommonlygiverisetoconcerns 11.1 riiily nlt o dfae h taig rc o lse shares), listed of price dealing trading insider the deflate or inflate artificially held liable foritsportfoliocompanyactsoromissionsinNorway. been has company portfolio another case or any investor PE see a to where yet all- have the we and still practice, of is rule encompassing liability (contained) individual and personhood corporate of concept general the notwithstanding, foregoing The that the until rectificationwassatisfied. ruled remedy structure holding to was the in upwards moved (unable was it own) its on subsidiary situation which a of in liability courts environmental Norwegian by decisions of examples disturbing, but few, very seen have we years, recent company consolidation portfolio a same if violates, e.g. applicable play antitrust the or environmental legislation. Over to lawsuits), come may private rules (identification) or fines to limited is usually liability that (meaning liability” “civil of category the In transgression(s). 1OtherUsefulFacts 11 the liabilitiesofanotherportfoliocompany? considering aninvestmentinyour jurisdiction? and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor rnatos sc “rmnl iblt” a aie in arise may liability” “criminal such transactions, should have known have should or akt manipulation market violation of relevant security trading regulationstrading relevantsecurity of violation ), and thus held liable for the same the for liable held thus and ), udrae i odr to order in (undertaken www.iclg.com Norway public-to-

217 Norway 218 Norway © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com the to amendments relevant propose and evaluate to committee these initiatives, the Norwegian government has appointed an expert of result a As come. to years the in Norway in transactions M&A public for framework regulatory the on impact an have indirectly, capital the markets. These initiatives from the EU, will most likely, regarding directly or statements clarification and/or regulations Directives, new several issued has EU the years, few last the Over increased EU initiatives an been also this willcontinueinthecomingyear. has There that expect we and area this on authorities the from aggressiveness law. VAT Norwegian to subject under become individual will therefore that and services consultancy indicated have management services provided by a Sponsor must be reclassified as the authorities of parts that determine may inspection The tax a in circumstances VAT. to ordinary exempt, and other consultancy/advisory services that may Sponsor’sbe subject VAT-is general, the in which, companies portfolio its of between management issues classification difficult companies, such services should be subject to 25% VAT. This raises portfolio its to services consultancy and advisory provides Sponsor a event the in that argued much- authorities the which a in memo criticised issued authorities tax Norwegian the 2013, May 16 On VAT among itspartnersandwillbetaxedatthehandofsuchpartners. allocated be must law Norwegian under partnerships limited such from losses and profit the since partnerships, limited as organised funds PE into investing Norway in an domiciled investors have on mainly impact will ruling This assessment. tax the aside set to that this was not sufficiently considered and justified, thus resolving was concluded court However,the fee services. transaction such to management related the of 40% that argued had authorities tax tax-deductible for such under funds. In this particular be case, the managers, Norwegian not will consequently fund’s and capitalised a be must law, Norwegian by out carried companies) portfolio funds’the of exits and acquisitions to transaction related services (i.e. services to related considered be could that fees management such of part any that concludes Court Supreme the regard, this In fund. the of behalf on managers such by out carried tasks different aabø-evensen &co

that couldalsoworkforLBOtransactions. near the in future, will Norway,have also implemented a if type of “whitewash procedure” as looks it form, current its in Parliament by adopted is proposal this If buyer’sfinancing. the acquisition for security of form the in target the from assistance financial any of form receives buyer such if company target the “adequate towards deposit security” must (borrower) buyer a that requirement the M&A One such new rule, is the Ministry’s revised proposal for abolishing at aimed not the financing (and on the financing structures) are of M&A transactions. amendments these specifically,and structuring the on both impact an have could some of most though certain Even etc. shareholders, its to assistance financial provide addition, to ability In company’sa to relation in also and parties a related its and company between transactions law. to regard with Norwegian proposed are the amendments into of 2017/828 rules directive the (EU) EU implement amend to order in to Acts Companies proposals Norwegian and certain Trade Industry, issued of Ministry Fishery Norwegian the 2019, early In Proposed amendmentstotheNorwegianCompanieslegislation January 1 until 2020 attheearliest. law Norwegian into implemented be to changes proposed the expect not do we However, legislation. Norwegian into amendments these adopt to unclear expected be currently can Parliament is when It on phase. pre-offer rules the of regulation Norwegian limited the concerning report voluntary and mandatory offers, with particular focus on the current a submitted also market developments. On 23 January 2019, the committee has now update Norwegian takeover rules on the basis of past experience and and review to need the rather but rules EU to and changes of out arise voluntary not does report committee This phase. pre-offer the governing of regulation rules Norwegian mandatory offers, with a particular focus on the report STA current limited a the on working also concerning currently is committee a addition, In reports five New Takeover Rulesexpected published now has Abuse committee proposing severalamendmentstotheSTA. Market This the and I, Directive. MIFID the Directive, the amending Transparency EU from resulting legislation Norwegian existing iclg to: privateequity 2019 Norway aabø-evensen & co Norway

Ole Kristian Aabø-Evensen Aabø-Evensen & Co Karl Johans gate 27 P.O. Box 1789 Vika N-0122 Oslo Norway

Tel: +47 2415 9010 Email: [email protected] URL: www.aaboevensen.com Norway Ole K. Aabø-Evensen is one of the founding partners of Aabø- Evensen & Co, a Norwegian boutique M&A law firm. Ole assists industrial investors, financial advisors, PE funds, as well as other corporations in friendly and hostile take-overs, public and private mergers and acquisitions, corporate finance and other corporate matters. He has extensive practice from all relevant aspects of transactions, both nationally and internationally, and is widely used as a legal and strategic advisor in connection with the follow-up of his clients’ investments. Mr. Aabø-Evensen is also the author of a 1,500- page Norwegian textbook on M&A. He is recognised as a “leading individual” within M&A by The Legal 500, and during the last eight years he has been rated among the top three M&A lawyers in Norway by his peers in the annual surveys conducted by the Norwegian Financial Daily (Finansavisen). In the 2012, 2013, 2017, 2018 and 2019 editions of this survey, the Norwegian Financial Daily named Mr. Aabø-Evensen as Norway’s No. 1 M&A lawyer. He is also the former head of M&A and corporate legal services of KPMG Norway. Mr. Aabø-Evensen is the co-head of Aabø-Evensen & Co’s M&A team.

Aabø-Evensen & Co is a leading M&A boutique law firm in the Nordic region, operating out of Oslo, Norway. The firm is not, nor does it strive to be, the largest law firm measured by number of offices or lawyers – instead it endeavours to find the best solutions for its clients’ legal and commercial challenges, and securing their business transactions. Our M&A and equity capital practitioners are recognised for their high level of expertise and experience. We advise bidders, targets and financial advisers on all aspects of public and private M&A deals. Our work covers the gamut of M&A and corporate finance, including tender offers and take private transactions, mergers, demergers (spin-off), share exchange, asset acquisitions, share acquisitions, group restructuring, joint ventures, LBO, MBO, MBI, IBO, PE acquisitions and exits therewith, due diligence, take-over defence, shareholders activism, M&A tax, securities and securities offerings including credit and equity derivatives, acquisition financing, anti-trust and TUPE- issues. A large amount of our work relates to cross-border transactions and our approach to international work is driven by the principle that complex transactions require first-class independent legal expertise, rooted in local practice, procedures and culture.

iclg to: private equity 2019 www.iclg.com 219 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 29 portugal ricardo andrade amaro

morais leitão, galvão teles, Soares da Silva & associados pedro capitão Barbosa

1 Overview 1.3 What trends do you anticipate seeing in (i) the next 12 months and (ii) the longer term for private equity transactions in your jurisdiction? 1.1 What are the most common types of private equity transactions in your jurisdiction? What is the current state of the market for these transactions? Have you For the next 12 months, we expect to continue to see strong numbers seen any changes in the types of private equity in venture capital transactions given the relevance of European transactions being implemented in the last two to structural funds and the success acquired by Lisbon as a start-up three years? hub. In the longer term, our supposition is that with the end of the first Private equity in Portugal has experienced significant growth despite large private equity “investment cycle” in Portugal, many funds will the financial crisis and sovereign debt crisis, which have loomed over need to be unwound, generating significant volume in transactions the country in the last few years. According to the latest data available with private equity on the sell-side; management entities on the (the Portuguese Securities Market Commission – “CMVM”, 2017), other hand will need to explore new strategies to stay profitable, value under management by private equity players has been steadily especially large ones which traditionally focused on turnaround rising since 2003, reaching €4.8 billion by the end of 2017. investments. Turnaround or distressed transactions have been the most relevant types of private equity deals in Portugal in the last few years, followed 2 Structuring Matters by growth capital investment. Nevertheless, venture capital (start-up, seed and early-stage) investing and management buyouts have maintained their relevance throughout 2017. 2.1 What are the most common acquisition structures Other recent trends in the Portuguese market include: (i) the award of adopted for private equity transactions in your European structural and investment funds to capitalise SMEs; (ii) the jurisdiction? emergence of in-house venture capital units in large Portuguese corporations, which do early- and mid-stage investments in seed and The typical private equity transaction in Portugal is made through a start-up companies; and (iii) following recent changes in immigration private equity fund. Pursuant to this structure, the fund participants law, the incorporation of private equity funds specifically structured or LPs (as well as the managing entity, which retains some “skin in for non-EEA residents to obtain investment residence permits. the game”) subscribe and pay-up units in the fund, after the latter is With regards to sector allocation of investments, in 2017 real estate, registered before the relevant regulatory authority in Portugal hospitality, manufacturing and information technologies took the lead. (CMVM). The aforementioned investment vehicles then either: (i) acquire equity participations directly or through a wholly owned “BidCo” or 1.2 What are the most significant factors encouraging or subscribe newly issued shares by the target company (in a typical inhibiting private equity transactions in your jurisdiction? buyout, growth or venture capital deal); or (ii) acquire debt instruments or securities (notably senior bank loans) and convert such instruments into equity, thereby gaining control of the target (in The search for yield by investors, as the ECB continues its distressed or turnaround transactions). accommodative monetary policy, still plays an important role in the demand for private equity transactions (notably those concerning If the private equity investor does not ultimately come to hold the infrastructure assets). entirety of the company’s equity, a shareholder agreement is generally entered into with the surviving shareholders. Also, as mentioned in the previous question, (i) the launching of public tenders by State-owned entities to capitalise companies, such as tenders to award European Union funds to entities organised as 2.2 What are the main drivers for these acquisition private equity fund managers, and (ii) the use of private equity funds structures? as conduits for obtaining investment residence permits, are also encouraging fundraising and consequently, private equity and The main drivers for these structures relate to incentive alignment venture capital transactions in Portugal. and tax reasons.

220 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London decisions, anti-dilution provisions and pre-emption/tag-along rights. private the equity investor usually requests veto transactions) rights in shareholder and board capital venture in (notably investments minority in different, markedly being structure capital the Besides cash pay-outs). performance-based or shares phantom include (alternatives instruments equity “physical” additional of attribution not the may include or may which plan, incentive an of recipient the be and shares common own typically will hand, other the on Management, investor equity private special “politicalrights”andpreferenceinliquidation. the latter the granting shares, preferred as well as with latter the subscribing quasi-equity contributions and classes share shareholder in divided is equity the Usually directly are made gains any and attributed toitsLPs,atafavourablerate. tax income corporate from exempt are Portugal in incorporated funds Tax-wise,equity private (detailed below)alsohelpsalignincentives. best interests of the LPs. The carried interest remuneration structure the in act to committed is it that signal to fund the in participation equity residual a retains entity managing In the funds, equity private companies. non-listed which in directly hurdles investing from regulatory arise would and risks operational avoiding while bonds, or equities public than yields higher offer potentially which classes asset alternative into money pool to investors institutional Investment using private equity funds is an efficient way for various © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 usually is concept leaver” defined by exclusion, meaning that “bad a manager will be deemed a bad the deals, investor-friendly In factors professional to unrelated (illness, seriousinjury, attendingtofamilymembers). the reasons leave serious to requires for former company the if alternatively, or, so it deem A manager will be treated as a good leaver if private equity investors Forwhatreasonsisamanagementequityholder 2.6 In relationtomanagementequity, whatisthetypical 2.5 If aprivateequityinvestoristakingminority 2.4 Howistheequitycommonlystructuredinprivate 2.3 are acquiredatfairvalue. shares if, leaver”, “good considered (ii) are management alternatively,the or value; nominal at acquired are “bad shares a unvested deemed leaver”, are management if (i) departure: management of mode the on depend essentially provisions acquisition Compulsory vesting thereafter. “linear” and cliff one-year a with structured being period the with period, four-year to three a during occurs Vestingusually considerably, fromsingledigitstoasizeableminorityparticipation. Equity attributable to management in majority acquisitions may vary oasliã,glã ee,Sae aSla&ascao portugal morais leitão,galvãoteles,Soares daSilva&associados considerations? institutional, managementandcarriedinterests)? your jurisdiction? usually treatedasagoodleaverorbadin acquisition provisions? what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and position, aretheredifferentstructuring equity transactionsinyourjurisdiction(including

contain confidentialityprovisions. financial companies, need not be or made public market) and will almost regulated surely a in a to exchanged are relate shares which in they (i.e. public unless regulated agreements, Such typically agreement. are shareholder arrangements governance These the monitor to investor equity company. private the for used committee transactions party related and/or committee of remuneration a of feature up typical Another more set- the is companies larger)portfolio (the of structures governance directors. or non-executive one as serve have commonly to companies portfolio of directors of will board the on representatives investors equity Private n icue eeat xasos r ietet i te business, the approvals ofbusinessplansanddealingswithrelatedparties. in divestments or expansions relevant include and nature in managerial more are level board at matters” “Restricted distributions. and accounts annual association, of approval demergers,mergers, of fundamental articles portfolio to include amendments as in typically such matters corporate investors level equity shareholder at private companies by enjoyed rights Veto investor enjoysavetoright. equity private the which regarding business the of aspects material involving classes) share or supermajorities (via level shareholder shareholders will have “restricted matters” at board of directors and equity investors and management/surviving shareholders/partnering private between into entered agreements shareholder Yes.Usually . Whatarethetypicalgovernance arrangementsfor 3.1 . Arethereanylimitationsontheeffectivenessofveto 3.3 Doprivateequityinvestorsand/ortheirdirector 3.2 being dismissedwithcausefromboardfunctions). resigning at own volition from board functions before a certain date, leaver instance, bad (for premises of set “discrete” a the contains often definition transactions, manager/founder-friendly more In be to her allow would which considered a“goodleaver”. manner a in same the with ways leaver towards the company unless it is determined that it has parted uemjrte o sae lse) o saeodr’ eouin as resolutions well, grantingaveto righttotheprivateequit shareholders’ (again for matters classes) restricted share of or set supermajorities a create by-laws and agreement would depend on the type of company in question), (which the shareholders’say last the have shareholders where matters on Similarly, them enforceabletowardsthirdparties. making by-laws, company’s the into transposed exception, without almost are, matters board Restricted exist. usually limitations No GovernanceMatters 3 in yourjurisdiction? typically addressed? position, whatvetorightswouldtheytypicallyenjoy? arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor www.iclg.com y investor. 221 portugal 222 portugal © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com not cateronlytotheinterestsof privateequityinvestor. may and company portfolio the of shareholders all to loyalty) and be aware that, under Portuguese law, they owe fiduciary duties (care should investors equity private by appointed directors Concretely, their behalf,exercisefunctionsas directors. As a general rule, legal persons are entitled to appoint persons to, on Arethereanylegalrestrictionsorotherrequirements 3.6 competition lawprovisionstoassesstheirvalidity. and labour mandatory against weighed be should these provisions, any non-compete (ii) and provisions); law Portuguese mandatory other (although as well as paragraph previous the exist in out set restrictions the should respect companies restrictions Portuguese regarding shareholder agreements particular shareholder of jurisdiction no and agreements, law governing (i) Regarding: advantages” (i.e.prohibitionofvoteselling). may exercise or not exercise its voting right in exchange for “special the company or its management or by audit bodies; and (iii) given/made no shareholder proposals or in instructions vote the always with to accordance commit may shareholder no (ii) bodies; audit of restricting the actions of members of the contents company’s management or the regarding included law be may provisions no (i) include: the agreements shareholder in out set restrictions Other the towards nor parties, company itself. third towards enforceable not are thus, and, parties the upon only binding are agreements shareholder of Under Portuguese law, it is generally understood that the provisions Arethereanylimitationsorrestrictionsonthe 3.5 share capitalinthecompany. the of 90% than more holding shareholder majority a is there in case (ii) and transactions), such against vote shareholders minority (when demergers and mergers (i) of case in shareholders minority for rights “opt-out” for provides law the addition, In transactions). self-dealing on (e.g. detriment their to be to proved if shareholders, majority the by approved resolutions annul to right the or by-laws) the in included is mechanism such (if list separate a from directors several for appoint to right provides the as such shareholders, minority of law rights special Portuguese that noting worth also is It the and shareholders other company) suchasdutiesofloyalty. (towards shareholders by observed there are, in any case, general corporate law duties which should be that argued is It otherwise. or shareholders minority to relation in investors equity private regarding exist duties statutory special No Arethereanydutiesowed byaprivateequityinvestor 3.4 oasliã,glã ee,Sae aSla&ascao portugal morais leitão,galvãoteles,SoaresdaSilva&associados typically addressed? portfolio companies? equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin non-compete andnon-solicitprovisions)? (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements shareholders (or to minorityshareholderssuchasmanagement vice versa )? Ifso,howarethese by (usually providing protectionstotheprivateequityinvestor). companies portfolio several in directorships having management equity private from arise which interests of conflicts regulate to attempt often investment the implementing Agreements a conflictofinterest. contain provisions impeded to vote in the relevant meetings if they are deemed to be in law corporate mandatory provisions whereby shareholders statutory and board members are generally, More horizontal (portfolio company-portfoliocompany)conflictsofinterest. and (company-fund) vertical with deal to up set often At portfolio company level, a related-party transaction committee is notably related-party transactions,andotherconflictsofinterest. fund, the by undertaken transactions issuing certain entail on opinions typically attributions which of Council, Advisory At fund level, conflicts of interest are typically addressed through an private equitysellersareinvolved. are where policies notably market, Portuguese the insurance in introduced being indemnities slowly and warranties addition, In become morecommonintransactions. have mechanisms adjustment price “locked-box” years, recent In insurance banks, (especially sectors regulated some in deals waiversfrom competitionauthorities;and e) d) in asset deals (e.g. transfer of business via agreement or prior securingfinancingforthetransaction; sometimes, c) or, direct in banks, b) financing from waivers a) in transactions for formalities Portugal generallyinvolvethefollowing: other and constraints Timetable . Howdodirectorsnominatedby privateequity 3.7 culpable actionbytheinvestor. declared insolvent if it is proven that the insolvency was the result of a facto de exercise they if a investors, as qualified be to it allow to company the in influence equity significant private hand, other the On . Havetherebeenanydiscernibletrendsintransaction 4.2 Whatarethemajorissuesimpactingtimetablefor 4.1 Transaction Terms: General 4 of otherportfoliocompanies? terms overrecentyears? prior require institutions) approval fromtherespectiveregulatoryauthorities. financial other and companies from opinions and meetings employment employees’ representativestructures; hall to town notably related matters, formalities demerger), statutory indirect changesofcontrol; disclosure obligationsandfinancingissues? party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust board member, may be held liable should the company be company the should liable held be may member, board iclg to: privateequity 2019 break feesorsimilarpay-outsinpublictenderoffers. n h ohr ad “okdbx cnieain tutrs are structures consideration “locked-box” increasingly beingused(moreprevalentonthesell-side). hand, other the On usually preferred by private equity investors acting on the buy-side. is structure This capital. working net of accrual relevant, when (ii) (i) include: companies portfolio deduction of the amount corresponding to non-current net debt; and of shareholders to Portugal in investors equity private by payable price the to variations Common re in transaction of type this of example Portugal, itisnotpossibletoassesspatternsortrends. one but is there Since family officePortuguese holding company and a European a infrastructure fund). by formed venture joint a by 2012, in operator, toll highway a Brisa, of acquisition the (i.e. Portugal in recorded been ever has transaction public-to-private type equity private one Only Whatparticularfeaturesand/orchallengesapplyto 5.1 © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 when provided, also are applicable. covenants Asset-specific non-compete include provisions. usually undertakings other and Covenants Whatisthetypicalscopeofothercovenants, 6.3 Whatisthetypicalpackageofwarranties/indemnities 6.2 Whatconsiderationstructuresaretypicallypreferred 6.1 Whatdealprotectionsareavailabletoprivateequity 5.2 e te nwr o usin . aoe Tee r, however are, There above. 5.1 question to answer the See t el, pcfc nente (oal tx nente) r also are indemnities) tax included. (notably indemnities specific to “buyer-friendly” more deals, opposed in (as Especially companies offered. are portfolio management) the the of mostly assets involving underlying warranties and representations Standard oasliã,glã ee,Sae aSla&ascao portugal morais leitão,galvãoteles,Soares daSilva&associados o Portuguese listed companies which advise against the adoption of commendations in the Corporate Governance Code applicable Code Governance Corporate the in commendations Transaction Terms: Private Acquisitions 6 Transaction Terms: Public Acquisitions 5 transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private on thebuy-side,inyourjurisdiction? acquisitions? commonly dealtwith? equity selleranditsmanagementteamtoabuyer? undertakings andindemnitiesprovidedbyaprivate team toabuyer? offered byaprivateequityselleranditsmanagement by privateequityinvestors(i)onthesell-side,and(ii) investors inyourjurisdictionrelationtopublic

, frequently) onhavingescrowaccountswithpartoftheprice. occurs it (and keener are hand, other the on buyers, equity Private account/price retentionmechanismstothebenefitbuyers. representations and warranties but may occasionally provide escrow reaching funds maturity,of breach for securities providing from away shy to prefer by backed ones especially sellers, equity Private warranties against (typically includedindisclosureletters)arealsocommonlyused. disclosures Specific transactions. exit equity Caps and baskets are the most usual limitations to liability in private liability cap. the of percentage a as calculated usually is premium insurance The fraud; andmattersknowntothebuyerduringduediligence. matters; tax certain liability; criminal include: exclusions Typical now more commonintransactionsinvolvingprivateequitysellers. is but used scarcely was insurance indemnity and Warranty listing inPortugal. No private equity investment has ever generated an exit involving a Reverse breakfeesarenotcommon. seller’s the obligations, typical remedyistoclaimfordamages. funding of non-performance of case In limited a extent, bankguaranteesarealsoprovided. To common. are letters guarantees/comfort Corporate . Do(i)privateequitysellersprovidesecurity(e.g. 6.6 Whatlimitationswilltypicallyapply totheliabilityofa 6.5 To whatextentisrepresentation&warrantyinsurance 6.4 . Whatparticularfeaturesand/orchallengesshoulda 7.1 Arereversebreakfeesprevalentinprivateequity 6.8 Howdoprivateequitybuyerstypicallyprovide 6.7 Transaction Terms: IPOs 7 the managementteam)? warranties, covenants,indemnitiesandundertakings? the typicalcostofsuchinsurance? exit? If so,whattermsaretypical? under anequitycommitmentletter, damages,etc.)? warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and private equitysellerandmanagementteamunder exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) private equitysellerbeawareof inconsideringanIPO transactions tolimitprivateequitybuyers’ exposure? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and www.iclg.com 223 portugal 224 portugal © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com the sovereigndebtcrisisandensuing recapitalisationmeasures. as banks foreign by following sheets balance their improving still are banks Portuguese increasingly syndicated being is debt This has risen inrecentyears. finance) project finance, (acquisition activity financing debt rates, interest low of continuance the to as well as Portuguese centres, large urban in market estate real blooming a to part in Due Whatrecenttrendshavetherebeeninthedebt 8.3 financial of deductibility expenses, shouldalsobetakenintoaccount. the limit which law rules Portuguese stripping” under “interest financing, debt raising planning When of possibility the pursuing leveragedbuyouts. is limiting shares) thus providing law, own Portuguese company’s or under the restricted of loans acquisition contracting the for (i.e. securities assistance financial that noting worth is it response, above-mentioned the Notwithstanding Arethereanyrelevantlegalrequirementsor 8.2 equity by bankingsyndicates. private in a rare and are acquisition facility finance issuances and the few issuances which exist are subscribed Bond acquisition an facility). revolving of composed (usually loan secured facilities senior through made usually is transactions equity When it does occur (in larger transactions), debt financing of private the and rare issuance ofhigh-yieldbondsevenmoreso. thus is transactions of financing Debt holders. unit its from funds’raised equity,the are through exclusively almost investors made equity private involving deals small, is Portugal in transactions equity private of value average the that fact the to Due Pleaseoutlinethemost common sourcesofdebt 8.1 equity portfoliocompanyeverbeinginitiatedinPortugal. private a of sale the for process dual-track any Weof aware not are Doprivateequitysellersgenerally pursueadual-track 7.3 as no IPO exit from a private equity investment has ever been made. As mentioned above, there is no factual basis to answer the question Whatcustomarylock-ups wouldbeimposedon 7.2 oasliã,glã ee,Sae aSla&ascao portugal morais leitão,galvãoteles,SoaresdaSilva&associados Financing 8 through asaleorIPO? private equitysellersonanIPOexit? financing marketinyourjurisdiction? financing) ofprivateequitytransactions? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof bonds). for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare eea cls o a i mn ohr uidcin, lal sae that state clearly variable managementcompensationistaxedascapitalgains. jurisdictions, other many in as to, calls tax several a from that, fact been have the there clear, not is income such to of treatment perspective, due such, As legislation. tax from clear not is compensation and managers’ equity interest private variable carried other from derived income of treatment the Alas, the general exemptiononcapitalgainsobtainedbynon-residents. under exempted not is it if entity, non-resident the and, regarding activity business a of the out if income (“PIT”) the derives tax entity income resident personal and CIT 10% to subject are Capital gains derived by the sale of units in the private equity funds for companies). rates tax income corporate current the and individuals for rate final 28% (i.e. treatment special any receive not do shareholders its to companies equity private by payable dividends hand, other the On deduction is used to invest in companies with high growth potential. such as long as years, preceding five the of base tax the of sum the of limit the to corresponding sum a of allowance tax a from benefit fsoe tutrs r nt omn wn msl t the to mostly in transactions owing up setting common of repercussions not tax disadvantageous are structures Offshore general cases, thereis25%corporateincometax(“CIT”)withholdingtax. The other in entities; blacklisted of entities. case the in 35% resident is tax withholding by 25%), than (more or directly indirectly held, entities non-resident are beneficiaries the when beneficiary is an entity resident in a blacklisted jurisdiction; and (ii) the (i) when: applicable are rule exemption the or 10% the Neither derived incomemaybeexemptedfromtaxinPortugal. the attributable, is income the which to Portugal in establishment gains capital on (resident or non-resident) or if they are an entity with no permanent tax from exempted entity an is income) such of If the unit holder in the private equity fund (i.e. when the beneficiary a of business activity). out income this derives (that Portugal in resident individual (whether tax resident entity (without permanent establishment in Portugal), or an withholding 10% a to personal or corporate income tax), provided subject the unit holder is a non- is hand, other the tax. income on funds, corporate equity tax private the in from holders unit for the by exempt derived Income are vehicles, such neutral as considered and purposes, are funds equity Private Tax considerations invariably play a role in structuring management rvt eut cmais ( companies equity Private vehicles the execute transaction). Luxembourg to BidCo Portuguese through a incorporating invest then (typically usually managers fund Whatarethekeytaxconsiderations forprivateequity 9.1 refinancing various borrower creditprofiles. been increasing have and rates diminishing of there consequence a as transactions times recent in Finally, . Whatarethekeytax-efficientarrangementsthat 9.2 blacklisted entities (see paragraph above). Nevertheless Tax Matters 9 off-shore structurescommon? shares, deferred/vestingarrangements)? investors andtransactionsinyourjurisdiction? Are equity acquisitions(suchasgrowth shares,incentive typically consideredbymanagement teamsinprivate iclg to: privateequity 2019 oidds e aia d risco de capital de sociedades , international also ) os o apa t b, oee, nnmu ad t a face may it and unanimous however, be, challenges fromtaxpayersinthefuture. to appear not does otgl nnerpel hl i te 2 ots ro t the to prior months 12 the distribution ofdividends. in held uninterruptedly Portugal hold, to has it directly or 12.6%, indirectly, at least least a 10% stake at in the company resident of in rate tax nominal CIT a to State residence its in subject be to has income the of beneficiary the that rate on the dividends paid by a company in Portugal, besides the fact Under the outbound regime, to benefit from the 0% withholding tax 10% ofthesharesorvotingrights. least at of period holding 12-month continuous a as such met, are its to in regime) requirements some transparency provided tax-exempt, are resident shareholder corporate tax the company to subject a not by (and Portugal distributed dividends that foresees force in currently regime Exemption Participation Portuguese The a Portuguesecompany. exemption regime; and the tax treatment of dividends distributed by the of Additionally,participation the considerations: tax key two are there acquisition of date original participations. the preserving time same the at but realised, asset is value in up step no that and/or order in contribution, de-merger, merger, of cases also for is allowing reorganisations available, corporate the on regime neutrality tax A two least at for stocks relevant the own must Employees ■ and enterprises small or micro as qualify must Employers ■ For thistaxexemptiontoapply: start-ups/emerging companies’ employees. from arising stock option plans up gains to the amount of of €40,000 received PITby the for exemption the foresees that benefit tax a It is worth mentioning, however, that the 2018 State Budget includes private in equity transactions. management remunerate to arrangement tax-efficient typical one no is there physical but earn-outs, of or shares form “phantom” shares, a in are they whether packages, compensation © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 as being subject to stamp duty ( consider management fees charged by management entities to funds to authorities tax Portuguese caused has law the Ain change recent Have therebeenanysignificantchangesintax 9.4 Whatarethekeytaxconsiderationsformanagement 9.3 oasliã,glã ee,Sae aSla&ascao portugal morais leitão,galvãoteles,Soares daSilva&associados participation higherthan5%intherespectivecompany. a hold not and body corporate any of member a be not years, years withinthetechnologicalsector. have developed their activities for a period not longer than six investment intoanewacquisitionstructure? anticipated? teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities teams thataresellingand/orrolling-overpartoftheir imposto do selo ). This interpretation venture capitalinvestmentinthePortuguesemarket. crowdfunding equity for relevant of increasingly becoming is which Portugal, creation in platforms the for which framework legislation, a crowdfunding provides new the is noting, worth Also applicability of “EU passport rules” (i.e. the ability to market liquidity appropriate an employ ) f shall entities managing delegate to intention e) the of informed be shall CMVM d) possible of situations identify to taken be should measures c) hierarchically and functionally be should management risk of authorisation prior the to b) subject is incorporation their a) Such funds are now subject to, period countingfromthedateofinitialinvestment. five-year a during exercised be may which rights reimbursement include no are there which not regarding and leverage do through acquired assets portfolios respective the when million, €500 (ii) or leverage; with acquired assets include portfolios respective the when million, €100 (i) exceeding: value a with management under assets have which undertakings collective of entities management no. 18/2015 is imposing a more demanding regulatory framework to However, the main innovation put in place by the enactment of Law capital venture and equity private – requirements funds Own c) management the of aspects certain change may Management b) of regulations management the – compartments Investment a) include: major Highlights several Portugal. in equity provided private of regulation the to 18/2015 changes no. Law and 16/2015 no. Law 5 aqiiin o cnrl f rtcl nrsrcue y non-EEA by infrastructure critical of control of acquisitions 15, September of 138/2014, no. Decree-Law of provisions the Under foreign to investment controlsincriticalinfrastructure. apply which exist rules in certain transactions case, any equity In private Portugal. of scrutiny enhanced no is There 01Havetherebeenanysignificantlegaland/or 10.1 02Areprivateequityinvestorsorparticulartransactions 10.2 0LegalandRegulatoryMatters 10 countries). third or countries EU other in funds equity private of units management system;and of theabove-mentionedmanagingentities; services to third parties for carrying out functions in the name and manage prevent, to as well monitor conflictsofinterest; as interest of conflicts portfolio management function; the including units, operating the from separated CMVM; .2 o te mut f h nt au o ast under assets of value net the of management exceeding€250million. to amount corresponding the funds of own 0.02% their have must companies of unitholders. in reduction and manager investment management fees) in private equity the funds without the consent of several details (e.g. regulations into divided be may compartments, named“subfunds”. fund the private equity or venture capital funds may now establish that anticipated? jurisdiction (e.g.onnationalsecuritygrounds)? private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting subject toenhancedregulatoryscrutinyinyour inter alia , the following obligations: www.iclg.com 225 portugal 226 portugal © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com law’s the of foul fall not provisions. to effort an in procedures customer” officialyour instated “know have Portugal in players equity private the major Consequently,the is. who LPs such of owner and beneficial ultimate LPs) fund (the is clients the its what of know structure to controlling obliged be instance, for due shall, investor on equity impact private the as an structuring, fund during have taken procedures diligence duties reporting aforementioned The institutions). to applicable are obligations private equity fund managers These (as well as to banks and other financial terrorism. of financing the flows for purposes of your preventing money laundering transactions and “know others, jurisdiction), among customer” and due diligence procedures and disclosure of monetary on, Portuguese obligations the several to establishes Directive Laundering Money 5 the transposes partially (which 18 August of 83/2017, no. Law Hasanti-briberyoranti-corruptionlegislation 10.4 perform thereviewinsuchmatters). due diligence (sometimes because other advisors will be engaged to review. under agreements Often, insurance, competition and tax matters will material be excluded from and litigation for thresholds materiality have typically will and months three to one from range diligence due conducting for Timeframescompany. a in investing Private equity investors usually undertake legal due diligence before Howdetailedisthelegalduediligence (including 10.3 to oppositionbythegovernmentarenullandvoid. Transactions which have not been previously cleared and are subject government. Portuguese the by review to subject be may residents oasliã,glã ee,Sae aSla&ascao portugal morais leitão,galvãoteles,SoaresdaSilva&associados materiality, scopeetc.)? diligence, contractualprotection,etc.)? approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors th

may arise. liability subsidiary no relationship), group horizontal (i.e. investor assuming that they are both directly held by the same private equity another, one before liable being companies portfolio of case the In delay inperformanceoftheobligationquestion). before the creditors of said portfolio companies liable (following a 30-day severally and jointly of are they that “co-mingling state and sorts a of assets” assume Portugal, provisions in law incorporated corporate company mandatory portfolio a of the capital of 100% share holds latter the if companies, equity private for As benefit ofsuchcompanies. of the portfolio companies, unless it has provided guarantees for the In this sense, the fund may not be liable for debts and other liabilities respectively. participants, and companies portfolio its to relation in Private equity funds enjoy full limited liability and asset partitioning agreements usuallycontainarbitrationclauses). transaction why is (which courts State the in disputes of resolution the for timings concerning notably remain, challenges some Alas, This isalsoreflectedintheprivateequitysector. jurisdiction. “transaction”-friendly outside and and “business”- inside a as both investors to itself establishing been has Portugal 05Arethereanycircumstancesinwhich:(i)aprivate 10.5 11Whatotherfactorscommonlygiverisetoconcerns 11.1 1OtherUsefulFacts 11 the liabilitiesofanotherportfoliocompany? considering aninvestmentinyourjurisdiction? and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor iclg to: privateequity 2019 morais leitão, galvão teles, Soares da Silva & associados portugal

Ricardo Andrade Amaro Pedro Capitão Barbosa Morais Leitão, Galvão Teles, Morais Leitão, Galvão Teles, Soares da Silva & Associados Soares da Silva & Associados Rua Castilho, 165 Rua Castilho, 165 1070-050 Lisbon 1070-050 Lisbon Portugal Portugal

Tel: +351 21 38174 00 Tel: +351 21 38174 00 Email: [email protected] Email: [email protected] URL: www.mlgts.pt URL: www.mlgts.pt

Ricardo Andrade Amaro is a partner at Morais Leitão and is part of the Pedro Capitão Barbosa is an associate with Morais Leitão and is part portugal corporate, M&A, capital markets team and energy law team. of the corporate, M&A and capital markets team. Pedro joined the firm in 2011, and previously worked with the real estate team. He is a lawyer with great experience in corporate and commercial law, securities law, as well as in energy law. Ricardo has, inter alia, acted Pedro has relevant experience in corporate transactions (restructurings, as legal advisor in the setting up of the first private equity fund in joint ventures) and mergers and acquisitions in several industries (with Portugal exclusively dedicated to the recovery of companies a particular focus in renewable energies) and additionally regularly (turnaround fund), which is currently the largest Portuguese private partakes in legal advice concerning investment fund structuring and equity fund. regulation. In the area of corporate and commercial law, he has acted as legal Pedro Capitão Barbosa has a degree from the New University of advisor in several mergers, restructuring, acquisitions and sales of Lisbon (2010) and has obtained a LL.M. in Finance & Law from the companies, on behalf of domestic and foreign clients. Duisenberg School of Finance (in partnership with the University of Amsterdam). He has been a member of the Portuguese Bar He has also acted as legal advisor in the setting up of several initial Association since 2014. public offerings, including the largest initial public offering ever made in Portugal and the largest in Europe during 2008, and also in the structuring of several public share takeover bids. Ricardo was also engaged as a junior assistant at the Law faculty of the University of Lisbon from 2005 to 2009. Ricardo Andrade Amaro has a law degree from the University of Lisbon (2002) and a postgraduate degree from the Catholic University in Corporate Law (2004). He has been a member of the Portuguese Bar Association since 2004 and of the Securities Institute (also since 2004).

Morais Leitão, Galvão Teles, Soares da Silva & Associados (Morais Leitão) is a leading full-service law firm in Portugal, with a solid background of decades of experience. Broadly recognised, Morais Leitão is referenced in several branches and sectors of the law on national and international level. The firm’s reputation amongst both peers and clients stems from the excellence of the legal services provided. The firm’s work is characterised by unique technical expertise, combined with a distinctive approach and cutting-edge solutions that often challenge some of the most conventional practices. With a team comprising over 250 lawyers at a client’s disposal, Morais Leitão is headquartered in Lisbon with additional offices in Porto and Funchal. Due to its network of associations and alliances with local firms and the creation of the Morais Leitão Legal Circle in 2010, the firm can also offer support through offices in Angola (ALC Advogados), Hong Kong and Macau (MdME Lawyers), and Mozambique (HRA Advogados).

iclg to: private equity 2019 www.iclg.com 227 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 30 Singapore christian chin

allen & gledhill llp lee Kee yeng

1 Overview the region. We anticipate continued growth of the MAS’s external fund manager programme which attracts and supports global asset managers in the public markets space to anchor in Singapore. 1.1 What are the most common types of private equity In late 2018, the MAS announced an incentive programme that will transactions in your jurisdiction? What is the current place up to US$5 billion for management with private equity and state of the market for these transactions? Have you infrastructure fund managers. MAS has also pledged to work with seen any changes in the types of private equity private market funding platforms in order to connect growth transactions being implemented in the last two to companies to the broader investor network. Longer term, we expect three years? to see increased development of the private markets financing channels. The most common types of private equity transactions in Singapore are venture capital, buyout transactions, and minority investments in The Singapore Academy of Law and Singapore Venture Capital and portfolio companies. Private Equity Association have also worked together to develop and launch a set of model agreements for use in seed rounds and The volume of private equity activity in Singapore remained strong early stage financing, called the Venture Capital Investment Model in 2018, with the technology and real estate sectors continuing to Agreements (VIMA), with the aim of cutting down transaction costs generate keen interest. FinTech, in particular, has generated much and reducing friction during the negotiation process. attention in the last two to three years. Noteworthy private equity transactions include Grab Holdings, which raised US$2 billion in its 2018 funding round with Toyota Motor Corp and other investors, 2 Structuring Matters Bain Capital Private Equity’s acquisition of Singapore- headquartered DSM Sinochem Pharmaceuticals for US$582 million, Allianz’ acquisition of a minority stake in Ocean Financial 2.1 What are the most common acquisition structures Centre for US$392 million and Standard Chartered Private Equity’s adopted for private equity transactions in your jurisdiction? privatisation of crane supplier Tat Hong Holdings for US$302 million. Private equity investments are typically structured with an off-shore holding company whose shares are held by the private equity investor 1.2 What are the most significant factors encouraging or and management. A BidCo is sometimes used under the holding inhibiting private equity transactions in your company to hold the target’s shares and/or to take on acquisition debt. jurisdiction?

Singapore is one of the most developed markets in South-east Asia, 2.2 What are the main drivers for these acquisition with a stable political-economic environment, strong infrastructure structures? and stable regulatory environment, investor-friendly tax regime and skilled workforce with a strong pool of professional talent. The The main drivers for these acquisition structures are tax efficiency Monetary Authority of Singapore (MAS) fosters growth in private and financing requirements. market financing and the asset management industry with a view to promoting Singapore as the leading financing centre in the region. 2.3 How is the equity commonly structured in private These factors continue to draw private equity investors, as equity transactions in your jurisdiction (including Singapore provides a good base from which to make investments in institutional, management and carried interests)? the region. Private equity investors typically invest through a combination of 1.3 What trends do you anticipate seeing in (i) the next 12 ordinary and/or preference equity and convertible debt, with the months and (ii) the longer term for private equity latter two forming the bulk of the investment. transactions in your jurisdiction? Key management may be granted equity sweeteners whose structures can vary substantially – from ordinary shares with a Over the next 12 months, we expect private equity sentiment to vesting schedule and profit participating options exercisable on exit, remain upbeat as there continues to be sustained investor interest in to subordinated equity.

228 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London as badleavers. treated be usually will dismissal summary justifying circumstances as good leavers and persons who are dismissed for cause or in other treated be usually will disability or death to due leave who Persons be the eventofanexitbyprivateequityinvestor. may equity such in right drag-along a (b) and which cost, at or value fair either at acquired under provisions leaver” “bad and leaver” “good (a) to subject usually is equity Management exit. an Management equity typically vests over three to five years, or upon The typical range of equity allocated to management is 10% to 20%. priority) orpreferredshares. maintain (to debt mezzanine or convertible of form the take usually are positions investors equity private by investments Minority returns. preferred minority taking when ensure to need the and below) 3 section in specified (as governance considerations key The Ifaprivateequityinvestoristakingminority 2.4 allen &gledhillllp © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 of issuances further on restrictions include investors over equity rights veto private by enjoyed enjoy rights veto Typical actions. corporate typically material investors equity private Yes, Doprivateequityinvestorsand/ortheirdirector 3.2 take-private transactiongovernedbytheSingapore Takeover Code. a of part as into entered arrangements contain they unless available filed with ACRA and are generally not required to be made publicly Authority Regulatory (ACRA). Corporate Shareholders’ agreements are, however, and not required to be Accounting the with filing portfolio the in out set be upon public the company’sto available made is which constitution, also will arrangements the of Some resolution deadlock and procedures. undertakings non-compete business, of operation continued the on covenants securities, of transfer the agreement. Typical arrangements include veto rights, restrictions on with more than one shareholder are usually set out in a shareholders’ The governance arrangements of private equity portfolio companies What arethetypicalgovernancearrangementsfor 3.1 Forwhatreasonsisamanagementequityholder 2.6 Inrelationtomanagementequity, whatisthetypical 2.5 GovernanceMatters 3 position, aretheredifferentstructuring your jurisdiction? acquisition provisions? considerations? position, whatvetorightswould theytypicallyenjoy? etc.)? Ifaprivateequityinvestor takesaminority disposals, businessplans,related partytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor in yourjurisdiction? arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such usually treatedasagoodleaverorbadin what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and piae qiy netr os o oe n dt t minority to (or duty shareholders any management as owe such not shareholders does investor equity private A the directors. of instead shareholders the to rights veto such giving by addressed often is company,concern the such to owed duty fiduciary their by that the directors’ ability to exercise their veto rights may be limited rights concern a is there Where sit. they veto board whose on company the to However, level. duty fiduciary overriding their to subject board are directors by exercised and level shareholder the both at arrangements veto enforce generally will courts Singapore igpr cmais eur a lat n Singapore-resident who has been convicted for offences relating to fraud or one dishonesty) least at director. Certain persons (e.g. an undischarged bankrupt or require a person companies Singapore down. struck be also will nature in penal as is regarded are that Provisions restraint the that show can reasonable andseekstoprotectalegitimateproprietaryinterest. enforcement seeking party the unless unenforceable are policy.These public against and trade on restraint a as regarded are provisions non-solicit and Non-compete public policy. those to for contrary as regarded otherwise or unlawful are which except provisions company, Singapore a to relation in agreement shareholder a of provisions the uphold generally courts Singapore . Arethereanydutiesowedbyaprivateequityinvestor 3.4 Arethereanylimitationsonthe effectivenessofveto 3.3 . Arethereanylegalrestrictionsorotherrequirements 3.6 Arethereanylimitationsorrestrictionsonthe 3.5 future conductofthecompanyorawinding-up. may the regulating court orders including fit, deems it the as remedies such order made, is oppression of finding a If shareholders. conducted in a manner which is oppressive to one or more minority 216 of the Companies Act if the affairs of a Singapore company are Section under recourse seek can shareholders minority However, capital plan, disposals. business and budget annual expenditures above a certain threshold and material the acquisitions and as such matters the stake, operational over rights minority veto have also the may investor equity of private size party the related on Depending and winding-up transactions. business, of change debt/equity, typically addressed? typically addressed? portfolio companies? non-compete andnon-solicitprovisions)? shareholders (or to minorityshareholderssuchasmanagement the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) equity investorsthatnominate directors toboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements vice versa )? Ifso,howarethese www.iclg.com Singapore ie versa vice . ). 229 Singapore 230 Singapore © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com of use the include transactions equity private in trends Recent Have therebeenanydiscernibletrendsintransaction 4.2 Whatarethemajorissuesimpactingtimetablefor 4.1 Howdodirectorsnominatedby privateequity 3.7 instructions anappointeddirectorisaccustomedtoactupon). as appointed considers a “shadow court director” (usually a These person whose directions formally the or whom person any persons to also company. but company, to the of the directors only to not duty apply fiduciary obligations law common a owe also directors Such Companies Act). the of 157 (Section duties its dischargeof the in diligence reasonable with and honestly times all as directors (Section 158 of the Companies the Act) and a duty to act at from authorisation capacity their in received seek information disclosing to prior company to the obligation of an 156 Act), (Section Companies company the with transactions in interests company.Singapore the their disclose to obligations include These Singapore companies have duties under the Companies Act are not eligible to be directors of a Singapore company. Directors of allen &gledhillllp 120 workingdays(inrespectofaPhase2review). and review) 1 Phase a of respect (in days working 30 approximately is clearance competition for timeframe regulated The and clearances. competition etc.) in telecommunications, insurance, holdings banking, to (e.g. industries relation in approvals industry-specific include timeline the affect materially may that approvals regulatory Key approvals. regulatory other and deals) locked-box of purposes scope of due diligence (including the preparation of financials for the Other factors that may affect funding the timetable for transactions include the certain to satisfy thisrequirementshouldalsobetakenintoaccount. to needed time subject the transaction, the launching to prior are requirements transactions public-to-private As meeting. shareholders’ the for Singapore period notice the the by and Exchange clearance for shareholders’ needed time the to include to subject weeks is privatisation the approval, the timetable will be stretched by an additional Where five to seven are clearances required. regulatory other no assuming complete, to months three to two between take generally Code Takeover Singapore the to subject transactions Privatisation transaction. the announcing to and the clearances required from the Securities Industry Council prior Code Takeover Singapore the by imposed timelines mandatory the For public-to-private transactions, the key drivers of the timetable are their consentevenifdirectorshavetoabstainfromvoting. without taken be cannot decisions certain that ensure to ability the their veto rights accordingly so that the investor, as a shareholder, has craft should investors equity Private abstain resolution. the and on voting from board the to conflict the of nature the disclose should Directors who face a conflict of interests (whether actual or potential) Transaction Terms: General 4 terms overrecentyears? disclosure obligationsandfinancingissues? and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust of otherportfoliocompanies? party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof

vis-à-vis

acquisition costsforpublic-to-privatetransactions. offer sweeteners to key shareholders, and this often results in higher be treated equally also limits the ability of private equity investors to Singapore TakeoverThe to Code’sshareholders all for requirement can bewithdrawn. of announcement, with limited covenants under which the financing time the at place funds’in be must financing deal certain that means requirement This obtained. being financing upon, conditional or to, subject be cannot announced, once takeover, public a make to intention firm A structuring. deal on impact significant Singapore a have the by which restrictions and governed rules certain imposes Takeoverwhich Code, are transactions Public-to-private u-ie rvt eut ivsos lo ed o rfr l cash all prefer to tend to amount escrow an require typically and also structures, consideration investors equity private Buy-side are structures Locked-box levels). sometimes usedbutarelesscommon. capital working for adjust to (typically post-completion prepared be to accounts on completion based cash adjustments to all subject prefer are to that structures tend consideration sell-side the on investors equity Private via thenegotiateddealwithseller. than other stake a by acquiring from process purchasers sale potential preventing the control to ability seller’s the protect standstill clauses sell-side, the On other time. pursue of period actively specified a to for buyers ability seller’s the limit exclusivity which or clauses no-shop include buy-side the on protections Deal Takeover Code,theyarenotcommonlyused. Singapore the under permitted are fees break be While not will enforceable. it loss, a of pre-estimate a to opposed as penalty a as in the best interests of shareholders; if a break fee has been assessed are and negotiations commercial ordinary during upon agreed were the of board provisions fee break the that adviser financial its and by company offeree made offeree be the of must value confirmations the and Code of company 1% Takeover than Singapore more no the be it imposed, that requires is offeror). fee an break on a (levied Where fees break reverse and a company) on (levied target fees break include acquisitions public to relation in Singapore in investors equity private to available protections Deal . Whatdealprotectionsareavailabletoprivateequity 5.2 Whatparticularfeatures and/orchallengesapplyto 5.1 debt and/orworkingcapitalasattheclosingdate. structures box locked- of introduction the and insurance indemnity and warranty . Whatconsiderationstructuresaretypicallypreferred 6.1 rnato em:Pbi custos Transaction Terms: Public Acquisitions 5 Transaction Terms: Private Acquisitions 6 commonly dealtwith? on thebuy-side,inyourjurisdiction? acquisitions? investors inyourjurisdictionrelationtopublic transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private by privateequityinvestors(i)onthesell-side,and(ii) in lieu in of purchase price adjustment mechanisms for mechanisms adjustment price purchase of iclg to: privateequity 2019 Singapore The typical cost of such insurance is around 1.5% of the insured amount. the of 1.5% around is insurance such of cost typical The liabilities. anti-bribery/corruption and liabilities environmental risks, pricing losses, purchase price adjustments, secondary tax liabilities, transfer consequential fines, criminal or civil warranties, forward-looking matters, known/disclosed include outs/exclusions carve Customary typical policy limits range from 20% to 30% of the insured amount. Typicaland amount insured the of 1% to 0.5% from range excesses the privateequityinvestor’s bidincompetitivesituations. on liability caps and on the buy-side to improve the attractiveness of among popularity private equity investors. It is used on the sell-side to bridge the gap gaining is insurance indemnity and Warranty the managementteam. not by given be generally would these though seller, equity are private the by given non-solicits or Non-competes leakage. value the any ensure minimise to and to course ordinary the order in on carried in is business pre-completion business of conduct the to as undertakings of set a to agree typically sellers equity Private way tobridgetheliabilitygaps(seequestion6.4below). a as popularity gaining also is insurance indemnity and Warranty to limited liability caps of between 10% to 25% of the consideration. subject warranties of scope the increase to prepared be may sellers equity private the significant, not is stake management a the Where with together buyer, the management representationmadetotheprivateequitysellers. to warranties comprehensive give to expected are they stake, significant a holds management Where and/or indemnitiestowarrantiesontitle,capacityandauthority. warranties their limit to seek typically would sellers equity Private Whatisthetypicalpackageofwarranties/indemnities 6.2 profit or payments Earn-out guarantees arealsopreferredmechanismstobridgevaluationgaps. claims. warranty for aside set be allen &gledhillllp © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 under caps. Liability position. bargaining covenants, indemnities and undertakings may not be subject to such party’s each of strength the and warranty of type the on depending paid consideration the usually are and warranties seller capped, and the other amount of the cap may range from 10% to 100% of equity for private liabilities The team’s management paid. consideration of amount the at capped or uncapped either is liability seller’s equity private authority,and capacity title, to limited are warranties the Where the Whatlimitationswilltypicallyapplytotheliabilityofa 6.5 To whatextentisrepresentation&warrantyinsurance 6.4 Whatisthetypicalscopeofothercovenants, 6.3 offered byaprivateequityselleranditsmanagement the typicalcostofsuchinsurance? equity selleranditsmanagementteamtoabuyer? team toabuyer? warranties, covenants,indemnitiesandundertakings? private equitysellerandmanagementteamunder exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) undertakings andindemnitiesprovidedbyaprivate enforceable againstthebank. not usually are and sellers to comfort soft are provide to intended only letters commitment bank but fund, equity private the against are funds required. certain Such commitments are generally enforceable where by the seller financing of availability the on comfort provide to cases certain in provided be also a may letter commitment include bank A transaction. the complete typically to resources has financial sufficient it letters that fund equity private bid the from warranty or or commitment agreements purchase The ultimately dependsontheirrespectivebargaining strengths. provided by sellers, the agreement reached between buyer and seller being security such on insist to try will buyers equity private While claims. Generally, private equity sellers do not provide security for warranty neetd esnTascin. f h piae qiy seller equity private the If Transactions. Person Interested ■ lock-up to subject be may seller equity Aprivate Lock-ups. ■ to required is prospectus IPO An Disclosure. Prospectus ■ Prospectus Liability. A private equity seller participating as a ■ Reverse breakfeesarenotcommoninSingapore. . Howdoprivateequitybuyers typicallyprovide 6.7 Do(i)privateequitysellers providesecurity(e.g. 6.6 . Whatparticularfeaturesand/orchallengesshoulda 7.1 Arereversebreakfeesprevalentinprivateequity 6.8 also customary. a and made General limitations, such as time limits within which claims must be set aside fromtheconsiderationtosatisfysuchclaims. be may amount escrow an identified, are risks known Where Transaction Terms: IPOs 7 under anequitycommitmentletter, damages,etc.)? the managementteam)? an “interested person” for the purposes of the listing rules of rules listing the of purposes the for person” “interested an be will it post-listing, more or 15% of shareholding a retains Singapore the of rules listing Exchange –pleaseseethediscussion inquestion7.2below. the under requirements background including information, information onallvendorsintheIPO. material all disclose or statements misleading or omissions intheprospectus. false for penalties civil and of criminal imposes offering law public Singapore the IPO. the of the under part securities of as accuracy issued the be for to responsible prospectus is IPO an in vendor exit? If so,whattermsaretypical? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and private equitysellerbeawareofinconsideringanIPO transactions tolimitprivateequitybuyers’ exposure? de minimis de threshold before claims can be made, are made, be can claims before threshold www.iclg.com Singapore 231 Singapore 232 Singapore © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com show a willingness to support leveraged finance transactions, taking to continue banks and stable fairly remains market financing The Singapore. in transactions equity private for finance debt of source Traditional bank financing through loans remains the most common Pleaseoutlinethemostcommonsourcesofdebt 8.1 and notanIPO. sale a through realised been have deals dual-track most Recently, that consummationofthepreferredoptionisimminent. apparent becomes it as soon as dual-track the end to keen also are only are processes more likely to be consummated. exit It follows that private equity is sellers option which dual-track unsure are sellers equity private costly,when undertaken are they Because Doprivateequitysellersgenerallypursueadual-track 7.3 the reflecting lock-up the acquiring suchshares,comparedtotheIPOpriceforshares. to subject in seller equity private the by enjoyed discount price proportionate shares the date; the of preceding months proportion 12 of period a shares the within of acquired proportion a over given be to lock-up six-month a require also will Exchange Singapore the of rules listing the listing, of time the at 15% than less of shareholding a retains seller equity private the If listed. is company the which upon criteria admission the on depending listing, after months 12 or six either of period a require a lock-up to be given by the seller over all of their shares for will Exchange Singapore the of rules listing the listing, of time the at more or 15% of shareholding a retains seller equity private the If Whatcustomarylock-ups wouldbeimposedon 7.2 a into company portfolio the of conversion The Takeovers. ■ allen &gledhillllp Financing 8 h lsig ue my eur anucmns o e made be to announcements and/or priorshareholderapprovaltobeobtained. transactions”. require may rules person listing the “interested transaction, be the of value the of materiality the on Depending will associated unlisted companies) or subsidiaries its of any (or company listed the and associates) its of any (or seller equity private the between transactions any and Exchange Singapore the bonds). for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin through asaleorIPO? and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare private equitysellersonanIPOexit? anticipated levelofpost-listingshareholdinginterest. exit should bear these thresholds in mind when structuring its six-month period. A private equity seller considering an IPO additional acquires any within rights voting the of 1% than more carrying shares and company, the of rights voting the company; or (b) holds at least 30% but not more than 50% of the of rights voting the of more or 30% acquires (a) either: be made by any person who, together with its concert parties, regime under Singapore law, which requires a general offer to takeover the to shareholders its subject will company public its environmental,socialorgovernancetargets. on improves or maintains borrower the if or projects sustainability towards utilised are they if rates better enjoy may borrowings Such financing. sustainability or debt green of instances more are there investments, responsible socially in interest continued the Given a is parent their public company. unless companies, private to applies longer no its by assistance financial such giving against whitewashed prohibition public The company. a of be subsidiary a or to company public a have is it if may shareholders and company target the of part the on assistance financial constitutes arrangement an Such acquisition debt andgivesasecuritypackageoveritsassetstothelender. the over takes company target the where completion following pushdown debt a involve typically buyouts Leveraged person not resident in Singapore would be subject to withholding to subject be would Singapore in resident not person a to paid and Singapore in establishment permanent or person a by through debt, any payments in the nature of interest which partly) are borne or (wholly financed such are acquisitions equity on private Where imposed be will tax dividends. withholding Singapore no and entities) corporate or individuals are dividends the such whether of of recipients tax- (regardless shareholder are a of company hands the Singapore-resident in exempt a by paid dividends and final is profits corporate on tax the system, this Under system. tax corporate one-tier the under are companies Singapore-resident All or not lessthan15%. trade any from profits is time, or that at territory that in company any by on carried business gains any on received, is income the which from territory the of law the under levied tax income to is received in Singapore, the highest rate of tax of a similar character jurisdiction the from which such income is received; and (ii) at the time the of income law the certain under tax income to if character similar tax from a of tax to subject is income exempt such (i) including: met, are conditions are company Singapore-resident service income received or deemed to be received in Singapore by a Foreign-sourced income in the form of dividends, branch profits and gains taxinSingapore. Singapore, is subject to income tax in Singapore. There is no capital (i.e. Singapore outside from sourced outside Singapore) which is received or deemed received in derived or accruing or Singapore) in sourced (i.e. Singapore from derived or in accruing income Any . Whatrecenttrendshave therebeeninthedebt 8.3 Arethereanyrelevantlegalrequirements or 8.2 packages. security and pricing quantum, debt the sponsor, the of record track the assets, target of quality the as such factors consideration into . Whatarethekeytaxconsiderationsforprivateequity 9.1 Tax Matters 9 financing marketinyourjurisdiction? financing) ofprivateequitytransactions? off-shore structurescommon? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof investors andtransactionsinyourjurisdiction? Are iclg to: privateequity 2019 Singapore f-hr srcue ae ut cmol ue – lae e the see please – discussion inquestion2.1above. used commonly quite are structures Off-shore fund the and fund the manager. both by met be must conditions Various be exempt from tax under the fund management incentive schemes. may investments designated of list prescribed a from derived funds by Singapore-based fund managers. Specified income of qualifying managed are which funds resident tax non-Singapore or Singapore qualifying for available be also may schemes incentive tax Certain certain the relevantincentiveshavearrangedsuchissuance. where securities debt with institutions financial Singapore where qualifying and met, are conditions for available be may exemption tax withholding a instance, For applicable. be also may be may rates tax withholding tax withholding from exceptions certain and treaties tax by reduced the However, Singapore. in tax allen &gledhillllp © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 disposal restrictionsapplytotheshares awarded. when they vest (or are exercised, in the case of options) and whether on depending taxable, generally and are plans such implemented, to pursuant awards be may plans equity Share-based in available Singapore. UK) the in status” shareholder “employee or relief” There are no key tax-efficient arrangements (such as “entrepreneurs’ Whatarethekeytaxconsiderationsformanagement 9.3 Whatarethekeytax-efficientarrangementsthat 9.2 business ofpropertydevelopment). of trading or holding Singapore immovable properties (other than the business the in is that company investee unlisted an (ii) and insurer; an as income its of part as included are shares of disposal the from rule does not apply to: (i) a divesting company whose gains or profits This shares. convertible or ordinary redeemable preference, are not of and shares, disposed shares the (b) and months; 24 least at of period continuous a for company investee the in shares ordinary the of 20% least at held has company divesting the disposal, the of date the to prior immediately (a) if: taxable not are 2022 May 31 to 2012 ordinary shares in an investee company during the period from 1 June of disposal its from company divesting qualifying a by derived gains that provides rule This Non-Taxation of Rule”). “Certainty (the met shares in an investee company are not taxable if certain conditions are ordinary of disposal its from company divesting a by derived gains Certain “safe harbour” rules have been enacted in Singapore whereby such acquiring shares forlong-terminvestmentholdingpurposes). to opposed (as profit a for disposal subsequent for shares such acquired having or shares such in trading be to IRAS the subject to income tax if the entity disposing the shares is regarded by and income trading as regarded be may shares of sale a from gains the example, For tax. income Singapore to subject is which of latter key the of one gains the income, trading or gains capital constitute transactions such from Singapore, the whether in is transactions tax equity private gains for considerations capital no is there As Unlike theUK,“rolloverrelief”isnotavailableinSingapore. shares, deferred/vestingarrangements)? investment intoanewacquisitionstructure? teams thataresellingand/orrolling-overpartoftheir equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate

private equitytransactions. or teams management investors, equity private impact would that no significant changes have been introduced, nor are any anticipated has an interest in the Singapore residential property. Save as stated, disposing of the equity interests of the property holding entity which of parity disposes Singapore residential property directly,or versus acquiring or acquires ensure person a when paid to be to duty introduced stamp the in were treatment changes residential The the in interest properties. underlying the of conveyance a were disposal or acquisition such if as properties, residential Singapore in entities) other through indirectly or (directly interest an have that entities holding property in interests equity certain of disposal and acquisition the on duties were conveyance Act additional Duties imposing Stamp passed the to amendments 2017, March 11 On rvt eut ivsos r nt ujc t ehne regulatory enhanced to subject not are investors equity Private and consultations Further for the VCC structureisexpectedtotakeplacein2019. segregated. be accompanying legislation designed to operationalise the framework also would funds sub- the of liabilities and assets, the with capital from distributed be to dividends allow and standards accounting GAAP US apply allow investment funds to will use a single entity structure to house multiple sub-founds, corporate new Variable the the (VCC), Company as Capital Known corporate new funds. investment a for introduce tailored to structure enacted was legislation 2018, In become entrenchedinmanagementofthecompany). of minority shareholders) and entrenchment (when owner managers extract excessive to private benefits from seek the company to managers the detriment owner (when expropriation of risks the against through an IPO in Singapore. DCS listings are subject to safeguards 2018, June funds 26 raise to rights voting different from with firms for way the effectpaving with listings (DCS) share the class dual consultation, of rounds two for framework regulatory its implemented has Exchange Singapore of completion the Following a on solvency entity’s forward-looking basis. amalgamated the to attest to required be been The also have companies simplified, and directors of amalgamating companies will no longer of post-completion. amalgamation purchasers the for by procedures pushdowns debt effect the companies. This facilitates leveraged buyouts public and by making it for easier to assistance companies financial to exemptions private new of for introduction assistance financial of concept the abolish to 2015 in updated was Act Companies Singapore The 01Havetherebeenanysignificantlegaland/or 10.1 Havetherebeenanysignificant changesintax 9.4 02Areprivateequityinvestors orparticulartransactions 10.2 0Legaland RegulatoryMatters 10 anticipated? jurisdiction (e.g.onnationalsecurity grounds)? anticipated? private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities subject toenhancedregulatory scrutinyinyour www.iclg.com Singapore 233 Singapore 234 Singapore © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com by acquiringassetsinsteadofshares). will usually seek to in restructure the transaction to isolate the transactions risk (e.g. equity private all, Singapore. If non-compliance is a concern, private equity investors not if most, to prerequisite a Compliance with applicable anti-bribery and anti-corruption laws is Hasanti-briberyoranti-corruptionlegislation 10.4 the of complexity target’s the businessandthetimeframeforparticularacquisition. requirements, internal financing investor’s equity and private compliance the on depend will scope and is diligence acquisition. due legal Such any usually conducted on an “exceptions only” basis, and months. the materiality to three to one prior between usually take and target vary diligence due the legal conducting on for Timeframes diligence due legal Private equity investors typically engage outside counsel to conduct Howdetailedisthelegalduediligence(including 10.3 regime undertheSingaporeCodeon Takeovers regulatory andMergers. the with comply to need also will Public-to- transactions private providers. telecommunications and insurers licensed licensees, services markets capital banks, incorporated Singapore alia inter include, these – approvals regulatory enhanced to subject be will scrutiny. Generally, only transactions involving regulated industries allen &gledhillllp materiality, scopeetc.)? diligence, contractualprotection,etc.)? approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors aqiiin eceig h pecie pretg in percentage prescribed the exceeding acquisitions , hud o cue o mc cnen n h pr o experienced of part the on private equityinvestors. concern much too cause not should laws and regulations are in line with international best practices and consistently ranked as one is of the easiest countries in which to do business. and Most jurisdiction investor-friendly an is Singapore of fraudorbadfaith. company portfolio one absence the in company portfolio another of liabilities the for liable hold or of liabilities companies the portfolio for underlying liable investor equity veil private corporate a the hold pierce and/or not generally would courts Singapore 11Whatotherfactorscommonlygiverisetoconcerns 11.1 Arethereanycircumstancesinwhich:(i)aprivate 10.5 1Other UsefulFacts 11 considering aninvestmentinyourjurisdiction? the liabilitiesofanotherportfoliocompany? should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof iclg to: privateequity 2019 Singapore allen & gledhill llp Singapore

Christian Chin Lee Kee Yeng Allen & Gledhill LLP Allen & Gledhill LLP One Marina Boulevard #28-00 One Marina Boulevard #28-00 Singapore 018989 Singapore 018989

Tel: +65 6890 7616 Tel: +65 6890 7783 Email: [email protected] Email: [email protected] URL: www.allenandgledhill.com URL: www.allenandgledhill.com

Christian’s areas of practice include mergers and acquisitions, venture Kee Yeng’s areas of practice encompass mergers and acquisitions (for Singapore capital, corporate restructuring, joint ventures, employment law and both public and private companies), equity capital markets and general commercial contracts. corporate advisory work for financial institutions and public companies listed on the Singapore Exchange. Kee Yeng has advised sovereign Christian represents investment and commercial banks, private equity funds, private equity firms and multinational corporates in an extensive and sovereign funds and strategic corporate clients on domestic and range of domestic and cross-border transactions including public cross-border mergers and acquisitions, joint ventures and private takeovers, private acquisitions and joint ventures. She is also actively equity transactions. He also acts for venture capital investors and involved in the listing of structured warrant programmes on the companies in Series A and subsequent funding rounds. Singapore Exchange. Christian has been a Legal Case Studies Instructor at the NUS Law Kee Yeng has been recognised for her work in Corporate and M&A in School and a lecturer and instructor for the Corporate & Commercial Chambers Global, Chambers Asia-Pacific and IFLR1000. She has Practice module of the Singapore Bar Examinations. He has been also been recommended by The Legal 500 Asia Pacific for public cited as a notable individual in Corporate and M&A by The Legal 500 mergers and acquisitions. Asia Pacific and also noted for his work in M&A by IFLR1000. Prior to joining the Firm, she served as a Justices’ Law Clerk and as an Christian joined the Firm in 2004 and has been a partner since 2006. Assistant Registrar with the Supreme Court of Singapore. Kee Yeng joined the Firm in 2007 and has been a partner since 2009.

Allen & Gledhill is an award-winning full-service South-east Asian commercial law firm which provides legal services to a wide range of premier clients, including local and multinational corporations and financial institutions. Established in 1902, the Firm is consistently ranked as one of the market leaders in Singapore and South-east Asia, having been involved in a number of challenging, complex and significant deals, many of which are first of their kind. The Firm’s reputation for high-quality advice is regularly affirmed by the strong rankings in leading publications, and by the various awards and accolades it has received from independent commentators and clients. The Firm is consistently ranked band one in the highest number of practice areas and is one of the firms with the highest number of lawyers recognised as leading individuals. Over the years, the Firm has also been named “Regional Law Firm of the Year” and “SE Asia Law Firm of the Year” by many prominent legal awards. With a growing network of associate firms and offices, Allen & Gledhill is well-placed to advise clients on their business interests in Singapore and beyond, in particular on matters involving South-east Asia and the Asian region. With its offices in Singapore and Myanmar, associate firm Rahmat Lim & Partners in Malaysia, and alliance firm Soemadipradja & Taher in Indonesia, the Allen & Gledhill network has over 550 lawyers in the region, making it one of the largest law firms in South-east Asia.

iclg to: private equity 2019 www.iclg.com 235 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 31 South africa michael Denenga

webber wentzel andrew westwood

1 Overview 1.3 What trends do you anticipate seeing in (i) the next 12 months and (ii) the longer term for private equity transactions in your jurisdiction? 1.1 What are the most common types of private equity transactions in your jurisdiction? What is the current state of the market for these transactions? Have you We expect to see deal activity pick up following the May 2019 seen any changes in the types of private equity general elections, and as the South African economy returns to transactions being implemented in the last two to (modest) growth. There will also be deal flow generated by the three years? maturing of current fund vintages and new capital being raised for new funds, and we expect to see more transactions from captive The South African market continues to see a substantial number of funds within banks and corporates. private equity (PE) transactions by local and foreign PE houses, The economic cycle has created opportunities for PE players to including leveraged buyouts, buy-ins, follow-on acquisitions, exits pursue delisting transactions and to acquire businesses or divisions and Broad-Based Black Economic Empowerment (B-BBEE) of listed groups needing to rationalise and pay down debt, and these transactions (see question 11.1 below). Recent years have seen an trends are likely to continue to play out. established trend in exits by way of auction/managed disposal

processes and an increasing number of secondary PE transactions (demonstrating that the PE market in South Africa is maturing). 2 Structuring Matters 2017 and 2018 saw a slowing of deal activity and some failed deals due to parties watching and waiting on South African political 2.1 What are the most common acquisition structures changes, and it is anticipated that activity will pick up following the adopted for private equity transactions in your May 2019 general elections. In addition, there has been strong fund jurisdiction? formation activity, including the formation of new B-BBEE funds, which we expect will drive deal activity as capital is raised and In most leveraged buyout transactions, a “debt push down structure” deployed. would be used in order to facilitate the introduction of acquisition debt on an efficient basis. This involves a two-stage transaction 1.2 What are the most significant factors encouraging or whereby, in the first stage, the purchaser (Bidco) acquires the shares inhibiting private equity transactions in your in the target company using equity funding and a bridge loan. jurisdiction? Shortly thereafter, the assets of the target company are acquired by a new company (Newco), typically a subsidiary of Bidco, using term In an African context, South Africa is seen as a jurisdiction with debt (being debt with a longer repayment profile). The proceeds of strong and efficient banking and regulatory institutions, an the business acquisition are then distributed to Bidco and Bidco established legal system, as well as access to debt and capital applies the proceeds to settle the bridge loan. markets including the Johannesburg Stock Exchange (JSE), which Subscription and buy-back structures have often been used as an is highly regarded. There is also a wide range of mature businesses alternative to traditional share sale transactions. allowing larger deployments of capital or investments in earlier- stage or mid-cap businesses, depending on fund mandates. 2.2 What are the main drivers for these acquisition The South African Rand is relatively volatile, which can be to the structures? advantage or disadvantage of an investment depending on the timing, although this is not necessarily an unusual attribute for The use of a debt push-down structure allows the funding bank to take investors looking to invest in emerging markets. direct asset security from Newco, as well as a pledge over Bidco’s The creation and listing of permanent capital vehicles on the JSE shares in Newco. It also allows the target company to be liquidated in has been a notable trend which has provided access to a new pool of order to mitigate any historical liabilities and is efficient from a tax institutional capital via listed instruments. Whilst we note that there perspective (subject to certain interest-deduction limitations). have been fewer listings of permanent capital vehicles in the last Subscription and buy-back structures have provided a tax-efficient year, as noted above, fund formation activity remains strong. exit for disposing shareholders (especially South African tax-

236 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London into accountchangesintaxtreatment. common a are dividends, feature of structuring pre-transaction minority positions, but this will involve taking of payment the with coupled subscriptions or transactions, repurchase and Subscription time astheinvestment. same the at place take would restructuring or refinancing PE a Often the as implemented structure. group be existing the into invest just usually would investor would structure push-down debt a Where a PE investor is taking a minority position, it is unlikely that exit. incentivise and “ratchet”-type management alignment if a particular return hurdle exit is However,met by the PE drive investor at to used often level. are structures deal equity the individual of at part form structuring typically not does and structuring, and formation fund the of part as with dealt typically is interest Carried a managementtrustorotherinvestmentvehicle. on a subsidised basis. Their investment would often be held through Management will generally reinvest alongside the PE investor, often shares. and debt acquisition shareholder funding third-party in the form of shareholder loans and preference account into taking after small relatively is component capital.share) (ordinary equity share pure the Typically ordinary and shares preference loans, shareholder of combination a of consists typically structure capital equity The well- a and capital with developed continentalnetworkisseenasanadvantage. partner PE a having where continent, their the diversify growth of the drive business. Another driver to is expansion and into the continuing African and value control retaining realise whilst investments, to businesses African South primarily of management or founders the by desire a be to seems transactions investment/buy-in minority many for driver main The instances. limited in applicable be only will structures these and future, the last few years have limited the efficiency and use of this structure in the over amendments However, shareholders). corporate resident webber wentzel © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 a over occur typically Vestingwould vesting). no be would there were shares and outright shares their acquire would they management shares, their for value full paid such management if (i.e. extent what to whether so, if and, subsidised on depend the usually will whether time over vest may also shares management which and to extent The target, the of heavily size management inquestionarealsofounders. however, the is, This on investment. dependent equity the of 40% and Management would generally hold a minority stake of between 10% Inrelationtomanagementequity, whatisthetypical 2.5 If aprivateequityinvestoristakingminority 2.4 Howistheequitycommonlystructuredinprivate 2.3 considerations? institutional, managementandcarriedinterests)? acquisition provisions? what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and position, aretheredifferentstructuring equity transactionsinyourjurisdiction(including leaver willbepenalisedinsomeway.bad a while provisions) vesting any to (subject shares his/her for is offer an whether triggered. A than good leaver will generally rather receive the fair market value shares the for received value the affect generally would determination leaver leaver/bad good The or otherseriousmisconduct. fraud or cases of event the in apply would provisions some leaver bad aggravated in departure and Voluntary events, a leaver bad constitute constitute leaver. would dismissal generally good a would member retirement management or disability Death, hrhles shareholders Whilst the shareholders’ agreement is a private contract between the shareholder level. at matters protected specially certain of respect in a rights veto have to acquired expect would only it board, the investor control not PE does and stake the minority Where control. the have usually is company will investor PE portfolio majority a which over board the the of responsibility of management day-to-day The drag-along andexitprovisions. the on restrictions (v) transferability and of shares and shareholder loans, as well as tag-along, loans; the shareholder the of and/or of shares advancement of requirements issuance further funding the and company future portfolio the regarding provisions (iv) shareholders; other or investor PE the of favour in rights) (veto matters protected specially (iii) meetings; shareholder and board of board the of composition conduct the (ii) structure); shareholding the on dependent is (which the (i) minimum: a at out, would set which usually agreement, shareholders’ the and incorporation of memorandum its namely document, constitutional its in contained The governance arrangements in respect of a portfolio company are nelcul rpry omsin n i, n rnil, public a principle, in document. is, and and Commission Companies Property the with Intellectual lodged be to required is of incorporation memorandum The agreement. shareholders’ the with shareholders’ aligned the be therefore must incorporation of superseding memorandum The agreement. incorporation of memorandum the in result will incorporation of memorandum the shareholders’and agreement the between inconsistency any company, portfolio . Forwhatreasonsisamanagement equityholder 2.6 . Whatarethetypicalgovernancearrangementsfor 3.1 to relation in provisions management sharesshouldbeanalysedfromataxperspective. offer compulsory and/or vesting Any the reasonfordeparture. of termination employment, on with pricing and other terms dependent apply on vesting and would which provisions option or offer compulsory contain typically would agreement shareholders’ The holder shouldtheyterminatetheiremployment. the by received value the affect and years, five to three of period GovernanceMatters 3 your jurisdiction? in yourjurisdiction? usually treatedasagoodleaverorbadin arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such ne se inter ad ewe te hrhles n the and shareholders the between and , www.iclg.com South africa 237 South africa 238 South africa © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com the of interests the applicant. disregards unfairly or inequitable, or unjust prejudicial, unfairly is affairs, its conducted has it which in manner the or shareholder, another or company the of omission or act an the to that come court the satisfies shareholder the if shareholder a of assistance to court a allows section This shareholder. another of part the on conduct prejudicial unfairly or oppressive from relief with shareholder a provide does Companies Act the of 163 section other, each to duties any owe generally not do shareholders Whilst is discussed inmoredetailbelow. This director. the a as proxy capacity their by in acting and when company, shareholders, the to duties fiduciary have would nominees) investor’s PE the (including directors above, noted As Arethereanydutiesowedbyaprivateequityinvestor 3.4 veto rightscanbestructuredsoastoeffective ateitherlevel. shareholder level (rather than through the board), but at a PE exercised investor’s are rights veto particular if best a is it of Accordingly, shareholder. interests the with conflict potentially may which company, the of favour in duties fiduciary to subject are Directors practical any present generally difficulty, however. not does This Act. Companies company’s be void to the extent that portfolio they contravene or are inconsistent with the the in shareholders’will and/or agreement incorporation of memorandum contained arrangements veto Any Arethereanylimitationsontheeffectivenessofveto 3.3 minority a to thecompetitionauthoritiesisrequired. by notification a whether obtained and purposes law competition for arisen has are rights control joint or negative whether assessed be should shareholder,it veto significant party Where related and plans business transactions. Generally, vetorightsapplyatashareholderlevel. disposals, and material over vetos acquisitions include certainly and 25%, than more holds PE the investor PE the if extensive be typically would investor’sbut stake, of size the on depending vary would protections these of out additional specially protected matters or veto rights. The extent memorandum of incorporation and shareholders’ agreement may set the resolution, special a requiring actions corporate to addition In would beabletoblockspecialresolutions. elect the board of directors, and a shareholder holding 25% or more A shareholder holding a majority stake would (by default) be able to the in altered be memorandum ofincorporation. however, can, thresholds These rights. voting ordinary the of 75% least at of support the with resolutions special and support, majority with passed be can resolutions ordinary Act), In terms of the Companies Act 71 of 2008, as amended (Companies Doprivateequityinvestors and/ortheirdirector 3.2 webber wentzel position, whatvetorightswouldtheytypicallyenjoy? typically addressed? shareholders (or to minorityshareholderssuchasmanagement typically addressed? the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor vice versa )? Ifso,howarethese c ad h rlvn prflo opn’ mmrnu of memorandum company’s portfolio relevant incorporation, and any provision of the a shareholders’ agreement that and Act Companies the with consistent be must shareholders’Aagreement usday nr o o am o h cmay r n subsidiary any or company the also are Directors company. the of to not) or owned wholly (whether harm do to nor subsidiary, owned wholly a or company the than other anyone for advantage the board or information obtained by virtue of his position to gain an on position his use cannot company.director the a of Furthermore, functions in good their faith, for a proper purpose perform and in the best interests and powers their exercise to required are Directors duties havenotbeencodified,thecommonlawcontinuestoapply. duties and duties of care, skill and diligence. To the extent that such sections 75 and 76 of the Companies Act. These consist of fiduciary in codified partially been have directors of local duties law common The any) (or of number particular an directors. a have is to requirement he/she no because (e.g. the Companies Act. Foreign directors may be appointed and there is disqualified of 69 section in out set as director or a be to insolvent) unrehabilitated ineligible a not of board the to directors portfolio company, a as PE investor should ensure that such nominee nominees is its appointing Before regarding employmentandtherighttoatrade. concerns public given individuals, to applied when closely more the in investment its portfolio company. and The courts tend to investor scrutinise restraint provisions PE the the of protect interests to legitimate order in required reasonably is what to limited be as to, compete and/or non-solicitation provisions, they must non- be reasonable any contains agreement shareholders’ the that extent the To of theCompanies Act. contravention a Companies or the Act shareholders’and the agreement between conflicts any to rise give not does this that provided the parties to submit themselves to the jurisdiction of foreign courts, for and law foreign by governed be to company portfolio African South shareholders’a the to for relating permissible agreement is It of incorporationisvoidtotheextentinconsistency. Arethereanylimitationsorrestrictions onthe 3.5 of grounds constitute itself of prejudice, injusticeorinequitywithinthemeaningofsection. not will the shareholders or affairs majority company’s mere the Accordingly, of conduct law. the the with with dissatisfaction accordance in are these that provided shareholders of majority prescribed the of decisions the by bound be to undertakes person a shareholder a becoming by that the of account principle general the uphold courts our take and relief, requires conduct would particular whether court deciding in majority the a of motives underlying decision, its reaching In . Arethereanylegalrestrictionsorotherrequirements 3.6 inconsistent with the Companies Act or the company’s inter alia non-compete andnon-solicitprovisions)? portfolio companies? (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin , (i) geographic area, and (ii) time period, and should iclg to: privateequity 2019 South africa memorandum is ietr ol ne t mk te prpit dslsr t the to disclosure appropriate the make to need would The director another. one with transact or competition in are they where companies portfolio between arise only typically would conflict A is it interest, of and notbeexercisedatboardlevel. conflicts potential shareholders the to fall any like the and rights veto limit that recommended to effort an In to beratifiedbyshareholderresolutions. in respect of major corporate, commercial and/or financial decisions resolutions board for practice become has it board, the of decisions any in interest financial personal a having as regarded being them appointing investors PE the or directors nominee of risk the to Due has beenratifiedbyanordinaryresolutionoftheshareholders. matter. financial interest of a director or a person related to the director if it that on discussion is all he However, a decision by the board will be from valid despite any personal board, himself the recuse before to matter required a in interest financial personal material a has he accordingly,if and interest of conflicts any avoid In terms of section 75 of the Companies Act, a director is required to and nottothePEinvestorappointinghim/her. As set out above, directors owe their fiduciary duties to the company out D&Oinsurancetoprovideprotectionitsnomineedirectors. Typically, PE investors would require that a portfolio company take the in contained Companies Act toanyonewhohassuffered lossduetothebreach. duty any of breach a for available remedies the applicable, section 218(2) of the Companies Act effectively extends the to the where director, law) the appointing shareholder the common to not in and company the with liabilities line (in owed and are Act duties Companies directors’ although Furthermore, may attractliabilityforadirectorinhisorherpersonalcapacity. In terms of section 77 of the Companies Act, a breach of these duties and experienceofthatdirector. skill same knowledge, general the the having out and director that carrying as functions person a of expected be reasonably may that diligence and skill care, the exercise to required is director A to discloseit. not obligation ethical or legal a company,to subject are they unless required to disclose all information they believe to be relevant to the webber wentzel © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Reserve African the South the from of Department approval Surveillance Financial control competition exchange and including jurisdictions) Sub-Saharan African approvals, other applicable, if and, regulatory Africa South (in approvals to due largely is This completion. until agreements transaction the of signature from weeks 12 South about in take transactions typically PE Africa Whatarethemajorissuesimpactingtimetablefor 4.1 Howdodirectorsnominatedbyprivateequity 3.7 epcie ors n rcs hmef hr ncsay Where law maypreventcommondirectorships. necessary. where himself portfolio companies are in competition or similar sectors, competition recuse and boards respective Transaction Terms: General 4 of otherportfoliocompanies? disclosure obligationsandfinancingissues? and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof

Re more than90%ofthevotingsecuritiesaregulatedcompany). transactions (which may be exercised by a shareholder who acquires tigrd y n custo o mr ta 3% f h voting the of 35% than more of offers acquisition mandatory an (e) concert; by in (triggered acting persons or person a the by in interest beneficial a remaining voting securities of a regulated acquire company not already held to intention announced the arrangement between a regulated company and its shareholders; (d) of scheme a (c) company; regulated one least at involving merger or amalgamation an (b) company; regulated Takeover a of the undertaking the from certificate clearance of part greater the or all of disposal a (a) include: Panel, Regulation a and as require to will known which notification transactions transactions, These specific of transactions”. “affected conduct the regulated in in shareholders companies to fairness and transparency ensuring at aimed are Regulations Takeover and Provisions Takeover The those to opposed (as applicable to private acquisitions) and a greater amount requirements of publicity. disclosure impose and which rules Requirements, stricter Listings JSE the Takeover and the Regulations Provisions), (Takeover Act Companies the of 120 to 117 sections in contained provisions takeover the the of application to relate transaction public-to-private a of features main The price purchase “locked-box” become common featuresofPEtransactionsinSouth Africa. have the insurance indemnity of and warranty and use mechanism years, recent Over . Whatparticularfeatures and/orchallengesapplyto 5.1 Havetherebeenanydiscernible trendsintransaction 4.2 eurd t im neto sae ad i) etitos n the on restrictions (iv) and stage; intention firm at required is confirmation be cash or guarantee must bank as stage financing early an at (iii) secure announcement; intention firm a to prior shareholders approaching on restrictions are there and required, be regarding the deal, as the approval of 75% of the shareholders certainty would getting (ii) arrangement); of scheme the propose to need would board (i) the (as include: transaction the would for investors approval board PE obtaining by faced challenges main The (and thusdelistit). target the of 100% acquire to investor PE the allows approved, if invariably board of are the target to its shareholders, as the scheme of arrangement, Africa the by proposed arrangement of scheme a South of way by implemented in transactions Public-to-private incorporation, electtobea“regulatedcompany”. of memorandum its in may, company private a addition, In offer. or transaction particular a 24 of of day the period before immediately the months within persons, inter-related or related among or between transfer by than other transferred, been have company a be also that will of shares issued the of 10% than company more if company” “regulated private A companies”. “regulated are mining, the (e.g. industries/sectors banking, insurance,security, mediaandbroadcastingindustries). specific certain in of required be respect also may approvals regulatory Additional Bank. o proe o te aevr rvsos n te Takeove the and Provisions Takeover the of purposes For euiis f rgltd opn) ad f) “squeeze-out ) (f and company); regulated a of securities rnato em:Pbi custos Transaction Terms: Public Acquisitions 5 gulations, all public companies and certain state-own commonly dealtwith? terms overrecentyears? transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private www.iclg.com South africa ed companies ” r 239 South africa 240 South africa © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com indemnity maybeinsured). the case which (in diligence due the of part as identified been have (iii) and risks specific where agreed be may but typical, not are Indemnities structure); transaction “locked-box” cooperation andassistancewithregulatory filings,arestandard. a (in leakage the of business between the signature conduct date and the completion date; (ii) no the (i) to: relation in undertakings period Interim Whatisthetypicalscopeofothercovenants, 6.3 package andprovideacleanexittothePEseller. commonly taken out to cover the negotiated warranty and indemnity However, as mentioned below, warranty and indemnity insurance is rata typically expected to provide a full suite of business warranties, are team management the and seller PE the both Africa, South In Whatisthetypicalpackageofwarranties/indemnities 6.2 “ or structures earn-out see to uncommon not also is It by example net workingcapital,assetvalueand/ordebt. for instance, for elements, in, deviations hybrid for verification/adjustments including have often these however, common for sellers and buyers to settle on a “locked-box” structure; more is It preferable. generally are accounts completion buy-side the on whilst structure, pricing “locked-box” the prefer sellers PE Whatconsiderationstructuresaretypicallypreferred 6.1 target. approving asuperioroffer ifoneismade. the by accepted being Generally, offer however, it is not possible to prevent competing certain a target accepting or a negotiate of the may limiting possibility to view investor a with PE target, the with a provisions restrictive addition, In disclosed. limited to 1% of the offer value and the details thereof must be fully However, the Takeover Regulation Panel agreed. requires that break fees be commonly are and permissible are which target, the with agreed fees break are obtained be can that protection primary The Whatdealprotectionsareavailable toprivateequity 5.2 blocked bythecompany. the transaction to shareholders, hostile transactions can generally be recommending) not (or recommending in board the by played role central the to due addition, In be conditions. objective to only may subject arrangement of scheme the as deal, the of conditionality webber wentzel upon thetarget meetingcertainperformance thresholds. and date later a on payable only amount further a with completion (deferred) payments where a portion of the purchase price is paid on Transaction Terms: Private Acquisitions 6 o hi saeodn pretgs n h tre cmay company. target the in percentages shareholding their to acquisitions? equity selleranditsmanagementteamtoabuyer? undertakings andindemnitiesprovidedbyaprivate team toabuyer? offered byaprivateequityselleranditsmanagement on thebuy-side,inyourjurisdiction? by privateequityinvestors(i)onthesell-side,and(ii) investors inyourjurisdictionrelationtopublic agterskot pro ” arnis r uisrbe n ecue fo wrat and warranty from excluded and indemnity insurancepolicies. uninsurable are warranties recall product and pricing transfer anti-corruption, Environmental, limit. warranty general for insurance coverage the of of 2% to 1% of range the in be usually would policies cost The target’s the of value). 30% enterprise and 10% between range typically will (and agreements transaction the with line in negotiated be will claims indemnity and/or warranty for cap The value. enterprise target’s minimis a have typically will policy Ainsurance indemnity and warranty in thedataroomaspartofproposedtransactiondocumentation. provided be often would policy insurance indemnity and warranty buyer a for terms preliminary the and process, a the of usually requirement is this processes, disposal auction/managed In policy. insurance indemnity and warranty a obtain to transactions) larger provide business warranties, it has become the norm (particularly in Whilst in the South African market it is expected that PE sellers will aaeet o h etn ta wrate ae band from obtained are warranties that management. extent the to management considered not is by entity) held shares over security for look SPV also may They creditworthy. or trust individual, (for an seller the example, that extent the to security for look will deferred buyers PE or withholding escrow an to subject payment. be to not as so PE sellers will typically insist on warranty and indemnity insurance Warranty claims would be subject to due diligenceandinthedisclosureschedule. the of part as disclosure full make to encouraged and exposed also is team management the claim, warranty any of proportion largest the for liable be will investor PE the whilst that, means which basis Liability is further limited by providing the warranties on a attached totheacquisitionagreement. signature as part of the due diligence and/or in a disclosure schedule to prior purchaser the to disclosed information by qualified usually are team management and seller PE the against claims Warranty . Whatlimitationswilltypicallyapplytotheliabilityofa 6.5 To whatextentisrepresentation&warrantyinsurance 6.4 . Do(i)privateequitysellersprovidesecurity(e.g. 6.6 eid iiain. hr wrat ad nent isrne is insurance taken out,thesewillbealignedtothepolicy. indemnity and warranty Where limitations. period the typicalcostofsuchinsurance? the managementteam)? warranties, covenants,indemnitiesandundertakings? private equitysellerandmanagementteamunder exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and threshold equal to 0.1%, and a floor equal to 1%, of the of 1%, to equal floor a and 0.1%, to equal threshold iclg to: privateequity 2019 de minimis South africa , floor, cap and time pro rata de event ofafailedtransaction. agreed, often are covering costs in respect of, for example, competition filings, in the arrangements South in cost-sharing transactions However, PE in Africa. typical not are fees break Reverse case. evolve would the be to this practices seen not have we market but collapse, Abraaj the following that expectation an was There counterparties. their of record track and reputation the on more rely to tend parties and enforceability, limited of and soft be to confirmation/ tended of form similar or undertaking, particularly where an SPV is letter used; however, these have commitment equity an through provided full be may component equity the regarding Comfort the underwrite to willing be acquisition price. may buyer a circumstances some in although raised, being debt the on conditional be to deal that debt financing will be available. comfort It is, however,provide common for the to transactions, other for track debt their securing in as record well as sheets, term bank on rely typically Buyers Howdoprivateequitybuyerstypicallyprovide 6.7 webber wentzel © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 a lock-upperiodofbetweensixand 12months. The PE seller and the management team will ordinarily be subject to Whatcustomarylock-upswould beimposedon 7.2 agreement. shareholders’the in addressed be should IPO an achieve to process the and IPO an of possibility The listed). been previously not has which company portfolio smaller/younger a (particularly IPO for well aware of the process required to prepare the portfolio company are and stakeholders other and management with alignment have they that ensure should sellers PE IPO, by exit an considering In the lock-upsexpire. price due to the additional shares that will be coming to market once share the in hangover a be may there and IPO via immediately exit lock-ups mentioned below, it is usually the not possible to to achieve a due full addition, In advance. in in locked be cannot and place takes IPO the once known be only would valuation the However, multiples. listed than lower be typically as would multiples particularly unlisted valuation, attractive an provide may exit IPO An What particularfeaturesand/orchallengesshoulda 7.1 Arereversebreakfeesprevalentinprivateequity 6.8 Transaction Terms: IPOs 7 funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and If so,whattermsaretypical? under anequitycommitmentletter, damages,etc.)? private equitysellersonanIPO exit? exit? private equitysellerbeawareofinconsideringanIPO transactions tolimitprivateequitybuyers’ exposure? practice orpatterninthisregard. African South market the established no is there however, in assets; suitable for market seen been have processes exit Dual-track n diin o iet custo db, t a be cmo for common been has it debt, acquisition direct to addition In should alsobetakenintoaccount. structure) acquisition the original the of result of a as (especially security exercise upon debt triggered be senior may a that events of tax part financing, as package security the structuring When and Africa South in exempt fromtaxinSouth resident Africa. tax not such is where shareholder debt relationship, controlling to controlling a extend in persons also from potentially incurred rules limitation interest These taxable income”. expense deducted to a percentage of the target company’s “adjusted interest effectivelythe which limit rules, to limitation looks interest African South local to subject be would push-down debt a of part as raised debt senior on incurred interest The debt. acquisition for structure tax-efficient a and package security the facilitate to used are structures push-down debt above, 2.1 question at mentioned As . Pleaseoutlinethemost common sourcesofdebt 8.1 Doprivateequitysellers generallypursueadual-track 7.3 . What recenttrendshavetherebeeninthedebt 8.3 Arethereanyrelevantlegalrequirementsor 8.2 high-yield bondfunding. than funding bank to akin more terms negotiate to able been have and than conservative more been have investors covenant-light bond maintenance local covenants), than more rather incurrence (e.g. and bonds, offshore investment-grade space high-yield the of elements some Whilst have market African to South the in funding. bonds issued secured bank bonds existing refinance for to appetite companies an portfolio is PE there finance although to used transactions, commonly not are like the and notes Bonds, be seeninsmallerdealsinvolvinggrowthbusinesses. Mezzanine financing is not often used in larger transactions, but may healthy at levels basedontheprofitabilityofunderlyingbusinesses. sponsors, established by undertaken those particularly transactions, these funding to receptive generally is market finance form of secured term loans from the major South African banks. the The in sourced commonly most is transactions PE for finance Debt Financing 8 bonds). through asaleorIPO? financing marketinyourjurisdiction? financing) ofprivateequitytransactions? for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof

www.iclg.com South africa 241 South africa 242 South africa these typesoffacilities. for requirements as additional security (step in rights well and cessions over capital calls), as for restrictions, and language of sanctions up tightening a been has there collapse, Abraaj the Following © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com proceeds tosettle anytaxthatmaybetriggered. realised no have will and investment, their realising not are teams management such where so especially is This manner. tax-neutral a in structure acquisition new a into investment existing their over roll- to be would teams management for consideration tax key A Whatarethekeytaxconsiderationsformanagement 9.3 ordinary section 8Cinquestion9.4below. regarding an discussion the see please as However, investors. other as invests management where shareholder or investor, and is subject to the same risks and rewards position the be employees to tax at subjecting their marginal income tax companies) rates. This should not portfolio PE underlying the of growth the instances, certain in has, in participation (i.e. schemes participation legislation in resulted inadvertently tax the of scope wide The underlying portfoliocompanies). PE effective underlying capital gains tax rate of 18% on the the ultimate disposal of the an of at hands individual’s an in growth taxed is (which companies portfolio the in participation of from maximum 45%)) a (currently rate the tax at income taxed marginal is individual’s (which rendered services for income distinguish employees’to important is it thereof, governing taxation the and remuneration Africa South in legislation tax the of extent the Given Whatarethekeytax-efficientarrangementsthat 9.2 which requirescertainamendmentstobemade. an easier platform for foreign investors investing into provide South Africa, but may which regime, Company” “Headquarter African South the on discussion brief a for below 9.4 question see Please vehicle throughwhichforeigninvestorswillinvest. investment same the is this – the counterpart African South its of structure with and strategy Africa, South of outside established is that partnership mirrored second The a provides structure structure. dual-fund “dual-fund” a for provide to practice common is it South funds, into African-managed investing investors foreign of seek that investors exchange-control-friendly jurisdictions. Due foreign to the increasing trend for common are structures Offshore dividend underlying natureofsuchincome. gains, the in the with capital accordance taxed in jurisdictions) tax be their (in hands investors’ to (including derived payments) income interest and distributions any that vehicle for a through allows invest to i.e. transparency, tax be would investors for consideration tax key a market, African South the In Whatarethekeytaxconsiderations forprivateequity 9.1 webber wentzel lenders to provide financing to bridge or refinance fun Tax Matters 9 off-shore structurescommon? investment intoanewacquisition structure? teams thataresellingand/orrolling-overpartoftheir shares, deferred/vestingarrangements)? equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate investors andtransactionsinyourjurisdiction? Are d investments. Company” regime tobeapplicable. “Headquarter the for requirements the meet would fund a that such shareholders, permissible the to extension an require merely and for foreign investors. The amendments required are not substantive South the easier divesting and the investing make to as needs landscape PE African to commenced, has amendments regime legislative Company” make “Headquarter to process lobbying The dual-fund structure. the for necessity the negate would qualify to funds African South for allows that regime An Company” “Headquarter the to alternative. amendment viable the only the for is structure qualify dual-fund the not result, will a As benefits. fund attendant the and the regime Company” “Headquarter fund, African South the of control-friendly jurisdictions. Due to the fiscally transparent nature Company” regime that essentially mirrors the benefits of exchange- friendly jurisdictions, South Africa has introduced quite the “Headquarter is - exchange-control with compete to order process In funds. South African formation for manage to difficult the increasingly becoming is and effective, burdensome highly is structure made outside South be Africa (i.e. into to Africa). need Although that the dual-fund investments for Africa South in practice common become has structure dual-fund the above, 9.1 question in noted As such rulings. on replaced be can reasons reliance limited no ruling, the are for there provided and non-binding are rulings these However, because scenario. this in occur should taxation double no that private provide that binding Service Revenue are African South the There by issued rulings taxation. double in and result ambiguous still is could legislation the case, this In beneficiaries. the of hands the in shares underlying the vest trusts share employee the where apply necessarily not does position the amended this However, of hands the in taxed onanygains. shares) underlying be also not will an trust share employee the result, the a beneficiaries. As of for disposal provide the to amended exemption where employee retrospectively share trusts vest the share gain (made on was legislation will also pay income tax on the share or gain as remuneration. This who employees, in gains share or shares vests trust the where trusts in 2016, created the potential for double taxation in employee share the of hands the passed amendments in with together amendment, This income beneficiaries. as by taxed are vested trusts dividends share non-exempt employee and gains that provided rules 8C section the to amendment an 2017, March 1 from effect With arrangement withthatperson’s employer. that taxpayer by virtue of his/her employment or from by any person by acquired was instrument equity such where instrument, equity an from) subtract (or in an of vesting the upon arising loss) (or employee’sgain the income include incentive to such seeks of 8C Section abuse perceived schemes. the for cater constantly are to schemes modernised incentive share of respect in of employees taxation the regulate that 8C) section (primarily rules tax The . Havetherebeenanysignificant changesintax 9.4 becoming are these However, increasingly limitedandneedtobeconsideredindetail. management. for outcome Income African Tax desired this achieving in assist may which Act, South the in contained concessions roll-over tax various are There anticipated? teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities iclg to: privateequity 2019 South africa yet beenpromulgated. not has which Bill, Institutions Financial of Conduct proposed the current thinking the is to regulate this not that under the FAISunderstand Act, but we under However, managers. fund PE for licence FAISof category new a of creation the FSCAconsidering The was due prescribed of list a consider must fund pension the ■ for procedures and policies clear have must fund PE the ■ PE the of assets the verify must fund PE the of auditors the local the SAVCA, ■ of members be must managers fund ■ the conditionsarefollowing: in contained requirements significant most The funds. PE foreign to qualify for investment purposes – these stipulate apply equally to local and regulations relevant order in The with comply to needs fund PE a that requirements various funds). of fund per 5% and 10% of their assets in PE were funds (with sub-limits of 2.5% per PE funds fund pension to up invest to funds pension permit local expressly to 2011 in amended for limits investment prudential The changed fromtheFinancialServicesBoard(FSB)toFSCA. This means that the name of the regulator for PE fund managers has financial services. of financial and products regulator financial provide that conduct institutions, market the is (FSCA) Conduct Authority Sector Financial and the insurers, and conglomerates infrastructures, market banks, certain financial regulating institutions, for financial responsible cooperative now Prudential is the which Authority of terms in framework, regulatory peaks” was (FSRA) Act Regulation promulgated. The FSRA Sector introduced what has been Financial termed the “twin new the 2018, In Havetherebeenanysignificantlegaland/or 10.1 webber wentzel © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Competition the by introduced been have that factors express new market. same the in competitors and companies with line in is This the by scrutiny increased competition seen authorities regarding the extent of PE firms’ have interests in we matters recent some In (extractive amongst others). industries telecommunications and regulated insurance specific banking, industries, in apply only would scrutiny or approvals regulatory Other transactions. M&A other transactions are scrutinised by the competition authorities similar to PE scrutiny. regulatory particular to subject not are investors PE Areprivateequityinvestorsorparticulartransactions 10.2 0LegalandRegulatoryMatters 10 e srcue f h P fn ad h rs ad compliance and risk the policies andproceduresofthePEfund. and fund PE the of structure fee diligence matters before investing in a PE fund, including the and party; third a by annually least at verified be must valuations any and Guidelines, Valuation Equity Private International determining the fair value of its assets in compliance with the financial year; international financial reporting standards produce within 120 with days of the end of its must complying fund statements PE financial the audited and basis biannual a on fund managers fallwithinalessonerouslicencecategory); investment FAIS(foreign under licensed body,and industry private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting anticipated? jurisdiction (e.g.onnationalsecuritygrounds)? subject toenhancedregulatoryscrutinyinyour sal egg otie ea cusl o odc te ea due legal the conduct to diligence (including, counsel legal will investors outside PE engage usually advisers. and committee investment its with materiality and consultation in investor PE the by determined be will and business, scope The acquisition. threshold will typically depend on the nature an and size of the target’s to prior target the on diligence due legal comprehensive conduct usually investors PE portfolio companies. Accordingly, a PE investor could not be held be not could investor PE Accordingly,companies. a portfolio and will not be held liable for the liabilities or obligations of underlying liability limited have companies) African South in investing investors PE (including shareholders that is principle general The indemnity insurance policy). and warranties warranty any from anti-corruption/bribery excluded typically of are (which way by non-compliance possible against protection contractual for looking increasingly are investors PE and expected is checks) KYC and compliance bribery anti-corruption/ (including diligence due compliance a Conducting corrupt actual or transactions. attempted reporting not of act the criminalises present in South Africa; or (iii) the foreigner is not extradited. It also concerned is an offence under that act country’s law; the (ii) the (i) foreigner is citizen, if: foreigner, any African or Africa, South South in domiciled anyone any by Africa South outside undertaken also Act actions corrupt criminalises Activities it that in reach international Corrupt for allows of Combatting to and Prevention relation The in law. into signed been recently requirements have persons”, exposed “politically introducing including standards, international with line in it bring FICAto to Amendments Centre. Intelligence Financial the to transactions report and clients identify to institutions” “reporting on requirements KYC imposes (FICA) the UK Bribery Act). Locally, the Financial Intelligence Centre Act and Act Practices Corrupt Foreign US the (including laws foreign to subject investors PE international of respect in Yes,particularly checks) maybedonein-housewithsupportfromoutsidecounsel. (KYC) know-your-client and compliance anti-corruption/bribery and complexity of the target). Compliance due diligence (including size the on (depending weeks six and three between in completed be typically would which arrangements) property intellectual and 04Hasanti-briberyoranti-corruptionlegislation 10.4 Howdetailedisthelegalduediligence(including 10.3 05Arethereanycircumstancesinwhich:(i)aprivate 10.5 authorities the which force), in yet not is (which Act Amendment by theparties. mergers” “creeping and transactions other of extent the and markets, related in or industry an the in e.g. parties by – ownership future common of the extent in mergers assessing in consider to need will materiality, scopeetc.)? the liabilitiesofanotherportfolio company? diligence, contractualprotection,etc.)? approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof

inter alia , corporate, commercial, employment www.iclg.com South africa 243 South africa 244 South africa © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com of economy the in participation the promote and empower to intended government African South the of policy a is B-BBEE Whatotherfactorscommonlygiverisetoconcerns 11.1 provide cross-guaranteesforeachother’s debts. example, for they, unless company portfolio another the of for liabilities liable be would company portfolio one that unlikely is It the of obligations or portfolio company. actions the of respect in guarantees and/or liable unless the PE investor provides direct warranties, indemnities webber wentzel eilto, ol ips laiiy n hrhles n certain in shareholders on liability instances. impose would legislation, tax and legislation environmental example, for legislation, of the pieces “pierce to willing be may particular addition, In circumstances. specific very in veil” corporate court a where instances are There 1OtherUsefulFacts 11 considering aninvestmentinyourjurisdiction? should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor

structuring transactions. in with, comply and of, aware be to need investors PE something is requirements B-BBEE with compliance Accordingly, practices. other and “fronting” regarding rules existing strengthened as well B-BBEE major ownership transactions to a newly created B-BBEE of Commission, as details the report to requirement a introduced have B-BBEE Act the to Amendments rating. ownership B-BBEE appropriate an ensure to companies portfolio into ownership BBEE B- introduce to investors PE for necessary often is it Accordingly, in South Africa. B- scorecards), business doing companies most for B-BBEE imperative business a is BBEE respective their on measurements the do businesses doing business with an entity (procurement being one of African to South other for decisions factor a entities’also and entity, public an with business and government in factor key a be will B-BBEE as however, comply; to failure or measurement scorecards. stipulated Importantly, no sanction or prohibition on trading arises from a low with accordance Economic in purposes B-BBEE Black for Broad-Based measured are entities which by system a create which the B-BBEE on by Practice Good of Codes the and (B-BBEE Act) primarily Empowerment Act to given is policy effect The Africans. South disadvantaged historically iclg to: privateequity 2019 South africa webber wentzel South africa

Michael Denenga Andrew Westwood Webber Wentzel Webber Wentzel 90 Rivonia Road 15th Floor, Convention Tower Sandton, Johannesburg Heerengracht, Foreshore, Cape Town South Africa South Africa

Tel: +27 115 305 492 Tel: +27 214 317 235 Email: michael.denenga@ Email: andrew.westwood@ webberwentzel.com webberwentzel.com URL: www.webberwentzel.com URL: www.webberwentzel.com

Michael is a finance and investment funds specialist. He has over 15 Andrew specialises in private equity and venture capital transactions,

years of post-qualification experience in advising on the formation of including leveraged acquisitions, capital raises, structuring of South africa investment funds (including private equity, hedge funds, real estate management arrangements, refinancings, restructurings and disposal and venture capital funds) and treasury documentation (including transactions. He also has experience in mergers and acquisitions, international swaps and derivatives association, securities lending, both public and private, B-BBEE transactions and advising on general global master repurchase agreements and prime brokerage corporate and commercial law matters. Andrew has advised on a agreements). He has also had experience in the treasury departments number of leveraged buyouts by local and international private equity at Standard Bank of South Africa and Investec Bank. Michael has firms, as well as related transactions including follow-on investments structured private equity funds and hedge funds in South Africa, and acquisitions, refinancings, B-BBEE transactions and exits, as well Namibia, Mauritius, Cayman Islands, Luxembourg and Guernsey. His as numerous venture capital financings in the South African market. expertise has been recognised by various international research His expertise has been recognised by various international research organisations including The Legal 500. organisations including The Legal 500.

With over 150 years of experience and industry knowledge, Webber Wentzel is the leading full-service law firm on the African continent. We combine the collective knowledge and experience of our firm to provide clients with seamless, tailored and commercially-minded business solutions within record times. We value excellence and innovation and we work with our clients to help them achieve success in whatever they do. We are the dominant private equity practice in Africa – we understand the complexity of the environment and we provide a holistic and project- managed offering to ensure the deal is executed within the required timeline. We work with global, regional and national investors, offering a comprehensive range of legal and tax advisory services throughout Africa. Our clients include leading private equity houses, fund managers, investment firms, banks and financial institutions. What sets us apart from other legal firms in this space is the depth of our experience, expertise and talent in each of the key areas – transactional (M&A), fund formation, finance and tax. Our alliance with Linklaters and our deep relationships with outstanding law firms across Africa provide our clients with the best expertise wherever they do business.

iclg to: private equity 2019 www.iclg.com 245 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 32 Spain Ferran escayola

garrigues maría Fernández-picazo

1 Overview 1.2 What are the most significant factors encouraging or inhibiting private equity transactions in your jurisdiction? 1.1 What are the most common types of private equity transactions in your jurisdiction? What is the current state of the market for these transactions? Have you In the last few years, Spain has experienced consistent economic seen any changes in the types of private equity growth due to several structural reforms and competitiveness. transactions being implemented in the last two to The main drivers encouraging PE transactions in Spain have been: three years? (i) existence of liquidity in the markets and dry powder in the PE funds; (ii) low interest rates; (iii) the existence of global deals with According to the Spanish Venture Capital & Private Equity cross-border impact; (iv) easy access to financing (banking debt and Association (“Asociación Española de Capital, Crecimiento e direct lending); (v) global instability and the search for stable Inversión” – “ASCRI”), 2018 has beaten, for second year in a row, markets; and (vi) consolidated domestic corporates with significant a record in the Spanish PE sector activity in terms of volume (EUR international reach. 5.844 billion, representing an increase of 18% compared to 2017). Foreign investors are still the main source of PE investment, International funds continue to be major market players accounting although the recovery and consolidation of the domestic middle for 77% of the total investment volume (EUR 4.493 billion) in 118 market reflects also an intense activity and resources availability by transactions. domestic investors. Several transactions above the EUR 100 million in equity have been closed in 2018 representing 63% of the total investment volume 1.3 What trends do you anticipate seeing in (i) the next 12 (EUR 3.697 billion). For the first time, the EUR 1 billion mark has months and (ii) the longer term for private equity been reached or exceeded in the Spanish market, in particular in transactions in your jurisdiction? three transactions executed by international funds. Middle-market transactions (transactions between EUR 10 million Assuming that markets are cyclical, and economic instability makes and EUR 100 million) marked a historic record, reaching EUR trends unpredictable, for 2019 we expect to maintain sustainable 1.467 billion (an increase of 5% with respect to 2017), and economic growth and a relevant PE activity in the country. distributed in 56 investments, 44 of them executed by Spanish Spain has officially overcome the economic crisis and looks forward entities. to a more stable period. The times of opportunistic investors in the With regards to project development, the investment in buyouts Spanish market may be coming to an end and be substituted by reached a total volume of 3.529 billion in 50 transactions and in consolidated value-creating investors. The increase in Real Estate growth capital 96 deals were executed, resulting in EUR 606 PE transactions in Spain is expected to continue. million. Venture capital transactions reached EUR 417 million Although the Spanish PE market is more stable and mature, it needs spread in 510 transactions. a continued legislative development to remain competitive vis-à-vis In 2018, domestic PE players (including venture capital) invested other investment destinations in the European Union (“EU”) and EUR 1.307 billion, an increase of 3.3% with respect to 2017, worldwide. In this regard, in 2018 ASCRI issued a good distributed in 454 transactions targeting other Spanish companies, governance practices code for PE companies raising funds or resulting in a new record high. investing in Spain aimed to align the interests of managers and On the divestment side, transactions decreased by 41% compared to investors and promote corporate governance and transparency. 2017, totalling EUR 2.049 billion and totalling 295 transactions: 47% of said divestments were disposed to other PE and venture capital entities; 24% went to industrial investors; and 22% were share buybacks by former shareholders.

246 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London esn ad ufcet usac, olwn OC’ BEPS OECD’s following substance, regulations aremet). sufficient and reasons EU tax-efficient a in vehicle country on top of the ETVE structure a (provided that valid economic of incorporation the structure of used consists frequently another investors, the of residency tax by Spain and Latin American countries. Alternatively, subject to the targets to take advantage of the bilateral Double Tax Treaties signed de valores usually extranjeros companies PE International (“ ETVE Spanish through investment the canalise exit). the at gains capital and dividends of treatment tax the (mainly efficiency tax by driven general, in are, investments PE foreign for structures Transaction needed. is financing acquisition any if borrower the often also is and entity acquiring the is BidCo applicable. when team, management fund the and shareholders its with jointly funds, PE the are shareholders opne o truh hlig eil (“ vehicle holding a through or companies riesgo capital de Transactions may be executed by regulated funds named “ turnaround ofthecompany. certainly in succession situations); and (iv) investment for the restructuring are or and which businesses family for (typically structure shareholding current companies of growth consolidated or already have benefits; (iii) the replacement of part of the of financing of exitmaydictatetheacquisitionstructure. costs and rules foreseen the (iv) and company; the of restructuring post-closing the to related costs operational and economic the (iii) sponsors; PE and team management the of incentives and role the (ii) investor; the for returns expected the (i) as: such drivers Other tax regulationsfordeductibility. Spanish by or origin of country the by imposed requirements also but tax-efficiency only not reasons, the tax (ii) to and warranties entities; financial enough grant to ability the and considerations financial (i) to: relate mainly transactions PE for drivers main The the of part a which (“ buyouts leveraged is, that financed, is price in purchase companies of acquisition (i) following structures: the to according executed are transactions PE Usually Whatarethemostcommonacquisitionstructures 2.1 garrigues © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 exit. at or bonus management’s with also re-paid and laws, applicable other or Spanish under provisions assistance financial by restricted exit. at targetcompany,the by not provided if be also could financing This even or compensation, bonus management as re-paid be financed through loans that could be (partially) provided by the sometimes PE sponsors, is to team management the of investment The target companyorchannelledthrough aBidCo. As mentioned above, PE transactions can be executed directly in the Howistheequitycommonlystructuredinprivate 2.3 What arethemaindriversfortheseacquisition 2.2 StructuringMatters 2 adopted forprivateequitytransactionsinyour structures? jurisdiction? institutional, managementandcarriedinterests)? equity transactionsinyourjurisdiction(including , hog drc ivsmn i te target the in investment direct through ”, ”) structures to invest in most Latin American BidCo entidad tenedora entidad LBO ) whose ”) entidades ”); (ii) ”); properly carry out its duties. These provisions allow the sponsor the allow provisions These duties. its out carry properly to and company the in remain to team management the encourage provisions play an important role in management incentives, as they below) 2.6 question (see bad-leaver and good-leaver regard, this In relevant relationship withthetarget andtheexit. manager’s the the of of termination the departure from time the the (ii) of and manager, time the to company the with manager the the of from relationship elapsed the of time commencement or the investment (i) upon based sponsor, PE relevant the on depending structured, be may incentives of types other and In addition to question 2.3 above, vesting provisions for the ratchets BidCo or15%–20%insecondaryPEdeals. The management team usually takes 5%–10% of the share capital of retention schemes,amongothers. management key and etc.) options, put rights, tag-along (including in strategic decisions, seats at the board of directors, exit provisions non- with majorities investors reinforced and rights veto PE as such capital positions, controlling for share negotiation key of a proportion becomes its owned) to correspond would that those than (other rights additional granted being cases, such In families. founding or sponsors, PE investors, strategic other either partners; other with combination in or alone positions non-controlling hold to agree they or otherwise require policies investment their when However,unless stakes majority acquire usually funds PE Spain, in Majority orminoritypositionsdonotusuallyaffect theinvestment. . Inrelationtomanagementequity, whatisthetypical 2.5 Ifaprivateequityinvestoristakingminority 2.4 investors all to distributed is invested capital of cumulative compounded rate of return (usually 8% p.a.) once 100% or rate hurdle a include typically managers to paid interests Carried good-leaver andbad-leaverevents. to subject and usual), are years five to (four periods vesting agreed managers’ The throughout vested usually are arrangements ratchet the under rights exit). at obtained gain marginal the of portion a return and multiples in the 20% range of 2× of to 3.5× (with IRR intermediate levels an vesting be would thresholds Usual achieved. (“ return a or equity sweet ratchet that vests upon exit provided that a with minimum internal rate of provided cases, most in is, Management or loans and participating shares) (common profit preferred shares). equity (through both financing provides subordinated sponsor PE the whilst equity in only invests management that customary also is It according totheirinvestment. by received amounts which in management are substantially distributions, higher than would correspond to all them of split a has been there onwards, moment that From aggregate them. by of invested multiple capital certain a and/or 20%–25% around equals h aons r dsrbtd qal t bt, netr and investors both, to equally distributed management, are amounts the then and moment, that to up received not amounts the recover they Thereafter, a full catch-up is usually distributed to management until respective investments. acquisition provisions? considerations? what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and position, aretheredifferentstructuring IRR ”) is obtained and/or certain investment multiples are multiples investment certain and/or obtained is ”) r rata pro ni te mut dsrbtd o investors to distributed amounts the until www.iclg.com r rata pro Spain o their to 247 Spain 248 Spain © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com meetings andboard ofdirectorsmeetings,asapplicable. is required vote to adopt the favourable relevant decision, both their in general shareholders’ that ensure to company, the of decisions key certain of passing the for requirements voting super-majority As explained in question 3.2 below, PE investors can usually impose board meetingswithoutvotingrights. the in participate can who observer, an usually appoint to right investors the reserve PE director, a appoint to allowed not is reason other any for or stake minority a holds investor PE the where cases decision-making the process and to be involved control with the company business. However, to in order in director, their one appointing when even usually right, such have usually investors PE investments, minority In companies, capital. share the portfolio in than higher is board their the in representation of directors of PE investors usually have the right to appoint members in the board Whatarethetypicalgovernancearrangementsfor 3.1 and acquisitioncost. value market the both than lower is shares manager’s the of price Conversely, shares. such of value sale the situation, bad-leaver a in shares shall be greater than both the acquisition cost and the market leaver’s good the of price sale the states that bylaws the in clause a be obliged to transfer their shares. may Thereupon, it is common to leavers include bad and good both where case the be also may are It which shares, their transfer to distributed proportionallyamongsttheremainingequityholders. forced usually are instead, Good leavers usually keep their shares of the company. Bad leavers, on amaterialbreachofwhichtheyareliable. leaver”); and (iv) termination by the company with “good fair cause based as if (except holder voluntary equity management (iii) the company; of resignation the jeopardising offence criminal a of on misbehaviour in the workplace; (ii) being found guilty by a court are treated as “bad leavers” may be: (i) disciplinary dismissal based holders equity the management why reasons main contrary,the the On by termination non-justified voluntary company. (iv) and position; current which their in disability employment continued of physical incapable them (ii) or renders death; illness (i) as: permanent such (iii) control retirement; cannot they reason a for holder equity management a of cease the to refers usually leaver” “Good Forwhatreasonsisamanagement equityholder 2.6 contemplated, butPEsponsorsgenerallytrytoavoidthem. sometimes are managers the of favour in options Put applicable). as shareholders, other the of representative the (or sponsor PE the irrevocable powers of attorney granted by the managers in favour of this of effectiveness ensure with reinforced are occasions transfer,some to on obligation which to granted usually are options Call vary will is shares it allowed thattheleavingmanagerkeepsshares)orbadleaver. sometimes (where of leaver good a transfer is it whether on (mandatory) depending this of Conditions a manager leaving the company held at a pre-agreed purchase price. that equity the purchase to shareholders) other the also usually (and garrigues GovernanceMatters 3 your jurisdiction? in yourjurisdiction? arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such usually treatedasagoodleaverorbadin e dpe i bad f ietr’ etns u as i general in in included also usually are but provisions These meetings meetings. shareholders’ directors’ of board in adopted be to decisions to apply only not majorities Vetoreinforced and rights granted intheirfavour. then veto rights and reinforced majorities are usually negotiated and interests, its representing nominees director enough have not does investor PE minority the and for held is stake rights minority a veto When shareholders. to subject decisions those over except directors), have of board the the of appoint members may of number to wide a stake entitled or majority are majority they (as a decisions with the over investors influence PE regard, this In as agreedbytheshareholdersingeneralshareholders’ meeting. business plan, related party transactions, etc.) or, according to law or disposals, and acquisitions be (i.e. directors of to board the by have approved decisions certain so limited generally are attorney of powers such However, favour. their in granted attorney of powers the of means by company the of business day-to-day the of charge in are team management the by appointed executives practice, In oee, h Saih aia CmaisAt (“ Act Companies Capital Spanish the However, Commercial Registry. the in and bylaws the in registered be can they veto and of arrangements effectiveness the on limitations contractual no are There hs poiin ae edrd od n, hrfr, r not are therefore, and, void rendered enforceable. are provisions these as company the of bylaws the the in not in but included agreement shareholders’ and made be can matters certain of adoption the Finally, private the agreement to require the unanimous favourable vote for become they third parties. therefore the and against enforceable not are but shareholders the among in agreements registered parties or the company between differently shareholders’ be agreement but cannot be included agreed in the bylaws of the can limitations or These modified shareholder. affected the of consent some on or matters restricting others) the rights of certain shareholders with the amongst express restructurings corporate or bylaws on decide to the of amendment directors, of removal the as (such matters majorities certain maximum and minimum binding some agreements. Doprivateequityinvestors and/ortheirdirector 3.2 some directorsandmanagers,etc. to granted be and to attorney of powers the to limitation the and group private management the usually of structure the as such any matters, governance other as well as are provisions, these include documents, which confidential agreements, Shareholders’ otherwise beentitledbylaw. and managers to provide information to shareholders that might not company the to requirements impose usually investors PE Further, . Arethereanylimitationsontheeffectivenessofveto 3.3 the bylaws of the company and/or in the correspondin position, whatvetorightswouldtheytypicallyenjoy? typically addressed? etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) iclg to: privateequity 2019 LSC g shareholders’ ) e forth set ”) Spain pns P das te ate uuly ge t sbet the to slowerpublicSpanishcourts. subject to agree to arbitration, to ensure confidentiality usually and a fast process as opposed parties of disputes the any submit to and law Spanish shareholders’to agreement contents deals, the In PE law. on of Spanish observance restrictions the than or other agreements limitations shareholders’ no are There the only not company anditsshareholdersbutalsothirdparties. against enforceable thus and public are corporate documents other and bylaws while them, signed have who parties Shareholder agreements are private and only enforceable against the members. other the of detriment unjustified the to interest own its in majority in being without the by when, adopted is company,it the of need abuse reasonable a to response in imposed be to understood be the majority.will the resolution by The manner abusive an when in imposed occurs also company the resolution, although not causing damage to the company’s assets, is of interest the to Damage third or members more or parties. one of benefit the to company the of the to contrary Law, the interest the damage company’sor the regulation or meeting bylaws to be contrary may are they company, they when the Nonetheless, challenged of resolutions LSC investor. the PE to the pursuant by assumed voluntarily unless PE investors have no specific duties towards minority shareholders, Arethereanydutiesowedbyaprivateequityinvestor 3.4 garrigues © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 the and shareholders through cause its may they damage company,any for company the of the creditors to liable are Directors or against thelaworcompany’s bylaws. diligence without performed acts their by caused damage any for accountable personally held are Directors secrecy. of duty (iv) loyalty; (iii) obligations to avoid conflicts of interest situations; and, Directors’ duties are, among others: (i) duty of diligence; (ii) duty of and, inparticular, thoseestablishedintheLSC. prohibition statutory any or legislation related other and 2015, 30, in and, office March of 3/2015, Law their the in established those of any particular,to discharge to incompatibility or prohibition its of those or directors, of ground any to subject be not may of Directors directors. appointed board the of member as or director A PE investor should be aware of the fiduciary duties it may have as Arethereanylegalrestrictionsorotherrequirements 3.6 Are thereanylimitationsorrestrictionsonthe 3.5 shareholders (or to minorityshareholderssuchasmanagement non-compete andnon-solicitprovisions)? typically addressed? portfolio companies? equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements vice versa )? Ifso,howarethese permanent conflictwiththeinterestsofcompany. in it places way other any in that or company the with potential, or on or actual whether competition, behalf effective involve that own others of their behalf on activities in engaging others, among from, refrain also must directors Therefore, it. to duties their and necessary the company’sthe interests with conflict can others, of adopt or behalf on those interests, personal to their which duty in situations the avoid to have measures directors event, any In from positionsontheadministrationbodyorotherssimilar. removal director’sor the appointment as such such, as condition its prohibition are the resolutions or decisions that affect the director in a direct or indirect conflict of interest. Excluded from the foregoing passing decisions in which the director or a related person may have or resolutions on voting and discussing from refrain must Directors lieu structures earn-out and locked-box of use trends increasing the include Recent transactions. bilateral to respect with prominence special gaining are IPO and auctions years, three to two last the In (supervised bybothSpanishandEUcompetitionauthorities). thresholds antitrust certain exceeds that concentration business a in result that acquisitions those for required also are Authorisations regulation. air energy, can be at an EU, national or local level depending on the applicable concessions, Authorisations public operators. tour and sectors media sports, transport, telecom, financing, to, gaming, limited not but as, such sectors regulated in undertaken those PE transactions do not usually require prior authorisation, except for use ofrepresentationandwarranties insurance. . Howdodirectorsnominatedby privateequity 3.7 . Havetherebeenanydiscernibletrendsintransaction 4.2 Whatarethemajorissuesimpactingtimetablefor 4.1 as acting entities or persons those “ or directors to “shadow” extended also is duties these of breach a from resulting liability related the and directors Additionally, it is also important to bear in mind that these duties of has beenintentionalmisconductornegligence. in violation of the duties inherent to their office, provided that there out carried or bylaws, the or law the to contrary omissions) (or acts D&O insurancetocovertheircivilliabilityacertainextent. Most directors of PE-invested companies in Spain usually contract a of boards to directors portfolio companies. nominate that investors PE to applicable Transaction Terms: General 4 of post-closing adjustments of the purchase price, as well as the of otherportfoliocompanies? terms overrecentyears? disclosure obligationsandfinancingissues? party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust de facto de ” directors. This is the main risk main the is This directors. ” www.iclg.com Spain in 249 Spain 250 Spain © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com is which non-compete, usually provided by themanagementteambutnot thePEseller. is covenant controversial and requested typically most The burden. the bear team management the make to attempt sellers PE the that extent the to sellers, PE by possible as much as avoided are indemnities and undertakings Covenants, Whatisthetypicalscopeofothercovenants, 6.3 bank account for a period of time and partial releases can be agreed. Escrow sellers, in which a percentage of the purchase price is deposited in a time. and scope deposits are still between the most common in warranty granted by PE limited although company, target PE sellers commonly have to offer a set of representations about the Whatisthetypicalpackageofwarranties/indemnities 6.2 are Earn-outs nevertheless conflictiveandmayeasilyleadtolitigation. risks. overpayment reduce to buyer the allow and the price if the seller keeps control over the company’s management maximise to buyer the enabling used, still are structures Earn-out financial statementsuntilclosingdate. the in leakages undisclosed of non-existence the warrant to have will seller the structure, this under buyer of protection proper a for price (using the latest approved financial statements). In this regard, no adjustments) and the simplicity and cost-efficiency in setting the prefer usually investors are there (as provide they certainty the to due structures locked-box PE side, transaction the of Irrespective Whatconsiderationstructuresaretypicallypreferred 6.1 be must described inthetakeoverprospectus. advisors financial target’s be must fee break-up the of conditions and terms the the and submitted by report a fee, such favourable approved have must company target the of directors of board The cost. transaction total the of 1% exceed usually not do fees However,these bids. competitive or when auctions into entering fees break-up accept to requested usually are investors PE Whatdealprotectionsare availabletoprivateequity 5.2 be will it as Spanish in addressed toallpotentialoractualshareholders. submitted be must documentation all and prospectus takeover the into funds the of chain control full the detail shall investors PE that establish regulations takeover Spanish Whatparticularfeatures and/orchallengesapplyto 5.1 garrigues Transaction Terms: Private Acquisitions 6 Transaction Terms: Public Acquisitions 5 acquisitions? commonly dealtwith? equity selleranditsmanagement teamtoabuyer? undertakings andindemnitiesprovidedbyaprivate team toabuyer? offered byaprivateequityselleranditsmanagement on thebuy-side,inyourjurisdiction? by privateequityinvestors(i)onthesell-side,and(ii) investors inyourjurisdictionrelationtopublic transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private eiiin f aae i as ngtae ad iie t te item the to provided forintheSpanishCivilCode. limited and negotiated also is damages of definition the of extension The agreement. purchase and share the in agreed covenant any or warranties and representations the of breach the from arising damages potential any cover to or liabilities potential identified specifically for provided usually are Warranties years). subject to their relevant statutory limitation periods (i.e. four to five security, social labour, tax, personal as data protection or environmental matters which are usually such matters for except from closing, years two to up of period a for price and 20%) the and of 5% (between percentage a at liability their cap usually sellers PE and 2%ofthepolicylimit. the transaction among other factors, but usually range between 0.5% the of timing company,the and requested coverage the costs, insurer’sassociated target the on depending vary premiums Insurance period isgenerallysevenyears. policy recovery the and 1% and 0.5% between fixed is deductible the limit value, enterprise target’s policy the of the 20% the and 10% market, between ranges the of needed, average estimated an coverage provide to the considering characteristics of the transaction and the target company. However, each company by determined is insurance policies insurance the of parameter Any bid competitive or acquisition processes. auctions in particularly Spain, in increasing significantly is insurance warranties and representations of use The with an equity commitment letter which sets forth the availability of In Spain the most common scenario is the buyer providing the seller they rarelygrantwarrantiesinPEtransactions. shareholders, selling also are team management the when Except between theparties. time, and partial releases of the amount deposited need to be agreed of period a to limited price, purchase the of percentage monetarily a to limited are they although money, seller’s the to access faster and retention ensure and liabilities potential certain cover to buyers by requested usually are warranties These sellers. PE by granted warranties common most the are accounts escrow mentioned, As . Whatlimitationswilltypicallyapplytotheliabilityofa 6.5 To whatextentisrepresentation&warrantyinsurance 6.4 . Howdoprivateequitybuyerstypicallyprovide 6.7 Do(i)privateequitysellersprovidesecurity(e.g. 6.6 warranties, covenants,indemnitiesandundertakings? the typicalcostofsuchinsurance? under anequitycommitmentletter, damages,etc.)? the managementteam)? private equitysellerandmanagementteamunder exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) funding, righttospecificperformance ofobligations by thebuyingentity(e.g.equity underwriteofdebt sellers typicallyobtainintheabsence ofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and iclg to: privateequity 2019 Spain other seller. considering an IPO exit, further than those applicable by law to any in sellers PE concern shall challenges and/or features particular No because they are difficult to negotiate and enforce in case of breach. Reverse break fees are relatively unusual in PE transactions in Spain be may it precedents, difficult toobtaintheirenforcement. conditions certain to are subject they since commonly and letters the of nature soft the to due However, the under obligations of commitment performance letter and/or to be indemnified for the damages caused. specific request to right the have entity,sellers buying the by compliance of absence the In material no adverse changeoccurrence. and conditions; and terms contractual on agreement final diligence; due the confirmatory to conditions: certain subject of general fulfilment in are they although entities, financial by financing is required such letters (usually of a soft nature) are issued debt Where companies. the controlling funds PE the by provided usually is letter commitment the required, is finance equity Where arranged byaninvestmentbankisnotyetcommon. pre-arranged a or financing financing package offered Staple to potential bidders for an acquisition and finance. equity and/or debt garrigues © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 be to possibilities same ultimately realised. the have structures each both of so be successful, to particularities out turned have the IPOs and sales on both Spain, In depends transaction. usually until it process exit but dual-track the pricing, run to continue can sellers PE IPO marketisfavourable. the when and deals large in particularly Spain, in seen be can but transactions, all in implemented not are processes exit Dual-track Do privateequitysellersgenerallypursueadual-track 7.3 investor PE the that might stillhaveremaininginthetarget companyaftertheIPOexit. participation the on depending days 360 to They are imposed for 180 days with a possibility to be increased up Whatcustomarylock-upswouldbeimposedon 7.2 What particularfeaturesand/orchallengesshoulda 7.1 Arereversebreakfeesprevalentinprivateequity 6.8 Transaction Terms: IPOs 7 exit? If so,whattermsaretypical? through asaleorIPO? and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare private equitysellersonanIPOexit? private equitysellerbeawareofinconsideringanIPO transactions tolimitprivateequitybuyers’ exposure? financing. traditional banks, the from trend for Spanish corporates financing is to actively seek on alternative dependence high the despite Thus, low-risk a and yields premium. attractive with returned, has market bond high-yield the economy, Spanish the of recovery the with Lately, only is not provide equitybutalsodebt. This funds debt where structures returns. hybrid more in higher applied far typically with for structures, alternative allows flexible it and and since complex financing interesting proved banking has both financing of combination The do notreachorcovertheneedsoftransaction. providing financing facilities where the traditional financial entities market Spanish the in active very are funds debt mezzanine some tool when banks were not providing enough liquidity. Additionally, importance gained lending financing alternative an Direct as crisis financial and economic the during market. direct Spanish the or in debt loans (vendor’sof sources common most the lending are company) target the at financing direct and financing Bank o-eiet netr i Saih Ergltd eils (both vehicles PE-regulated Spanish in investors non-resident by obtained income haven, tax a in resident is investor the Unless providing co-exist investors andcompanieswithadiversifiedmenuofdebtstructures. lending direct and financing bank both Thus, observed asignificantincreaseindirectlendingfromfunds. positive macroeconomic has 2018, a and 2017 in transactions PE of record a and environment by driven market, Spanish the years two last the in rates, interest lower and liquidity offering are banks and entities financial although above, 8.1 question in mentioned As tax to imposed limitations tax deductibility ofinterests(asfurtherexplainedinsection9below). some are there Additionally, the for under theLSC. assistance financial provide restriction legal main the is shares) or quotas own its of acquisition or security, grant or credits loans, extend funds, advance to is, (that assistance Financial . Pleaseoutlinethemost common sourcesofdebt 8.1 . What arethekeytaxconsiderationsforprivateequity 9.1 Whatrecenttrendshavetherebeeninthedebt 8.3 Arethereanyrelevantlegalrequirementsor 8.2 Financing 8 Tax Matters 9 bonds). off-shore structurescommon? financing marketinyourjurisdiction? financing) ofprivateequitytransactions? for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin investors andtransactionsinyour jurisdiction? Are debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof www.iclg.com Spain 251 Spain 252 Spain follows arecenttrendinotherEUjurisdictions. also This income. employment as than rather on property, income movable or gain capital a as taxed be will interest carried met, are conditions certain if that, clarify to and align to is amendment in managers to certainty connection with the taxation of provide the carried interest. The goal of this and clarify to relevant Guipuzcoa) (in the in introduced been applicable regulations in one of the has territories of the Basque Country amendment an Recently, point ofview). tax income personal a from “salary” be to deemed are price assets, market any (e.g. rules below employee an by acquired derivatives, or securities anti-avoidance including existing already the and wide purposes, the tax for to “work-related-income” or due “salary” of re-classification, definition of risk their and instruments Nevertheless, there is a certain discussion about the taxation of these two years. 30% tax reduction provided for gains accrued in periods Likewise, longer than remuneration. a from benefit may 300,000 EUR to up exit employment upon payments ratchet as received income the of taxation the than lower is which TaxIncome rate, Personal 23% the same way as the financial investors, and would be subject to the of the target company, capital gains upon exit would be generated in As the management team also holds a minority stake in share capital the transferofSpanishsubsidiariesareexempt. © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com the of part is of structure acquisition new reinvestment a into investment team’s the management in consideration tax main The generally are subject toPersonalIncome Tax exit ata 23%marginal taxrate. at gains capital 9.2, question in mentioned As Whatarethekeytaxconsiderationsformanagement 9.3 certain enjoy may of time); or(iii)stockappreciationsimilarrights(“ period (which minimum a in generated bonus if purposes tax deferred for reductions of payments (ii) ratchets; management or equity sweet (i) on: reasons, attention their focus usually tax-efficiency teams Considering exit. at value of maximisation the and principles risk-sharing on based packages It is common practice for the management team to receive incentive Whatarethekeytax-efficientarrangements thatare 9.2 Tax Income Corporate from from (“ exempt entities Spanish are by subsidiaries obtained Spanish dividends is, that to 5%, applies than also regime higher is exemption target the in shareholding the when investments domestic participation The regime. consolidation tax the and target the acquiring entity Spanish the by deals. PE incurred expense interest the of deductibility tax the like issues Spanish tax in common also However, it is important to undertake a particular analysis of certain are structures to Off-shore channels cash-back efficient facilitate investors. to planning require vehicles of careful types Other resident). EU an is lender the if Withholdingto Taxsubject be (except could investors non-resident by obtained income interest residency, tax investor the to Subject Spanish PE)isnotsubjecttotaxationinSpain. dividends and capital gains derived from the transfer of shares in the garrigues CIT ”). Likewise, capital gains obtained by Spanish entities from entities Spanish by obtained gains capital Likewise, ”). investment intoanewacquisition structure? teams thataresellingand/orrolling-overpartoftheir shares, deferred/vestingarrangements)? equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate SAR ”). target the by companies. income of generation the with link direct a present not does financing the authorities, tax the of opinion the shares in when, own of repurchase the finance to or equity of distribution the finance to borrowed indebtedness on been has focus the Also, pricing. transfer as well as discussion, of area common a also is companies CIT-payersof transfer the on companies target Spanish to expenses of allocation The by borrowed (specially, indebtedness intra-group loans) and its impact on the payment of taxes. on focused of deductibility the on 2015 have authorities tax Spanish the purposes, CIT in for expense interest introduced rules of result a As applicable toPEhaveoccurredin2018. regulation tax the in changes significant other no taxation, interest Other than the amendments in the Guipuzcoa regulations on carried oee, e omnctd o pns atoiis u fr FDI for but authorities statistical purposesonly. Spanish to communicated be however, must, companies Spanish in divestments and investments Foreign exceeds certainantitrustthresholds. sector or the transaction results in a concentration of companies that any prior authorisation unless the company is engaged in a regulated to subject not are transactions PE above, 4.1 question in stated As (“ Act Market Securities 29, Spanish September the on 2018, that mentioning worth is it Notwithstanding, enacted oramendedin2018. been has investments PE affecting legislation new significant no 2015, and 2014 in undertaken activity legislative intense the After . Havetherebeenanysignificant changesintax 9.4 more than10%incash. in the target company as a result of the exchange, and (ii) cannot pay of the new shares (i) should hold more than 50% of the share capital for the tax neutrality regime in share-for-share exchanges, the issuer To cases. apply certain in shares of exchanges to regime neutrality tax the of application the denied have resolutions court and audits tax recent However, tax-neutral. as qualified is exchange the that 02Areprivateequityinvestorsorparticulartransactions 10.2 Havetherebeenanysignificantlegaland/or 10.1 uoen alaet n o te oni o My 5 21 on 2014 15, May of Council markets in financial instruments (“ the of and Parliament European the of 2014/65/EU Directive of provisions the transpose partially aaeet opne ad moe diinl requirements additional impose especially inthecommercialisationoffunds. and companies management 0Legaland RegulatoryMatters 10 anticipated? jurisdiction (e.g.onnationalsecuritygrounds)? anticipated? teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities subject toenhancedregulatoryscrutinyinyour private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting iclg to: privateequity 2019 MIFID II ”), which impact on the LMV ) mne to amended ”) Spain rvdd y h slig hrhles ado shareholders’ and/or shareholders) selling be agreements. the to representation by a provided as (particularly agreements investment in usual increasingly becoming are provisions compliance Further, every timetheentityapproachesapotentialinvestment. are companies on supervised diligence AMLcarefully due and extensive focused undertaking PE primarily officers compliance internal regulations. incorporating anti-bribery and corruption anti- with compliance with concerned increasingly are sellers PE generally is It t and well. usual The area. as each in specialised diligence advisors outside by conducted common due are thresholds sample-based materiality reports, red-flag However, financial, tax, commercial,technical,regulatoryandcompliance. legal, including potential perspectives the several of from analysis acquisitions extensive an covers usually report the thoroughly,since performed be to process a is work diligence Due Howdetailedisthelegalduediligence(including 10.3 garrigues © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 Hasanti-briberyoranti-corruptionlegislation 10.4 work. diligence due of exempt normally are companies traded Publicly process. and resources devoted by each party and th and party each by devoted resources and imeframe covers a four-week period, depending on the commitment prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors diligence, contractualprotection,etc.)? materiality, scopeetc.)? approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ e technology used in the in used technology e for herassistanceinthe2019edition. We would like to give special thanks to our colleague Andrea Esbrí, Acknowledgment investment inourjurisdiction. and to considerations major labour become rights other and rates, regulations union exchange foreign stability, political certainty, economy,other legal any in sections. must As previous the in addressed investor PE potential a that consider when approaching a Spanish investment have already been factors relevant the of Most its (nor liabilities ofanotherportfoliocompany. company portfolio a the for accountable held be officerscannot directors, employees) or law, Spanish under Otherwise, for which aliabilityhasrisenisattributedtothePEinvestor. omission or action the consequently, and, company company portfolio a as considered the of veil corporate the is lifts court the if (ii) investor or director”; “shadow portfolio PE underlying the the if (i) of companies: liabilities the for accountable held be could investor PE a which under circumstances two are There 11Whatotherfactorscommonlygiverisetoconcerns 11.1 Arethereanycircumstancesinwhich:(i)aprivate 10.5 1OtherUsefulFacts 11 considering aninvestmentinyourjurisdiction? the liabilitiesofanotherportfoliocompany? should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof www.iclg.com Spain 253 Spain garrigues Spain

Ferran Escayola María Fernández-Picazo Garrigues Garrigues Avinguda Diagonal, 654 Hermosilla, 3 08034 Barcelona 28001 Madrid Spain Spain

Tel: +34 93 253 37 00 Tel: +34 91 514 52 00 Email: [email protected] Email: maria.fernandez-picazo@ URL: www.garrigues.com garrigues.com URL: www.garrigues.com Spain

Ferran Escayola is a Corporate, M&A and PE partner based in Spain María joined Garrigues in October 1995 and she was appointed and co-chairs the Firm’s U.S. Desk. Until January 2016, he headed partner in 2006. Her practice focuses on M&A, PE, Corporate Law, the Firm’s office in New York. Banking and Renewable Energies. His practice focuses on Spanish M&A and PE, with a particular María specialises in M&A, with a special focus on PE (both emphasis in cross-border transactions with the US and LatAm and transactions and funds), leveraged financing, and MBIs/MBOs and American investments in Spain. Ferran has a significant track record regulated acquisitions in the financial (insurance companies, banks, and experience with multijurisdictional acquisitions and foreign stock brokers, fund managers) and energy industries (wind, solar, investments. biofuels). Prior to joining Garrigues in 1999, he was an associate in the María has a degree in Law from Universidad San Pablo CEU, Madrid corporate and business law department of another international firm. and she is a member of the Madrid Bar Association. He graduated from the Autonomous University of Barcelona where he completed a specialisation in European Community Law. Later, he obtained his LL.M. in International Economic Law (honors) from Howard University School of Law in Washington D.C. and supplemented his studies by completing a postgraduate programme at Harvard Law School. In 2005–2006, he worked as an associate in the M&A department of Skadden, Arps, Slate, Meagher & Flom, LLP, in New York.

Garrigues is a leading legal and tax services firm with international coverage through our dedicated offices in Beijing, Brussels, Bogota, Casablanca, Lima, Lisbon, London, Mexico D.F., New York, Porto, Santiago de Chile, São Paulo, Shanghai, and Warsaw, in addition to our 18 offices in Spain. Our PE teams sit in the main offices of the firm’s extensive Spanish and international network, thereby finding the right blend between specialist expertise and local market knowledge. The PE group works in close collaboration with other industry specialists, ensuring optimum quality and tailor- based analysis for each acquisition and for each investor. Our PE practice covers areas such as setting-up funds, acting on behalf of management teams and investors, advising transactions in seed or venture stages, LBOs or MBOs and funds of funds transactions. Our experience accumulated in the sector has made Garrigues one of the leading providers of tax and legal services to PE firms, LPs, GPs and other industry players. Garrigues M&A and PE partners are highly and consistently recognised by the most prestigious rankings and international legal directories and by their clients.

254 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 33 Sweden Sten Hedbäck

Advokatfirman Törngren Magnell Vaiva Burgyté Eriksson

1 Overview 1.3 What trends do you anticipate seeing in (i) the next 12 months and (ii) the longer term for private equity transactions in your jurisdiction? 1.1 What are the most common types of private equity transactions in your jurisdiction? What is the current state of the market for these transactions? Have you As the number of players on the Swedish PE market is increasing seen any changes in the types of private equity and, with that, the competition for attractive investment targets, PE transactions being implemented in the last two to houses are, to an increasing extent, attempting to differentiate three years? themselves through specialisation and access to specialist industrial advisers in order to be able to add industrial and operational know- The Swedish Private Equity (PE) market remains active and the how to their portfolio companies. amount of PE transactions involving Swedish targets and/or Swedish PE fund managers continues to be high. 2 Structuring Matters Infrastructure and engineering/manufacturing-related deals have traditionally been frequent on the Swedish transaction market. In respect of the number of PE transactions, the wholesale and retail, 2.1 What are the most common acquisition structures consumer goods (herewith consumables), professional services, adopted for private equity transactions in your financial institutions and technology (internet-based services, jurisdiction? fintech, medtech, biotech and gaming) sectors have also dominated the Swedish market. Due to a threat of an increased regulatory Today, virtually all national and international PE funds with burden on target companies in the publicly funded healthcare and Swedish activity are organised as some type of limited liability educational sectors, the PE players have, in recent years, not made partnership, wherein the institutional investors participate as direct new platform investments in these sectors. Instead, they have or (normally) indirect limited partners, and wherein the fund focused on exiting their current holdings by IPO or selling their manager acts as the general partner, normally owned through a shares to long-term institutional investors. private limited liability company specifically organised for this A majority of the Swedish PE players focus on mid-cap target purpose. companies. In general, the target companies are exited through Funds organised under Swedish law will, when investing into trade sales, secondary buyouts and IPOs. Controlled auctions are Swedish target companies, normally adopt a one-tier structure by still quite commonly used in PE transactions involving non-public investing through a set of Swedish holding companies. However, target companies. funds organised under a foreign jurisdiction investing in Swedish target companies will usually structure the acquisition by adopting a two-tier structure, irrespective of whether the manager is foreign or 1.2 What are the most significant factors encouraging or domestic. inhibiting private equity transactions in your jurisdiction? Normally, the acquisition of the shares in the Swedish target company will be made by the foreign or domestic holding structure The Swedish transaction market in general remains active, fuelled through a Swedish-incorporated and tax-resident special purpose by low interest rates and an abundance of capital invested in PE vehicle (SPV) that eventually acquires the target company. funds. The good market conditions, in combination with a stable Additional (Swedish and foreign) holding companies could be financial system providing relatively inexpensive financing and an added into the structure to allow for flexibility in obtaining un-bureaucratic legal system allowing foreign and domestic subordinated debt financing and for other tax and commercial investments, have allowed for a strong transaction market. The PE reasons. industry is, furthermore, quite mature, well-known and, in many Due to public pressure and new tax legislation, several large ways, trusted in Sweden. Swedish PE fund managers have announced that they contemplate setting up their new funds onshore. Further, due to the increased regulatory burden, the smaller Swedish PE players focusing on mid- cap and small-cap targets are starting to arrange alternative investment structures in the form of pure investment companies.

ICLG TO: PRIVATE EQUITY 2019 WWW.ICLG.COM 255 © Published and reproduced with kind permission by Global Legal Group Ltd, London 256 Sweden © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com being often CEO of the layers granted around30percentofthepot. with different proportions the agreed between in allocated management deals, large in cent structure. return aside differentto management ranging from 10–15 per cent to as low as 3 per set be a would pots equity sweet deal, the of with size the on Depending coupon) 1 preference (including and/or tier common shares typically, comprises often are, most to offered management equity participation The CFOs. equity and CEOs including management, the for Eligible exit process. smooth a enable to present normally are provisions tag-along and Drag-along company). the leave to choose or cause for dismissed are shareholders’agreement, the of breach material a commit they if (e.g., leavers bad considered are they if discount a at or leavers, good are they if value, market the to corresponding price purchase a for investor majority the to shares their back sell to need typically shares incentive the to apply restrictions transfer strong Usually, offer (or a holding company directly or indirectly owning the SPV). typically the make to SPVused the in shares incentives management include investors PE by provided arrangements Compensation Inrelationtomanagementequity, whatisthetypical 2.5 tag-along rights. and drag-along as such provisions exit and founders) the (binding include typically information participation, will board of agreement right shareholders’ provisions, governance the do, they changed in recent years as there is an increased tendency to do so. If Historically, PE investors rarely took minority positions but this has Ifaprivateequityinvestoristakingminority 2.4 investors havereceivedreturnaboveapredeterminedhurdlerate. after arises normally entitlement interest carried The thereof. mix a or and deals, separate of basis level the on interest carried fund the calculating on managed typically calculated on the basis of the whole fund. However, is there are funds interest carried The Sweden and partner general the the and by management respectively. case) generated plan/investment creation business value the expected in out (set return preference shares. and The envy shares ratio is normally linked ordinary to the expected of way by structured generally is equity The Howistheequitycommonlystructured inprivate 2.3 the debt of the structure equity and acquisition holdingcompanystructure. and purposes debt tax the on to requirements mainly providers’ relate drivers main The Whatarethemaindrivers fortheseacquisition 2.2 advokatfirman törngrenmagnell through an accession to a shareholders’ agreement. T rights, veto rights, anti-dilution provisions, share transfe institutional, managementandcarriedinterests)? structures? acquisition provisions? what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and considerations? position, aretheredifferentstructuring equity transactionsinyourjurisdiction(including he management r restrictions (and thecompanyitself). parties third to binding also and available publicly are association The of articles company’s The provisions. its by bound the are restrictions). agreement to parties the transfer only and public not share is agreement shareholders’ and structure, governance capital (containing corporate association governance, of articles the regarding company’s and restrictions) transfer share provisions and undertakings information (containing and sponsor management the by into entered agreement shareholders’ the are companies portfolio PE for arrangements governance typical The non-compete undertakings). are in breach of the terms of the shareholders’ agreement (including who those or misconduct gross on based dismissed summarily are employment their or grounds personal on based employment their from dismissed are terminate who investment, their after who time of period set a within those voluntarily normally are leavers employer without cause, due to long-term illness or retirement. Bad the by terminated are who those be normally would leavers Good instructions provided bytheshareholderappointing him. the director. A director might therefore disregard the veto rights and appointing shareholder the by provided owe instructions the supersede CEO) and that jointly) shareholders all board (and company the to the duties fiduciary (e.g., representatives company The The parties. by theprovisionsinarticlesof association. third or bound however, are, parties representatives third and representatives its company, its itself, company the its against shareholders’enforceable The not provisions. is agreement by bound are agreement shareholders’ the to parties the Only annual budgets,newinvestmentsoutsideofthebusinessplan,etc. and acquisitions new and plan agreement business the of CEO, approval measures, anti-dilutive disposals, shareholders’ the of the appointment in the list concerning matters) reserved (or veto a implement will it stake, controlling a important hold not does investor control PE to able the therefore in the If rights. voting its through company the in decisions corporate is shares the and of company majority the portfolio holds often investor PE The . Whatarethetypicalgovernance arrangementsfor 3.1 Forwhatreasonsisamanagement equityholder 2.6 . Arethereanylimitationsontheeffectivenessofveto 3.3 Doprivateequityinvestorsand/ortheirdirector 3.2 GovernanceMatters 3 in yourjurisdiction? your jurisdiction? typically addressed? position, whatvetorightswouldtheytypicallyenjoy? arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such usually treatedasagoodleaverorbadin the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor iclg to: privateequity 2019 can be up to five years if there are special circumstances) and/or without reasonablecompensation. circumstances) special are there an if years five to up for be can extended be it but – reasonable deemed is years two to up of period a (typically not may provisions shareholder a longer no is party a after time of period unreasonable the meaning fair, a in common shareholders’ are agreement. and reasonable be to need provisions The provisions non-solicit and non-compete Both minority protectionrules,arenotenforceableunderSwedishlaw. shareholders’ the of agreement. breach Provisions that are contradictory to mandatory law, in e.g., adopted resolutions corporate of shareholders’ the under validity the affect not will breach the party,but breaching the from breach a damages contractual seek may commits party non-breaching the agreement, shareholder a If the parties and not enforceable against the company or third parties. between binding only is agreement the 3.3, question in mentioned Shareholders’ agreements are enforceable under Swedish law but, as shareholders’ the in provisions agreement arenotenforceable. through provisions protection However, minority agreement. mandatory their use to investors minority the disallowing generally shareholders’ the through issues share and transfers value e.g., handle, to how on the advance in of an scrutiny appoint special agree typically parties company. a The the of board’sadministration to implementing minority and the auditor additional entitling e.g., minority specific clauses, certain also protection are There etc. majority qualified offered not are that issues share new the and shareholders, to other of benefit detriment own its for decisions implement not may Sweden investor majority the that meaning equally, treated be should shareholders contains Act all Companies principle, general a As provisions. Swedish protection minority various the However, minority shareholder. a towards such as duties any have not does and interest Under Swedish law, a controlling shareholder is free to act in its best Arethereanydutiesowedbyaprivateequityinvestor 3.4 investor’s the with accordance instructions). in vote not does representative board the if sanctions of (containing them by appointed directors the articles companies’ the with agreements consultancy separate into entering and in association provisions governance detailed implementing by risk such for cater to seek funds some result, a As advokatfirman törngrenmagnell © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London the iclg to: privateequity 2019 by bound not are directors the Furthermore, EU/EEA. the of residents be should company liability limited Swedish a in The investor should be aware that at least half of the board members Arethereanylegalrestrictionsorotherrequirements 3.6 Arethereanylimitationsorrestrictionsonthe 3.5 shareholders (or to minorityshareholderssuchasmanagement non-compete andnon-solicitprovisions)? typically addressed? portfolio companies? equity investorsthatnominate directors toboardsof investors toportfoliocompany boards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements prorata to the current shareholders require the support of a of support the require shareholders current the to vice versa )? Ifso,howarethese relevant the shareholders. to relating matters in a disqualified be as not board will the whole that so appointed also is director independent an Often, person. another with together or alone whether represent, to the company and a legal person which the board member is entitled between agreement an company,or the of interest which the conflict may interest material has question in member board party, the third where a and company the between agreement an company, the specific and member board a the between agreement an in regarding matter participate not A therefore company. may the board for the care of and member of interest best the in act to duty fiduciary a have directors the questions, previous in mentioned As ouet te agts or t eaut te fe ad any and offer the shareholders, etc.alsoneedtobeconsidered. offer evaluate the to of alternatives to the offer period, conduct squeeze-out of the board minority approval target’s receive the and document, prepare to necessary time in Sweden will, in general, be similar to those above. However, the transactions going-private for timetable the influencing issues The vehicles andtopreparetheexitoftarget company. investment desired the establish to required time the does as deal, the of size and complexity the upon dependent heavily be normally will discussions such for required time The timetable. the impact as (such Timing and speed of the work stream for financing discussions also consider to e.g., financialinstitutions,infrastructure,mediaanddefence. requirements specific requirements for be public permits and approvals). Such industries are, may there industries, regulated certain within operates company target the If time the with accordance schedule agreeduponbytheparties. in completed be regular can hence purchases authorities, share Swedish from consent require not do general in transactions corporate clearance, competition for Except . Howdodirectorsnominated byprivateequity 3.7 . Whatarethemajorissuesimpactingtimetablefor 4.1 provided todirectorsappointedbyPEinvestors. be normally will Insurance D&O Customary Act. Companies the company under thecustomary claw-back provisions in accordance with by recovered be may transfers such transfers, value unlawful investor, the If however, has director.instructed a director (or other shareholders) to execute the appointing for merely investor PE This damages. liability is personal for the director and such will not be transferred to the compensate shall transfers e.g., value of, respect unlawful in assists or taxes due pay to fails company, the to damage causes negligently or intentionally duties, her or financial his of its including affairs, the performance the director,in position. managing who, Aor director company’s and the organisation the of for management responsible are and company Swedish the a of directors the company have a fiduciary duty to act in the best interest and care of Instead, agreement. shareholders’ Transaction Terms: General 4 of otherportfoliocompanies? disclosure obligationsandfinancingissues? party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust www.iclg.com 257 Sweden 258 Sweden © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com between thepartieswouldbemutual. undertakings and parties equal between merger a of part be would arrangement the if as such circumstances, specific under be granted only would exemptions such but Council, the Securities with Swedish restriction this from exemption an for apply to possible fees and arrangements no-solicitation to procure exclusivity, are not permitted. It is and break-up as such measures, protection suppliers. deal typical that means This or customers undertakings employees, to respect confidentiality with undertakings for except offeror, the with arrangements related binding-offer any into enter to allowed not is company target a rules, take-over Swedish Under Whatdealprotectionsareavailabletoprivateequity 5.2 due tocircumstanceswithinthebidder’s control. refuse to make available acquisition facilities unless a default occurs includes “certain funds” language, meaning that the lenders may not agreement. The debt financing for a takeover bid therefore typically financing banks fail to fulfil their obligations under the relevant loan the should invoked be only effectively could and financing equity to relate not may condition such However, offer. its in condition financing a include may bidder the transaction, going-private a In declining theoffer. or revaluating of risk the mitigate to conducted are conditions key the of diligence target company and due preparations with respect to financing and other to respect with preparations major due Secondly, from acceptances unconditional shareholders ofthetarget company. or conditional secure further and shareholders of its to board recommendation target’stheir for the directors by pre-approval the seek the may acquirer dissent, the shareholder with associated acquirer prepares and structures the transaction risks accordingly. Firstly, the address To rules thatmustbecompliedwiththroughoutthetransaction. and restrictions particular imposing apply, the may Rules and Takeover exchange’s Act Takeover a the on market, listed regulated companies Swedish involving transaction going-private a In PE investors. Sweden There are no particular features or challenges applied specifically to Whatparticularfeatures and/orchallengesapplyto 5.1 price purchase prevailing mechanism. the being involving mechanism price deals purchase in box” increase “locked the and the insurance (W&I) Indemnities are & Warranties Sweden in trends Recent Havetherebeenanydiscernible trendsintransaction 4.2 advokatfirman törngrenmagnell rnato em:Pbi custos Transaction Terms: Public Acquisitions 5 commonly dealtwith? terms overrecentyears? acquisitions? investors inyourjurisdictionrelationtopublic transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private h sles saeodr’ gemn wee qa tetet is treatment equal where normally ageneralrule. agreement shareholders’ sellers’ the under purchase provisions the drag-along customary in to due equally mainly treated agreement, are sellers all usually but seller PE the than warranties extensive more provide might Management a wider rangeofwarranties. provide to sellers PE allowed however, has, policies closing) insurance to (prior events W&I cost-efficient of introduction the certain years, recent In warranties. of absence and authority and they foreseeability, high transaction with typically only provide fundamental warranties such as title capacity and the possible distribute as to soon as wish proceeds usually sellers PE the Since vendor loannote. a through seller the by financed is price purchase the of part a that purchase price is and paid by issuing consideration shares in the SPV, or date box” “locked the closing. Depending on the between seller, it is not uncommon that part business of the flow the cash by expected generated the for seller is the component interest compensating an introduced, that common is it used, is mechanism proceeds to investors and sellers after closing. When a “locked box” sale of distribution prompt enables and thereto, relation in disputes potential and adjustments post-closing avoids price, purchase the in certainty offers mechanism box” “locked The reports. quarterly or monthly non-audited or audited of basis the on calculation debt price purchase box” “locked a net less value, enterprise an on based often preferred, is mechanism sellers, and buyers PE both For itiue h poed t is netr imdaey fe coig However, areas which have closing. not been sufficiently covered after by the due immediately investors its to proceeds the to sponsor distribute PE the enabling and buyer the and seller the between gap the bridging warranties, negotiating on spent time minimising used very frequently in Sweden, providing clean exits tool for sellers a and nowadays is insurance W&I 4.2, question in mentioned As between run is business the how including covenants Restrictive such covenantstothebuyer. provides normally non-competition/non- management however, companies, portfolio giving of in holding and restrictive structure fund the on depending covenants solicitation usually are funds PE common. are transaction the following years three to two to up Whatisthetypicalpackageofwarranties/indemnities 6.2 Whatconsiderationstructures aretypicallypreferred 6.1 . To whatextentisrepresentation&warrantyinsurance 6.4 Whatisthetypicalscopeofothercovenants, 6.3 signing and closing, and non-competition/non-solicit Transaction Terms: Private Acquisitions 6 team toabuyer? on thebuy-side,inyourjurisdiction? the typicalcostofsuchinsurance? equity selleranditsmanagementteamtoabuyer? offered byaprivateequityselleranditsmanagement by privateequityinvestors(i)onthesell-side,and(ii) exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) undertakings andindemnitiesprovidedbyaprivate iclg to: privateequity 2019 ation covenants Other ways for PE buyers to secure themselves against counterparty secure often more sellers party.third a to risks the by shifting themselves by insurances W&I and buyers PE above, mentioned As PE the to proceeds the investors assoonpracticableafterclosing. distribute to interest their to due claims potential cover to escrow an provide to reject typically sellers PE leakage no and course) Sweden (ordinary authority, events from excluded are covenants, and certain capacity of title absence as such warranties, Fundamental process. diligence due the during provided information for exclusions and items deductible of exclusion caps, and baskets time, in limitations including warranties, the to limitations standard several are There Whatlimitationswilltypicallyapplytotheliabilityofa 6.5 1.2–1.5 percentofthepolicylimit. around typically is insuring of cost The covered. fully be to policy insurance special a require may which issues pricing transfer and insurance policy. Typical exclusions include environmental matters the from excluded are matters disclosed and risks known diligence, advokatfirman törngrenmagnell © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 they do,however, occurunderspecial circumstances. transactions; PE Swedish in prevalent not are fees break Reverse Arereversebreakfeesprevalent inprivateequity 6.8 closing. to conditions the of satisfaction the to subject buyer the of behalf on act to rights sellers the giving of way by obtained typically are sellers the for rights SPV.Enforcement the by due price purchase equity an the of part with remaining the cover to fund’sinvestors, the or fund, the seller the provides commitment letter normally guaranteeing drawdown of sufficient equity from also the buyer from The confirmation through obtained agreement. purchase a into entering to prior provider debt proposed was price the of financing purchase that seller the to prove to have often buyers PE Howdoprivateequitybuyerstypicallyprovide 6.7 from thesellersinsharepurchaseagreement. Do (i)privateequitysellersprovidesecurity(e.g. 6.6 10–30 percentofthepurchaseprice. price. purchase the to Business warranties and corresponding other covenants are often capped at around cap a to subject typically risks are by requesting escrow accounts and guarantees private equitysellerandmanagementteamunder the managementteam)? warranties, covenants,indemnitiesandundertakings? If so,whattermsaretypical? transactions tolimitprivateequity buyers’ exposure? under anequitycommitmentletter, damages,etc.)? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and de minimis de and basket thresholds and thresholds basket and /undertakings on pbi o a euae mre, moe diinl ot and costs administrative burdenoncompaniesandtheirboardsofdirectors. additional impose market, regulated a on public going of moment the from Code, the under taken be to needed measures requirement to annually publish a corporate governance report. The the and board the of directors independent of composition certain a to seek Code the in rules improve transparency within public the companies, by, e.g., prescribing of Several explain”. or “comply of principle the under market, regulated a on listed companies to applicable rules out sets Code Governance Corporate Swedish The retains itsmajoritypositionposttheinitialoffering. shareholder majority a if discussion of subjects central the of one are rights appointment board the which of dissolved, be must rules market applicable shareholders’of violation in rights All association. of articles a company’s within the within as shares, such as restrictions the external and agreement such to related restrictions restrictions internal and including rights all dissolve to is The starting point related to the shares in a going-public transaction exited throughanIPO. been therefore have companies target PE the of Many valuations. high to subject been has market public Swedish the years, recent In to execution. is process prior just aborted and process sale the of end the until dual-track run normally The terms. favourable and most return the attractive providing most the offering route exit the pursue and A dual-track process allows the PE sponsor to keep its options open year wouldbecommoninsuchcase. a or months six least at of period lock-up A listing. upon disposal sudden such of risk price associated the on take to willing be not underwriter,an normally as would acting they is adviser financial a If disposal. sudden a of drop price the mitigate will period lock-up adviser. If the owners are considering a full exit of their holdings, a financial other any of recommendation the or underwriters runners, book whether advisers, appointed the of demand and function the and transaction the on depending apply may restrictions Lock-up . Whatcustomarylock-upswouldbeimposedon 7.2 Whatparticularfeatures and/orchallengesshoulda 7.1 . Doprivateequitysellersgenerallypursueadual-track 7.3 Transaction Terms: IPOs 7 exit? through asaleorIPO? private equitysellersonanIPOexit? private equitysellerbeawareofinconsideringanIPO and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare www.iclg.com 259 Sweden 260 Sweden © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com claims thanwhatthemezzaninefunds accept. bank’s the to subordinated deeply more be to accept often lenders direct new These sector. financing traditional the outside players see private and public pension funds, insurance companies and other we market, the entered have which lenders new Among position. credit the for requirements lower with competitors new of entry the and pricing to due declined have structures Mezzanine loans. term an offering years recent market alternative to mezzanine debt and also the as an alternative to the bank’s entered have lenders New Whatrecenttrendshavetherebeeninthedebt 8.3 any relevantsecurityorguaranteedocument. in inserted is issues these address however,to language limitation a are dealt with, requires analysis on a case-by-case basis. Generally, they how and apply, restrictions such extent what to and Whether certain prohibited loans and the purpose of the company’s business. under Swedish law is further subject to restrictions on distributions, subsidiary a or target a by guarantees and security of granting The guarantees afteraperiodoftime. and security provide may group targetHowever, the target. said of cash loans, security or guarantees in direct relation to an acquisition not is assistance law). Therefore, a target company or its subsidiaries cannot provide financial on perpetually linked to prohibition a certain loan (differing from, e.g., Norwegian the however, law; Swedish under procedure whitewash no is There company. sister or parent its or itself grantor or lender the in shares of acquisition an financing of purpose the with guarantees or security of granting contains law and loans of Swedish provision the prohibit which rules However,assistance financial choice. investor’s particularly PE that a restrictions affect or requirements legal no are There Arethereanyrelevantlegalrequirementsor 8.2 transaction withbondfinancingalreadyatcompletion. also seen in larger deals. However, it is not common to finance a PE Sweden are lender supersenior a as bank the with structures financing bond Bridge-to- years. few past the in development significant a seen market for high-yield bonds and debt funds offering unitranches has the whereas pre-crises, as used commonly as not is debt Mezzanine loans. bank senior and debt bond high-yield junior or mezzanine purposes, covenant and ranking for equity as treated is which debt ) subordinated shareholder and/or vendor combines (two or more of The typical debt financing of a PE transaction in the Swedish market Pleaseoutlinethemost common sourcesofdebt 8.1 advokatfirman törngrenmagnell Financing 8

bonds). financing marketinyourjurisdiction? financing) ofprivateequitytransactions? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin

neutral exchange of shares by deferring taxation until exit. exit. until taxation deferring by shares of exchange neutral

proceeds, and in relation to their roll-over in order to obtain a tax tax a obtain to order in roll-over their to relation in and proceeds,

exit would be their individual tax treatment in relation to their their to relation in treatment tax individual their be would exit

Important tax considerations for a Swedish management team in an an in team management Swedish a for considerations tax Important

9.3 What are the key tax considerations for management management for considerations tax key the are What 9.3

for the employer. the for

contributions for the employer which is, however, a deductible cost cost however,deductible is, a which employer the for contributions

tax rates. Salary and benefit costs are also subject to social security security to social subject are also costs benefit and tax rates. Salary

emplo

as securities (but rather as employee share options) provided to an an to provided options) share employee as rather (but securities as

shares below market value) and incentive instruments not qualified qualified not instruments incentive and value) market below shares

In In general, all types of salaries and benefits (including acquisition of

subject subject to restriction more severe than has been accepted in case law.

offered to management and to ensure that the instruments are not not are instruments the that ensure to and management to offered

it is important to make a third-party valuation of the instruments instruments the of valuation third-party a make to important is it

use use different types of share classes. In order to avoid a tax exposure,

acquisition company. An alternative may be to issue warrants or to to or warrants issue to be may alternative company. An acquisition

management may be offered to invest in the highly debt financed financed debt highly the in invest to offered be may management

participation loans). In order to lower the initial investment, investment, initial the lower to order In loans). participation

purposes (shares, warrants, convertible bonds, and profit profit and bonds, convertible warrants, (shares, purposes

security (typically subject to capital gains taxation) for Swedish tax tax Swedish for taxation) gains capital to subject (typically security

fund/target companies through an instrument that will qualify as a a as qualify will that instrument an through companies fund/target

are often structured so that management is offered to invest in the the in invest to offered is management that so structured often are

Management incentive programmes in Swedish target companies companies target Swedish in programmes incentive Management

9.2 What are the key tax-efficient arrangements that are are that arrangements tax-efficient key the are What 9.2

onshore structure. structure. onshore

on Swedish target companies have been established employing an an employing established been have companies target Swedish on

against offshore structures, many newly founded PE funds focusing focusing PE funds founded newly offshoremany against structures,

decreasing tax benefits, the regulatory burden and public opinion opinion public and burden regulatory the benefits, tax decreasing

turn, is owned by the fund. In recent years, however, due to the the to due however, years, recent In fund. the by owned is turn,

Luxembourgian or Channel Islands holding companies) that, in in that, companies) holding Islands Channel or Luxembourgian

structure, structure, owned by a foreign holding structure (typically one or two

Swedish target companies typically have a Swedish holding holding Swedish a have typically companies target Swedish

Offshore structures are still quite common. Structures involving involving Structures common. quite still are structures Offshore

exempt. exempt.

may also sell the shares in a Swedish wholly-owned subsidiary tax- subsidiary wholly-owned Swedish a in shares the sell also may

Swedish Swedish participation exemption rules, a Swedish holding company

target company, tax consolidation may be achieved. Under the the Under achieved. be may consolidation tax company, target

acquisition acquisition company holds more than 90 per cent of the shares in the

against against interest payments related to the acquisition and, provided the

allow allow for the taxable income of the Swedish target group to be offset

A Swedish acquisition company may be established in order to to order in established be may company acquisition Swedish A

rules. rules.

exempt for the seller under the Swedish participation exemption exemption participation Swedish the under seller the for exempt

conducted through share deals since a share deal is normally tax- normally is deal share a since deals share through conducted

The vast majority of transactions in the Swedish PE market are are market PE Swedish the in transactions of majority vast The

9.1 What are the key tax considerations for private equity equity private for considerations tax key the are What 9.1

Tax Matters 9

yee yee are considered employment income taxed

investment into a new acquisition structure? structure? acquisition new a into investment

teams that are selling and/or rolling-over part of their their of part rolling-over and/or selling are that teams

shares, deferred / vesting arrangements)? arrangements)? vesting / deferred shares,

equity acquisitions (such as growth shares, incentive incentive shares, growth as (such acquisitions equity

typically considered by management teams in private private in teams management by considered typically

off-shore structures common? common? structures off-shore investors and transactions in your jurisdiction? jurisdiction? your in Are transactions and investors

iclg to: privateequity 2019

with

progressive progressive

professional investors. border marketing of alternative investment funds within the EEA to cross- for rules contains Act AIFM the addition, In functions. of delegation restricting rules and procedures valuation requirements, organisational management, of liquidity conflict management, to risk related interests, rules with comply things, other among to, fund investment alternative an of manager the requires Act AIFM previously of number The regulation. a to subject funds, made PE including funds, unregulated has Act AIFM The Act. AIFM the through directive EU AIFM the implemented Sweden 2013, In carried on taxation interest. regarding cases and see discussions to expect Sweden Wecontinuous tax). cent per (25–30 gain capital a of instead tax) cent per 58 approximately to (up income salary a as taxed be closely held companies is that a portion of the carried interest should on rules the applying of effect The so- companies. held closely regarding called rules Swedish the to according interest carried the tax to trying now is and agency,cases tax court however,these lost Swedish The funds. PE in management for salary a as considered tax Swedish agency has previously considered that the carried interest should be The interest. carried of taxation the been has years recent during issue tax main the structures, fund PE the regards As Havetherebeenanysignificantchangesintax 9.4 advokatfirman törngrenmagnell © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 due thorough rather company’starget a the of risk material the conduct on focus a with diligence to wants often sponsor PE The Howdetailedisthelegalduediligence(including 10.3 media, energy, insurance, infrastructure andtelecomsectors. financial, the e.g., in, targets include may This considered. be to approvals or permits for requirements Within certain industries or scrutiny.sectors, there may regulatory be specific regulatory enhanced any to subject not are investors PE Areprivateequityinvestors orparticulartransactions 10.2 Havetherebeenanysignificant legaland/or 10.1 0LegalandRegulatoryMatters 10 teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities anticipated? anticipated? materiality, scopeetc.)? prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors jurisdiction (e.g.onnationalsecuritygrounds)? subject toenhancedregulatoryscrutinyinyour private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting relating toESGmattersisbecomingstandard. target liabilities and the risks any to limit to protection relating Contractual liabilities company. and risks potential identify Due and laws applicable with compliance anti-corruption. ensure to conducted is e.g., diligence and including, Social (Environmental, matters, ESG Governmental) CSR, on focus to players PE The regulatory burden, as well as the public opinion, has caused the el wds cmais ihu gig hog unnecessary through going without bureaucratic processes. companies Swedish and sell and investor-friendly buy to investors domestic is as well as foreign allows legislation generally Swedish the their Furthermore, and sponsors structuring. and PE execution deal efficient facilitate to which concerns, accustomed quite are advisors) their (and sellers and Buyers GDP). of share its of terms in (measured target mid-cap Europe in largest concerning the of one is and strong considered is companies, especially market, PE Swedish The activities inadeliberatelyunder-capitalised portfoliocompany. hazardous extremely to due or transfer value unlawful an following pierced be only will veil” “corporate The obligations. company’s portfolio the for liable held is sponsor PE a that rare extremely is it Since the portfolio company is a separate limited liability company, 05Arethereanycircumstancesinwhich:(i)aprivate 10.5 Hasanti-briberyoranti-corruptionlegislation 10.4 11Whatotherfactorscommonlygiverisetoconcerns 11.1 to addresssuchissues. how on suggestions with risks and issues material the summarising and legal for engaged typically compliance matters and the report format is often are a “red flag” report insurance counsels the in External included areas policy. all examine to need will PE the buyer since diligence due the of scope the affected has Sweden in insurance W&I in increase The company. target the of business the on depend thresholds materiality and timeline Scope, business. 1OtherUsefulFacts 11 diligence, contractualprotection,etc.)? considering aninvestmentinyourjurisdiction? the liabilitiesofanotherportfoliocompany? and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor www.iclg.com 261 Sweden 262 Sweden © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com Sweden advokatfirman törngrenmagnell Resolution; Employment;andRealEstate. Törngren Magnell’s main areas of expertise cover: Private M&A; Public M&A; Private Equity; Capital Markets; Banking & Finance; Corporate; Dispute deals, fromtheinitialinvestmentallwaytoexit(whetherasanIPOoratradesale). equity private cross-border complex and large to investments capital venture and start-ups from transactions, of types all on advising experience Swedish marketplace the and understands in what reputation private strong equity a and built other financial has investors team require investors for financial successful Our deal execution. Magnell. We Törngren for have considerable sectors industry key are capital venture and equity Private leading and companies public firms, law top-tier from experience previous international auditfirms. have lawyers The transactions. cross-border and domestic both in assists and Stockholm in located 2006. is in firm established The was and Sweden in firm law transaction premier a as known is Magnell Törngren of types all with industrial connection as well in acquisitions anddivestituresofcompaniesbusinesses. as entrepreneurs investors and financial companies other and funds private represents equity he where transactions, practice M&A his private and on practice M&Afocuses firm’s the of head is Hedbäck Sten R:www.torngrenmagnell.com URL: [email protected] +46760028305 Email: Tel: Sweden SE-111 53Stockholm Västra Trädgårdsgatan 8 Advokatfirman Törngren Magnell Sten Hedbäck nutis Hr ok nlds atr sc a sae n business and transfers, investmentsandmergers. share as of such range matters includes a work across Her clients industries. corporate as well as M&A investors, financial private on other and firms equity private international and Swedish advises She practice her focuses transactions, commercial contracts and general corporate law Eriksson matters. Burgyté Vaiva iclg to: privateequity 2019 e:+46760028350 Email: Tel: Sweden SE-111 53Stockholm Västra Trädgårdsgatan 8 Advokatfirman Törngren Magnell Vaiva BurgytéEriksson R:www.torngrenmagnell.com URL: [email protected] chapter 34 Switzerland Dr. christoph Neeracher

Bär & Karrer ltd. Dr. luca Jagmetti

1 Overview Management usually invests directly in the AcquiCo rather than via a management participation company. Often, a single shareholders’ agreement (SHA) is concluded between the financial investor(s) and 1.1 What are the most common types of private equity management, which governs all aspects of the investment transactions in your jurisdiction? What is the current (governance, exit procedures, share transfers, good/bad leaver state of the market for these transactions? Have you provisions, etc.). In other cases, a main SHA is concluded between the seen any changes in the types of private equity financial sponsors and a separate, smaller SHA with management. transactions being implemented in the last two to three years? 2.2 What are the main drivers for these acquisition structures? All of the standard transaction strategies to acquire portfolio companies are commonly used in Switzerland. We assume that regular leveraged buyouts have accounted for the majority of the The acquisition structure is mainly tax-driven (tax-efficient transactions in recent years. In 2018, private equity funds were repatriation of dividends/application of double taxation treaties, tax- involved in around one-third of the transactions in Switzerland. exempt exit). Directly investing in the AcquiCo may allow Swiss- domiciled managers to realise a tax-free capital gain on their investment when the AcquiCo is sold on exit. 1.2 What are the most significant factors encouraging or inhibiting private equity transactions in your jurisdiction? 2.3 How is the equity commonly structured in private equity transactions in your jurisdiction (including institutional, management and carried interests)? Although M&A levels have remained high in recent years, they continued to increase in 2018, with private equity transactions reaching a 10-year high. Low interest rates for transaction financing A Swiss NewCo often has only one class (or a maximum of two as well as favourable borrowing conditions have generated an classes) of shares. Preferential rights, exit waterfall, etc. are incentive for high levels of private equity activity. implemented on a contractual level in the SHA. NewCos incorporated abroad often have several classes of shares.

1.3 What trends do you anticipate seeing in (i) the next 12 months and (ii) the longer term for private equity 2.4 If a private equity investor is taking a minority transactions in your jurisdiction? position, are there different structuring considerations? While several voices predict a slow-down of M&A activity in the near future, we have not experienced this so far and remain Structuring is, in principle, not fundamentally different from optimistic that 2019 will continue to show a solid volume of M&A majority investments. Pre-existing structures are often maintained activity. to a certain extent. However, on a contractual level increased protection is sought (veto rights, right to trigger an exit).

2 Structuring Matters 2.5 In relation to management equity, what is the typical range of equity allocated to the management, and what are the typical vesting and compulsory 2.1 What are the most common acquisition structures acquisition provisions? adopted for private equity transactions in your jurisdiction? Management equity amounts and terms depend very much on the Usually, private equity funds investing in Swiss portfolio companies individual deal. Typically the management stake ranges between 3– set up a NewCo/AcquiCo in Switzerland as an acquisition vehicle. 10%. In most cases, standard drag and tag provisions and good/bad The NewCo is held either directly or via Luxembourg, Netherlands leaver call options for the benefit of the financial sponsor will apply. or a similar structure. We have also seen AcquiCos incorporated Put options for the benefit of management are less prevalent. outside of Switzerland. iclg to: private equity 2019 www.iclg.com 263 © Published and reproduced with kind permission by Global Legal Group Ltd, London 264 Switzerland © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com (dissolution, interest financial its of protection the at aimed rights veto fundamental only enjoys normally 20%) to (up investor small a while held, stake the on depend usually rights veto its rights, voting the of minority a holds investor equity private a If Doprivateequityinvestorsand/ortheirdirector 3.2 largely alsotoLLCs. apply corporations stock regarding 3.1 question in comments Our of articles the only association. Switzerland; in available publicly made be to required are SHA the nor regulations organisational the Neither the SHA. in level contractual a on reflected also – etc. requirements, quorum composition, board with together – is competence of division Such T Whatarethetypicalgovernance arrangementsfor 3.1 criminal acts. or SHA the of manager the by breach material (iii) and company, the by set cause absent manager the by (ii) employment of termination manager, the by set cause with company the by employment Bad leaver cases on the other hand usually include (i) termination of mutual termination. of company,incapability,death, (iii) and or age retirement of reaching the termination by set cause with manager the (i) by employment of termination encompass (ii) manager, the typically by set cause absent company the by employment cases leaver Good Forwhatreasonsisamanagement equityholder 2.6 Bär &Karrerltd. motn bsns dcsos n te opsto o senior of minority position areusuallyheavilynegotiated. composition regarding the a holding investors equity rights private and for rights exit The management. decisions veto/influence business have important also usually (20–49%) stake minority significant more a holding investors maximum etc.); leverage, business, in change fundamental no increases, capital Switzerland is the stock corporation ( dec competence the and level a management each contain of competences the often defining matrix They regulations. organisational on Day-to-day management is normally delegated to management, based possible. personam elected is director A etc.). management, senior of (appointment issues important and strategic on resolves and function supervisory The stock corporation is governed by a board of directors which has a advantage ofbeingtreatedastransparentforUStaxpurposes. the have which used, are GmbH) (LLCs, companies liability limited e rdmnn mdl o aqiiin o prflo opne in companies portfolio of acquisitions for model predominant he GovernanceMatters 3 isions whichneedapprovalbytheboardorevenshareholders. your jurisdiction? position, whatvetorightswouldtheytypicallyenjoy? etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor in yourjurisdiction? arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such usually treatedasagoodleaverorbadin ; proxies (e.g. in the case of absence at meetings) are not are meetings) at absence of case the in (e.g. proxies ; Aktiengesellschaft prorata ). Sometimes, right to right ad iety aig eiin ta wud culy e ihn the within be actually would that competence oftheboard,etc. decisions taking directly has person such if made successfully be might director shadow a is representatives its of one or shareholder a that claim The duties. such by bound be decision-taking inthecompany of permissive as long as the articles arrangement does not lead to a blockade of the in decisions association and the SHA. Such veto shareholders’rights are generally regarded as certain for quorums At shareholder level, veto rights may be created by introducing high as a circumstances, private limited equity investor or an individual acting for special, it may be regarded Under shareholders. minority and loyalty towards the company and, to a certain extent, also to the care of duty a have management and officers directors, However, stock corporationdonothaveanydutyofloyalty. Swiss a of private shareholders duties; a such have not principle, does investor equity in shareholder, a as position its from Purely . Arethereanydutiesowedbyaprivateequityinvestor 3.4 Arethereanylimitations ontheeffectivenessofveto 3.3 cnwegs ht h cmay a fli sm administrative some duties, enteringinto furtherobligationsisquestionable. fulfil may company the that acknowledges Arethereanylimitationsorrestrictionsonthe 3.5 ntutos ie b aohr esn ae o contractual SHA (atleastifthelatterisgovernedbySwisslaw). on the of breach in be not likely based will and instructions such follow not person another may member board the duties, such of breach a to leads provisions by given instructions loyalty and care trigger of duty may a but valid be by bound are directors Furthermore, SHA. the under consequences still would arrangement contractual such to contradiction in taken decision board A nominees. certain the that board shall agree not take certain decisions without parties the affirmative vote of the i.e. SHA; the are in incorporated rights regularly veto individual such However, documents. corporate members board other or association of articles the certain on based implemented be cannot of rights veto individual level, board At at t a H ad e on b is em. hl a majority a While terms. its by bound be and SHA a to be may party itself company the extent what to as doctrine legal Swiss in debate a is There parties. its against enforceable only is SHAA law,corporate mandatory best per the as in act must directors ■ entire the during time/valid in unlimited be not may SHA a ■ duties but there are certain limitations. The most important ones are: and rights the determine to free largely are parties The by law. Swiss governed normally are and Switzerland in common are SHAs de facto de typically addressed? non-compete andnon-solicitprovisions)? typically addressed? shareholders (or to minorityshareholderssuchasmanagement the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements a hne te nocmn o te H i is em would conflict withsuchduties. terms its if SHA the of enforcement which the hinder loyalty), may and care of (duty company the of interests 20–30 years;and lifetime of the company, but may have a maximum term of ca. /shadow director of the company and, consequently,and, company the of director /shadow also de facto de iclg to: privateequity 2019 acted as an officer of the company,officerthe an of as acted by e.g. vice versa vis-à-vis per se h cmay I aiig by abiding If company. the )? Ifso,howarethese . Switzerland may be regarded as a as regarded be may circumstances, a private equity investor or an individual acting for it limited special, Under investor. the private to appointing the contrary of interest is interest such if even company portfolio the of (including interest and (sole) the safeguard must and company company care the towards loyalty of duty a the have investor) equity of private the of managers nominees and officers Directors, be also granted forpersonsresidingoutsideSwitzerland. may rights signatory collective or individual Additional necessary that such persons are board members (but, e.g. managers). represent the company (entry into the commercial register). It is not fully to able be joint must Switzerland in residing with both power signatory individuals two (ii) or Switzerland, in residing power signatory individual with person one (i) least at note, practical a On Arethereanylegalrestrictionsorotherrequirements 3.6 penalty for provide payments incaseofbreach. also SHAs Sometimes, agreement. share separate escrow a under agent escrow an with shares their deposit often parties the SHA, the of provisions transfer share secure To of activitythecompany. non-compete Furthermore, scope and scope geographical the to limited be to need obligations company. the controlling (jointly) the of favour in company shareholders are typically enforceable if the respective shareholders are the of obligations Non-compete Bär &Karrerltd. © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 made. Unless the Competition Commission (CC) decides to initiate If certain turnover thresholds are met, a Swiss merger filing must be Whatarethemajorissuesimpactingtimetablefor 4.1 interest areoflimitedrelevanceinpractice. of conflicts to related issues board, the on represented each are that sponsor(s) financial few typical or one In with set-ups equity private Swiss process. the decision-making in and participating discussion from respective abstain and members board other the inform must director concerned the interest, of conflict a of case In How dodirectorsnominatedbyprivateequity 3.7 the company. of non-payment of certain social security contributions and taxes by case in liable held be may managers Further,and officers directors, a such prevent Toscenario, decisionsshouldsolelybetakenbythecompetentbodies. duties. such by bound be also consequently, Transaction Terms: General 4 equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin portfolio companies? disclosure obligationsandfinancing issues? and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust of otherportfoliocompanies? party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof de facto de /shadow director of the company and, company the of director /shadow gemns tl tn t b sgiiaty hre i lnt than length in shorter significantly US/ be to tend still agreements

public acquisitions. Swiss most in levels squeeze-out reach bidders however, practice, In shareholders. minority remaining the squeeze-out to able being consequently,not and, 90% than less holding up ending of risk the exclude to way a in offer the the structure not typically can bidder the on (depending shares Thus, exemptions). grant company’smay TakeoverBoard the circumstances, target the of two-thirds exceed not normally does however, which, condition acceptance minimum a to subject made company. regularly targetare offers the Voluntarytender of rights voting the of respectively merger) squeeze-out a (for 90% or squeeze-out) statutory a (for 98% least squeeze-out at hold must bidder offer, a the tender public a to subsequent or merger squeeze-out statutory a out exchange carry to stock Moreover, the and company the (disclosure obligation). to notification a make in a Swiss listed company (the lowest threshold is 3%) is obliged to rights voting the of thresholds certain Further,exceeds who anyone the completely excludedtheobligationtomakeanoffer (opting-out). increased either have or (opting-up) rights voting the of 49% of maximum a however,to threshold may, company target The Board. Takeover Swiss the by granted exemptions barring tender offer), (mandatory company the of securities equity listed all for company,listed Swiss a of offerrights an voting make to obliged is equity the of one-third to of threshold the added exceed owned, already which, securities securities equity acquires who Anyone . Havetherebeenanydiscernible trendsintransaction 4.2 . Whatparticularfeaturesand/orchallengesapplyto 5.1 a up NewCo (ca.10days)aresimilartootherEuropeanjurisdictions. setting as such constraints timing practical that, than Other the authorities involved. on and regulation governmental respective the on depends timetable industries, the on certain regarding approvals must be obtained (e.g. banks, telecoms, etc.). The impact transactions For not rejectedasincomplete10daysafterfiling. the filing is complete (thereby triggering the one-month period) and the by review for Secretariat (which usually takes one to submitted two weeks) to make sure be that filing draft a that recommended strongly is It application. complete the filing after I) (phase month a four-month phase II investigation, clearance is granted within one s gnrl bevto, yia Sis hr/se purchas share/asset Swiss typical observation, general a As S ute, ie te non sles mre, hr purchase share R&W, to etc.),albeitnotasextremeintherecentpast. regards market, with (e.g. seller-friendly more sellers’ be to tend ongoing agreements the given Further, prior tosecuringfinancing. agreements purchase binding into enter to willing more become system. ne et iacn i crety aiy vial, ues have buyers available, easily currently is financing debt ince rnato em:Pbi custos Transaction Terms: Public Acquisitions 5 K gemns a osqec o Sizrads ii law civil Switzerland’s of consequence a – agreements UK terms overrecentyears? commonly dealtwith? transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private

www.iclg.com Switzerland e 265 Switzerland 266 Switzerland © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com and categories certain (vii) deals, locked-box adjustments in covenants non-leakage price post-completion (vi) provided, be legally not may cover insurance where penalties or fines criminal or civil (v) underfunding, pension (iv) liabilities, tax secondary and pricing transfer e.g. matters, tax certain (iii) warranties, forward-looking (i) seller,the by disclosed due otherwise information or (DD) diligence (ii) cover the in not identified matters usually facts, known from will arising liabilities policy insurance W&I a Generally, sellers’in recentyears. current the given and market, W&I insurances active have become more common in Switzerland more being insurers with In the past, W&I insurances were relatively seldom used. However, To whatextentisrepresentation&warrantyinsurance 6.4 obligations foraperiodofonetothreeyears. non-solicitation and non-compete on agree parties the Typically, Whatisthetypicalscopeofothercovenants, 6.3 Quite often,taxindemnitiesareseen. offer. sellers strategic what from different materially not is which Usually, a customary set of representations and warranties is granted Whatisthetypicalpackageofwarranties/indemnities 6.2 outs andvendorloansareseenlessoften. Earn- mechanism. locked-box in the of use the in common increase an to led equally are buy-side, Switzerland. the However, the seller-friendly market in recent years on has preferred accounts, closing on based adjustments, Debt NWC/Net and sell-side, the on The locked-box mechanism (with anti-leakage protection) preferred Whatconsiderationstructures aretypicallypreferred 6.1 not bebindingintheeventofacompetingoffer. tender obligations from major shareholders. These would, however, decrease the likelihood of a competing bid. An alternative would be and position starting improved an secure trades block addition, In agreements intheoffer documents. such disclose also must parties The offer. the with connection in costs the exceed considerably not should fees break thumb, of rule offer.an submitting from parties third offerdeter the or rough a As by the target company will result in coercing shareholders to accept Both takeover parties can agree on break fees unless the fee payable Whatdealprotectionsare availabletoprivateequity 5.2 Bär &Karrerltd. Transaction Terms: Private Acquisitions 6 acquisitions? the typicalcostofsuchinsurance? exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) equity selleranditsmanagementteamtoabuyer? undertakings andindemnitiesprovidedbyaprivate team toabuyer? offered byaprivateequityselleranditsmanagement on thebuy-side,inyourjurisdiction? by privateequityinvestors(i)onthesell-side,and(ii) investors inyourjurisdictionrelationtopublic E Managers areonlyliableinproportiontotheirshareholding. subject tosuchlimitations. not often are representations tax Title and 10–30%. of range the in cap a as well as transactions), mid-cap in 1% approximately (often a to subject typically is minimis R&W of breaches for liability The ■ Lock-up: Typically, existing shareholders holding more than Typically,more Lock-up: holding shareholders existing ■ challenges foracompanygoingpublic: A private equity seller should be aware of the following features and (see proof financing actual above). equity on private insist in often seen sellers rarely transactions; relatively are fees break Reverse be confirmedbythereviewbodybeforelaunchofoffering. must funds of availability the transactions, public of context the In similar. or agreements by loan interim comforted sheets, term usually financing binding is portion debt The funds). necessary the with NewCo the provide to fund equity private the (obliging seller provides an equity commitment letter which may be enforced by the fund equity private the portion equity the to relation Typically,in . Howdoprivateequitybuyerstypicallyprovide 6.7 Do(i)privateequitysellers providesecurity(e.g. 6.6 Whatlimitationswilltypicallyapply totheliabilityofa 6.5 (viii) liabilitiesarisingasaresultoffraud,corruptionorbribery. of warranties, e.g. environmental warranties or product liability, and . Whatparticularfeaturesand/orchallengesshoulda 7.1 Arereversebreakfeesprevalentinprivateequity 6.8 multiple sellers (e.g. when a large number of managers are co-sellers). scrows to secure R&W are not uncommon; in particular in case of case in particular in uncommon; not are R&W secure to scrows Transaction Terms: IPOs 7 the managementteam)? warranties, covenants,indemnitiesandundertakings? hrfr, Hs mn piae qiy netr and investors respective undertakings. equity for provide should private managers and directors with agreements among SHAs Therefore, executive the IPO. the after months and sign 18 to six during to undertakings lock-up underwriters directors the by of required be will board management, the of members the as well as offering, the to prior capital share the of 3% exit? If so,whattermsaretypical? under anequitycommitmentletter, damages,etc.)? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and private equitysellerandmanagementteamunder private equitysellerbeawareofinconsideringanIPO transactions tolimitprivateequitybuyers’ exposure? amount (depending on deal size) and a threshold amount threshold a and size) deal on (depending amount iclg to: privateequity 2019 Switzerland de

netr ad gemns ih ietr ad aaes should managers and directors provide forrespectiveundertakings. with equity private agreements among and SHAs investors Therefore, IPO. the after months 18 to six during undertakings lock-up for up sign to the underwriters by required be will management, executive the and directors of board the of members the as well as offering, the to prior capital share the of 3% than Typically,more holding shareholders existing the and law Swiss jurisdictions, most in As Regulation: ■ will companies owned Private-equity governance: Corporate ■ to rights drag include also should SHAs rights: Drag-along ■ Bär &Karrerltd. © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 clear viewonthevaluation. relative a is there once made be to track the on decision the allows track. sale offersThis trade binding the the on with simultaneously the that published. so aligned is analyst reports and investor feedback on the IPO track are available are float tracks both to for intention timelines the the Preferably, before decision final their make to try parties although process, the in late very until pursued being are processes Dual-track place. takes process (auction) sale trade a just often beginning, the at route preferred the not is IPO an IPO is considered, dual-track processes are often seen. However, if an If conditions. market general the on dependent heavily is This Do privateequitysellersgenerallypursueadual-track 7.3 Whatcustomarylock-upswouldbeimposedon 7.2 Full exit: A full exit at the listing, i.e. a sale of all shares held ■ iblt: h laiiy eie n epsr i connection in exposure and regime liability The Liability: ■ itn rls f h SX ws Ecag poie for directors and the senior management, provide of board the Exchange of compensation reporting, financial regarding Swiss SIX obligations (e.g. company public the a of obligations additional of rules listing internal composition, board association, regulations, executivecompensation,etc.). of articles the to amendments (including IPO an for fit company the make to order in regimes governance corporate their adapt to have secondary tranche. the in sold be to shares sufficient are there that that ensure private equitysellersonanIPOexit? through asaleorIPO? and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare trades after thelock-upexpired. block more or one in or gradually shares remaining the sell to need will seller equity private IPO. the Therefore, an via possible not typically is seller, equity private the by elr’ xoue ne ti sauoy eie s iie in the limited is prospectus, regime statutory the this under is exposure preparing sellers’ public for going company responsible the primarily since However, liability. main prospectus statutory the the from results IPO an negotiation, in risk liability to subject therefore, and, SPA) the the liability of the seller(s) is primarily contractual (i.e. under with an IPO is different to a trade sale. While in a trade sale, the and obligations company support ofanexternalspecialist. the These within resources additional shareholdings). require major of disclosure ersnain i te newiig gemn ad t is it limited and advisable thattheseareagreedonearlyintheprocess. some agreement underwriting make the also in representations to shareholder(s) selling the require typically underwriters the addition, In cases. most ad hoc announcements,

mut f h rlvn Sis opn’ fel distributable freely company’s Swiss reserves. relevant the of amount may only be granted if certain prerequisites are met, and only in the law.security Swiss Upstream under limited is collateral new provide to the for collateral companies group target as Swiss of ability The financing. acquisition serves typically refinancing the with connection in released Security providers. debt acquisition the of debt acquisitions, bond of providers usually require that existing debt context is refinanced at the with level the In connection in Switzerland. into restrictions financing some are there credit although of bonds, form high-yield and the institutions in financial by debt provided facilities junior and senior use typically will investors buyouts, leveraged of context the In loans. of subordinated form the in financing provide usually investors equity Private salsmn o piae qiy ud, any u t te Swiss the to due the mainly for funds, location equity attractive private very of a establishment as known not is Switzerland covenants) financial to become moreandcommon. respect with (especially loans loose negative and sustained and activity interest rates introduced by the Swiss National Bank. Covenant-lite M&A of slow-down apparent no with robust be to proves still market financing debt Swiss The minimum corporate statutory no However, are requirements. leverage there law, Swiss Under justified withathird-partytest. intercompany loans on an annual basis. Higher interest rates can be Swiss tax authorities publish maximum safe haven interest rates for The above). 8.1 question (see nature cross-stream or upstream an of are which security providing on or loans granting companies Swiss restrictions are there Furthermore, shareholder. a by secured but party third a by provided is debt if applies generally same The not betax-deductibleandsubjectto35%withholdingtax. would interest such Consequently, a shareholder. or a of shareholder party a related to paid if dividend hidden a authorities. as requalified tax be Swiss by may thresholds certain exceeding debt of applied amounts on paid Interest rules capitalisation thin the . Arethereanyrelevantlegalrequirementsor 8.2 Pleaseoutlinethemost common sourcesofdebt 8.1 . Whatarethekeytaxconsiderationsforprivateequity 9.1 Whatrecenttrendshavetherebeeninthedebt 8.3 Financing 8 Tax Matters 9 bonds). off-shore structurescommon? financing marketinyourjurisdiction? financing) ofprivateequitytransactions? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin investors andtransactionsinyour jurisdiction? Are de facto de www.iclg.com limitations result from result limitations Switzerland 267 Switzerland 268 Switzerland © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com which under reform, tax corporate expected effect into (entry abolished be will regimes tax privileged anticipated the Further, in respectively, reporting) Switzerland. (country-by-country 2018 of as and of as 2017 (with force tax ruling exchange to be made as from 1 January 2018) into entry with rulings, tax of exchange reporting, spontaneous country-by-country e.g. Switzerland, by implemented were standards (BEPS) shifting profit and erosion base OECD The currently the change not applied practice. generally should which test, purpose OECD’s the Under principal a apply to opted has Switzerland instrument, determination. multilateral price purchase the in risks tax withholding such address and regime reserve” “old so-called will generally inherit the current withholding tax situation under the Tax buyer future a Federal ruling since particular tax in Swiss recommended, advance are confirmation and the set-up diligent by a Thus, scrutiny Administration. more to subject their recently and companies order to benefit from a acquisition Swiss dividend withholding tax reduction are foreign qualification as beneficial owners of of the shares in the Swiss target in substance The Havetherebeenanysignificantchangesintax 9.4 of aspecificmanagementparticipationinanadvanceruling. consequences the confirm to recommendable is it employer.Thus, for the later managers upon sale and social security charges for the Swiss a or salary taxable equity) (partial) to lead could value formula sweet a at investment (like terms preferential since decision certain in management a structured participation qualifies as a tax-exempt capital gain is a case-by-case under shares be of sale may the Whether roll-over circumstances. neutral tax A voting liquidation, rights). (dividend, rights managers ownership the full schemes), have bonus should synthetic (like salary as qualify to tax-exempt not order In shares. a held privately of sale the achieve upon gain capital to try generally managers Swiss-resident Whatarethekeytaxconsiderations formanagement 9.3 blocking year)ifsharesareacquiredbelowfairmarketvalue. per (6% discounts period blocking for except participations, share management for provisions tax or reliefs tax specific no are There Whatarethekeytax-efficientarrangements thatare 9.2 qualifying a for company. tax Swiss a withholding from distribution dividend Swiss shareholding) 10% (minimum 0% a foresee which and treaty taxation double a concluded has Switzerland which with jurisdictions from company) (holding vehicles acquisition NewCo by performed mainly are Switzerland in acquisitions equity Private Cayman Islands,Luxembourg, ScotlandorGuernsey. Therefore, regimes. private equity funds are tax often established in jurisdictions like transfer Jersey, securities and tax withholding Bär &Karrerltd. shares, deferred/vestingarrangements)? anticipated? teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities investment intoanewacquisitionstructure? teams thataresellingand/orrolling-overpartoftheir equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate ud aaeet opne ad nuac cmais in companies insurance and companies management to fund offered freely be still dealers, securities banks, as such may intermediaries financial regulated funds short, equity In private fundraising. in for interests approached be can investors of kind In what of question the to paid complex. be to has more attention public special particular, become has fundraising between consequence, a As distinction previous the distribution andprivateplacementundertheoldCISA. replaced concept offering of new This Switzerland. from admissibility or in funds equity private the in interests determining to key is distribution qualified to distributed investors only or are to other persons as well. they As a result, whether the concept of so, if and, Switzerland from CISAor of in meaning the in “distributed” being are interests Investment the offering and placement of for funds mainly depend on whether the requirements fund (Collective the CISA, the law Under CISA). Swiss Act, Schemes under schemes investment collective as qualify may funds equity private 2013, in legislation schemes investment collective Swiss the of revision major a After 01Havetherebeenanysignificantlegaland/or 10.1 social to subject generally is security contributionsbytheSwissemployer. which salary (taxable) as qualify could parties related by payments that also note to important is It carefully. structured be should and seller the for income taxable as qualify partly may agreements non-compete or target the for work to continuing sellers for arrangements earn-out thus, individuals; Tax authorities tend to scrutinise tax-exempt capital gains for selling are expectedtobeintroducedmaintaintheattractiveness. since general reductions of tax rates and measures like patent boxes have an impact on the effective tax rates of Swiss target companies, will 2019), May in vote public the to subject 2020, January 1 of as in linewithinternational standards. Act, as well as Exchange the new regulations for Stock derivatives trading, which the are in included formerly were that manipulation market and trading offers,insider takeover public shareholdings, of disclosure the on provisions the include These trading. derivatives the regulate which and securities to relation conduct”, in participants’activities market financial of rules “market of set a contains as FinMIA such the Furthermore, trade. of derivatives, transparency and organisation in regarding system trading trade organised an of operators for the provisions and infrastructure markets and international standards. It contains rules regarding the financial provisions European respective the with conformity in drafted been has and Switzerland, in instruments financial and services financial of provision the in improvements for provides which 2016, January the been has developments regulatory enactment of the Financial Market Infrastructure recent Act (FinMIA) on 1 more the of One Financial Swiss the Market Supervisory Authority (FINMA). from licence a requiring distributors Swiss with supervised, adequately be to need investors qualified Swiss to agent and representative of paying the funds). Distributors of Swiss foreign funds a for and requirement the legal (e.g. to requirements subject regulatory be may this as investors, qualified to funds equity private in interests of offering the for different is case The CISA. the of rules distribution the to subject not therefore, is, and Switzerland (the so-called “super-qualified investors”) from these super-qualified investors does not qualify a 0LegalandRegulatoryMatters 10 anticipated? private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting iclg to: privateequity 2019 Switzerland s “distribution” . Fundraising two tofourweeks’ duration. of DD legal flag red a conduct to engaged is counsel legal external Typically, an case. specific the on depends matters regulatory and corporate; areas: following the covers usually DD legal The point forstricterlawsinthatrespect. investments in the recent past, there foreign are no on political majorities at scrutiny this for called have politics in voices few a While narrowly more a by replaced be will “distribution” of concept the Furthermore, advisers. client to applicable requirements regulatory other and registration of favour in eliminated be will requirement the affect will laws distribution regime under the CISA. For new one, the distributor licence the particular, In MiFID. on modelled for landscape regulatory the change financial services significantly, with the will FinSA being to some extent These 2020. in force into enter will which FinIA), (FinSAInstitutions and Act Financial financial of area Services Financial the of enactment the be will markets the and Act the in development regulatory major next The Bär &Karrerltd. © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 recent in increased years. has sanctions economic and anti-corruption In DD, a focus on compliance of target companies with anti-bribery, Hasanti-briberyoranti-corruption legislation 10.4 Howdetailedisthelegaldue diligence(including 10.3 Areprivateequityinvestorsorparticulartransactions 10.2 appoint aSwisspayingagentandrepresentative. to requirement a triggering without – investors” “super-qualified be of qualified investors (except high-net worth individuals) – not only will it particular, types In all to schemes investment collective foreign offer to possible investors. qualified Swiss to schemes investment collective foreign offering for burden compliance the decrease substantially to expected is regime new The introduced. iacn areet; uies gemns epomn; real employment; agreements; property/lease; and IP/IT and litigation. The handlin business agreements; financing xmtos n te aeois f ulfe ivsos il b will investors qualified available of the categories to the changes and and exemptions “offering”, of concept defined materiality, scopeetc.)? jurisdiction (e.g.onnationalsecuritygrounds)? diligence, contractualprotection,etc.)? approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors subject toenhancedregulatoryscrutinyinyour g o f compliance e niiul cig o i my e eadd s a as regarded be may it for acting individual Under special, limited circumstances, a private equity investor or an onl ad eeal lal fr h attut ie o their to of companies avoid antitrustlawinfringements. portfolio their fines in programme antitrust compliance robust a the for implement therefore, liable should, investors equity Private subsidiaries. severally and jointly of line Commission’s thinking. European In Switzerland, holding companies tend to be found to be the equity follow could private Competition Swiss Commission the to that possible in is relation it far, though in so exist Even companies precedents way. such any no in Switzerland cartel alleged the facilitated or of aware been in, participated have to alleged not was GS although basis that it exercised decisive influence over the portfolio company, the on liable held was GS fine. the for liable severally and jointly arm, GS Capital Partners. GS and the portfolio company were held a equity private by its by committed owned formerly was breaches that company antitrust portfolio for Sachs Goldman on fine million €37 a imposed Commission European the 2014, April In 11Whatotherfactorscommonlygiverisetoconcerns 11.1 Arethereanycircumstancesinwhich:(i)aprivate 10.5 company willbeliableforanotherportfoliocompany. portfolio a that unlikely highly is it circumstances normal Under the See alsosection11 below. for liable made is be it may liabilities of another portfolio company, While this company is a less likely scenario. portfolio fine. a resulting that the possible paying for liable severally and jointly made be could law competition infringed has that company portfolio a controls jointly) or (solely that investor Aequity private duties (seequestion3.6). directors’by bound consequently,be and, company the of director 1OtherUsefulFacts 11 the liabilitiesofanotherportfoliocompany? considering aninvestmentinyourjurisdiction? should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof www.iclg.com Switzerland e facto de /shadow 269 Switzerland 270 Switzerland © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com Bär &Karrerltd. 2014 CitywealthInternationalFinancialCentre Awards. 2015 CitywealthMagicCircle Awards (“InternationalLawFirmofthe Year EMEA”). 2019, 2015and2014 Lawyers lists Christoph Neeracher as one of the world’s leading M&Aleading world’s the of one as Neeracher Christoph lists Lawyers The 2012). (since Switzerland and 2010) (since incentive and Chambers Global participation in clients represents he employee activity litigation proceedings. of fields core his (e.g. In agreements). employees key migration and relocation SHAs), projects, and all directly related areas such as employment and matters for partnerships ventures, joint (e.g. matters contract general and finance transaction on as well as buy-side restructurings corporate matters, corporate general on clients advises and sell- private in M&A, private the equity and venture specialises capital transactions. Furthermore, he and both processes), auction on corporate (including transactions, international and law. Christoph Neeracher is experienced in a broad range corporate of domestic and financial in lawyer leading a is and Switzerland in law at attorneys equity private M&Aand private preeminent the of one as the Private M&A and Private Equity Practice Group. He is recognised of co-head and Karrer & Bär at partner a is Neeracher Christoph Dr. 2019 client basis. the most important international legal ranking agencies in recent years. Almost all leading private equity funds active in Switzerland form part of our the of YearFirm Law Switzerland awarded repeatedly was Karrer & Bär by world. the around and Switzerland in individuals private to corporations innovative and complex transactions and representing them in litigation, arbitration and regulatory proceedings. The clients range from multinational Bär & Karrer is a renowned Swiss law firm with more than 170 lawyers in Zurich, Geneva, Lugano and Zug. The core business is advising clients on prolific individualDACHlegaladvisors. is Neeracher in Christoph first ranked individuals. leading and the negotiations” among in him strong ranks very and matters M&A in experienced 2018 2016, 2015and2014 2018, 2016,2015and2014 2018, 2017and2016 Trophées duDroitGoldorSilver. 2015, 2014,2013,2011 and2010 2016, 2013and2012 ayr. lawyers. International FinancialLawReview IFLR “Dealofthe Year” Award. h Lgl 500 Legal The Mergermarket and IFLR1000 IFLR The Legal500 Chambers Europe R:www.baerkarrer.ch URL: [email protected] +41582615264 Email: Tel: Switzerland 8027 Zurich Brandschenkestrasse 90 Bär &KarrerLtd. Dr. ChristophNeeracher Awards. lists him as one of the leading lawyers in lawyers leading the of one as him lists 21) ecie hm s “extreme as him describes (2012) Mergermarket ’s Profile League Table for 2016’s most 2016’s for TableLeague Profile ’s rank him as a leader in the field of M&A European Awards. The Lawyer nentoa Wos Who Who’s International (“mostrecommendedlawfirminSwitzerland”). ( IFLR) M&A Awards. ’s European Awards. “DebtandEquity-linkedDealofthe Year” Award. f M&A of ly Jagmetti is jointly ranked first in first ranked jointly is Jagmetti speedy”. to According for Acquisitions St. Gallen). & asset Mergers of University the of Law Commercial on Course the on and practitioners; on Seminar der engagements Akademie the (e.g.: topics Treuhand-Kammer; speaking M&A other and several DD legal transactions, has Jagmetti Luca and contract general in litigationproceedings. and restructurings clients represents he activity of fields core his In matters. commercial corporate transaction financing, and intragroup on clients advises further Jagmetti venture Luca schemes. processes, participation equity auction management and corporate investments capital industries, of range broad and international M&A transactions (share and asset deals) involving a domestic in experience vast has Equity.He Private M&A and Private Group Practice the in Karrer & Bär at partner a is Jagmetti Luca Dr. for 2016’s mostprolificindividualDACHlegaladvisors. IFLR h Lgl 500 Legal The 08 it hm s ntcal pattoe. Luca practitioner. noticeable a as him lists 2018 iclg to: privateequity 2019 R:www.baerkarrer.ch URL: [email protected] +41582615262 Email: Tel: Switzerland 8027 Zurich Brandschenkestrasse 90 Bär &KarrerLtd. Dr. LucaJagmetti 06 e s vr koldebe and knowledgeable “very is he 2016 Mergermarket ’s Profile League TableLeague Profile ’s Switzerland chapter 35 united Kingdom ross allardice

Dechert llp robert Darwin

1 Overview companies with highly regulated industries such as pharmaceutical companies and companies which rely heavily on imports and exports will likely be most exposed. 1.1 What are the most common types of private equity transactions in your jurisdiction? What is the current 1.3 What trends do you anticipate seeing in (i) the next 12 state of the market for these transactions? Have you months and (ii) the longer term for private equity seen any changes in the types of private equity transactions in your jurisdiction? transactions being implemented in the last two to three years? The PE industry will continue to adapt and drive value creation through their portfolio companies in highly focused and more The most common types of private equity (“PE”) transactions in the innovative ways. This will be handled through conventional add-on UK centre around leveraged buyouts (in the form of share and asset acquisitions but also platform deals where PE sponsors rebrand an acquisitions), take private transactions, refinancings, flotations and asset from the outset with a new management team. This is most bolt on transactions. likely to be achieved through carve-outs of entities from large Based on the British Venture Capital Association (“BVCA”), the corporates. value of PE investments in the UK since 2016 has consistently We also expect to see more exits in the UK as PE investors are keen remained between £21.5 and £22.5 billion. While this has proved to to lock in returns ahead of the country’s expected withdrawal from be a strong and consistent deal flow in the UK in the past few years, the EU on 31 October 2019. Given the uncertainty around the UK’s buyout activity in 2018 was dampened, especially on a value basis departure date it makes sense for funds to want to crystallise returns driven by a lack of large deals. There were a number of large exits in ahead of the departure date. the UK in 2018 with sponsors appearing to crystallise returns ahead of Brexit. Numerous considerations for PE remain with the backdrop of Brexit. 2 Structuring Matters The UK is due to withdraw from the European Union on 31 October 2019, although at the time of writing the terms under which the country will leave are unclear. 2.1 What are the most common acquisition structures adopted for private equity transactions in your jurisdiction? 1.2 What are the most significant factors encouraging or inhibiting private equity transactions in your PE transactions in the UK are typically structured using a UK private jurisdiction? limited company limited by shares (“Topco”), commonly owned by the PE fund and management executives, which act as the holding The UK has historically been the largest PE market in Europe and company for a chain of corporate entities. The bottom entity in the has a long and proud history in welcoming PE sponsors to fundraise acquisition chain, “Bidco”, acts as the buyer of the target shares and and invest there. As such, the UK has a well-established legal may act as borrower under any financing arrangements. A series of system and regulatory footprint to deal with various outcomes and entities are typically incorporated between Topco and Bidco for tax challenges which the PE industry may face from time to time. The and financing purposes, so as to allow for financing by junior lenders experience which the PE industry gleaned in the UK in the to be structurally subordinated to that by senior lenders. aftermath of the financial crisis in 2008 has delivered a strong and Where transactions involve a UK target, Bidco would typically be a robust system and created new asset classes and credit funds which UK-resident limited company. However, Topco (the level at which a have adapted to the leveraged buyout system. future sale by the PE fund of the UK acquisition usually takes place) There has, however, been a pronounced fall in the UK’s standing in may be a non-UK incorporated but UK-resident company as a means recent times, primarily brought about by Brexit. Country-focused of mitigating UK stamp duty, which is payable (usually) by a buyer funds that invest exclusively in the UK may find fundraising at 0.5% on the future transfer or sale of shares in a UK company. It challenging as international LPs adopt a “wait and see” approach remains to be seen if increased substance requirements in typical and then there is the impact on portfolio companies to consider. The offshore jurisdictions (such as the Cayman Islands, Bermuda, Jersey, potential introduction of trade tariffs will be onerous for portfolio etc.) will impact upon such UK stamp duty planning. iclg to: private equity 2019 www.iclg.com 271 © Published and reproduced with kind permission by Global Legal Group Ltd, London 272 united Kingdom © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com these of importance factors. relative the dictate to investor the of ability the limit may investor equity private a by taken position minority the but relevant remain will 2.2 question in described drivers The Ifaprivateequityinvestoristakingminority 2.4 be to need interest carried of considered. treatment tax recent UK 9, the section to in changes noted As achieved. are hurdles pre-agreed other any after and accrued return preferred any plus capital, down drawn- their of return a received have investors after crystallised capital from gains tax treatment on benefit a future exit. Entitlement to can carry is typically executives that such basis transparent a partnership to allow carried interest to flow through the structure on limited partnership will itself be interest a special limited partner in the carried fund limited the Often partners. limited as executives with partnership, limited a through structured typically is profits) overall fund’s the of share performance-related (a interest Carried incentivise further to place in management andotheremployees. put be often will plans incentive both the institutional strip and the sweet equity. Management equity in invest may executives senior gains, realised reinvest to required In be may they where buyout secondary a on particular in cases, some equity”. “sweat or equity” “sweet as to referred investors. often PE is the This with aligned are interests their ensure to order Topcoin in piece equity an take also commonly will Management and the “institutionalstrip”. shares, preference capital, shareholder debt held by the PE investor is commonly referred to as share ordinary of The combination rules. restriction interest corporate or rules pricing transfer by permitted levels the exceed otherwise would debt shareholder the issue of by further loan notes. satisfy Preference shares to may be used choose where of the may (“Topco”) issuer form the which the interest in usually debt, “payment in kind” (“PIK”) loan notes, which carry a right to annual shareholder as funded typically is commitment investor’s PE the of majority The transaction. the equity private the by investor typically represent only a small proportion of its funding of subscribed shares ordinary the However, Topco. in shares ordinary for subscribe typically will investors PE Howistheequitycommonlystructured inprivate 2.3 are they if example, seeking toqualifyforentrepreneurs’ (for relief). management of requirements the (iv) and expense); interest of deductibility maximum the achieving to as example (for group post-acquisition the of tax-efficiency overall transactions (for example as to any required subordination); (iii) the the financing lenders the of requirements the (ii) transaction; the in investing funds equity private the of requirements other and tax the Structures are typically driven by a number of factors, including: (i) Whatarethemaindrivers fortheseacquisition 2.2 Dechert llp institutional, managementandcarriedinterests)? structures? considerations? position, aretheredifferentstructuring equity transactionsinyourjurisdiction(including a “cliff-edge” basisonlyonclosingofthevestingperiod. place on a take may Vesting employment. of termination the to transaction the following years) five to three (usually period vesting specified a of expiry the on based be generally will This treatment. leaver the proportion of a good leaver’s shares which will qualify for good Vestingcost. and value market fair determine often will provisions shares. Aof lower the to entitled be commonly would leaver” “bad their for value market fair provisions, vesting to of subject and, costs higher the receive to entitled be commonly will leavers Good manager isagoodleaverorbadleaver. the whether on depend usually will acquisition compulsory such of his/her employment with the relevant portfolio company. The terms of termination the following equity manager’s a acquire to investor PE the for right a include invariably will documents Transaction the and transaction-specific very proportion maybelowerinlarger transactions. be will this the of although 15% equity, and 5% between hold typically would Management ewe te hrhles f h prflo n de nt generally need tobefiled. not does and portfolio portfolio the of the shareholders the of between board the on company.agreed shareholders’contract The private a is agreement observer governance or This director sponsor- appointed PE a company. of presence the the by supported be for may arrangement capital share and further equity of raising the over controls and sponsor PE the for information rights transfers, share of control business, the of operation their in follow to management for covenants positive sponsor), PE the for vetos of form the through expressed (generally company the of business of conduct behaviour, and appointments management The day-to-day to extend cover company.will agreement this that the matters typical in shareholders other any shareholders’ and management, a generally is UK Sponsor,PE the by agreed arrangements the out setting agreement, the in company portfolio PE a of governance the controlling document contractual primary The leaver. leavers bad a is good leaver good a as not is who treated leaver Typically, a nonetheless. be to categories such within falling not UK under (for discrimination management for discretion a cause be may There redundancy). example, without potential termination involuntary to or law) regard employment with taken be by employed be should care (although disability, to retirement or death their of reason cease who those typically are leavers Good . Forwhatreasonsisamanagementequityholder 2.6 Inrelationtomanagement equity, what is thetypical 2.5 . Whatarethetypicalgovernancearrangementsfor 3.1 GovernanceMatters 3 acquisition provisions? in yourjurisdiction? your jurisdiction? usually treatedasagoodleaverorbadin what arethetypicalvestingandcompulsory range ofequityallocatedtothemanagement,and arrangements requiredtobemadepubliclyavailable private equityportfoliocompanies? Are such pro rata “straight-line” basis over the vesting period or on iclg to: privateequity 2019 united Kingdom included. so PE sponsors should be mindful of this in terms of the information transfer rights. Articles of association are a publicly filed document, to relation in particularly breach), contractual a merely to opposed the company’s shareholders. (subject to the points above) can be implemented effectively among so and articles company’s the and/or agreement shareholders’ a in contained be typically will it company’sshareholders, the between upheld. Toas implemented properly director’sis a veto that ensure be not may and challenged be can law to contrary Vetosare PE which appointing creditors. its the insolvency, nears These dutiesoverrideandcanimpedetheexerciseofcertainvetos. just company a not if and, (i.e. the shareholder) to shareholders duties of its range wide a company, owe also directorship, her or his as arise can issues same outlined above. Additionally, the the relevant director will, by virtue of nominee, director a of level the At taken whicharecontrarytoUKpublicpolicy. being actions preventing (c) or company, the of powers statutory any of fettering inappropriate any allowing not (b) company, the of shareholder(s) minority a prejudice preventing unfairly may which (a) actions primarily behaviour, corporate proper promoting at aimed rules law English certain of foul fall they if issues into run can but respected generally are rights veto level, shareholder a At agreed an below valuation, andfundamentalchangeofbusiness. exit transfers, share anti-dilution, i.e. matters, strategic fundamental only and interests, economic of protection on Where PE has a minority position, the veto rights tend to be focused the portfoliocompanyday-to-day. manage to management of ability the and issues, strategic and control exit, an drive investment, its manage PE and the protect for to Sponsor need the between company) investee the of majority the controls PE where balance circumstances (in a struck be to is needs which there Inevitably, veto. shareholder a and/or board) circumstances where the PE Sponsor has a director appointed to the Yes. These veto rights tend to be expressed via a director’s veto (in Doprivateequityinvestorsand/ortheirdirector 3.2 an becomes then provisions these of breach a (as sponsor PE the by articles the in included be to tend controls governance Certain association. of articles its English is company an of document constitutional primary the Additionally, Dechert llp © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 not does shareholder sponsor APE Arethereanydutiesowedbyaprivateequityinvestor 3.4 Arethereanylimitationsontheeffectivenessofveto 3.3 hrhles n h cmay A epand n h ase to answer the in explained As question 3.3 above, however, a director appointee of a PE sponsor is company. the in shareholders etc.)? Ifaprivateequityinvestortakesminority disposals, businessplans,relatedpartytransactions, corporate actions(suchasacquisitionsand nominees typicallyenjoyvetorightsovermajor typically addressed? position, whatvetorightswouldtheytypicallyenjoy? typically addressed? shareholders (or to minorityshareholderssuchasmanagement the directornomineelevel?Ifso,howarethese arrangements: (i)attheshareholderlevel;and(ii) vice versa ultra viresultra prima facie prima )? Ifso,howarethese act of the company,the of act as owe duties to other to duties owe procure thattheirinvesteecompany actsastheywouldprefer. to becarefullydraftedinthiscontext,ordereffective. individual an from working to support prevent him or herself, so such covenants or will need trade restrain unfairly to attempt which covenants dislikes law English position, basic a As law. English under effective be to order in reasonable area reasonable a a within and for period, company), the in sponsor PE the at of investment aimed be the (i.e. goodwill relevant to the for protection need reasonable providing provisions non-solicit and Non-compete regulations. new with compliant be to ceasing information) to relation in (e.g. provisions existing their find may which shareholders’agreements older to challenges further add Union, European the in remains UK transmission and collection of data in Europe can, for as long as the the governs which (“GDPR”) Regulation Protection Data General European the instance for legislation, European certain addition, In enforce. to problematic be can behaviour corporate proper around above 3.3 question to answer the in outlined principles the offend drafted. properly to purport which shareholders’agreements in provisions are said, That they that provided disputes), resolving for jurisdiction the and English law governing as accepted generally is (which an law to English under respected and relating effective generally are company agreements shareholders’ law English novny rceig wee t s novn), n (b) and insolvent)), is it where issues consequential proceedings into company insolvency a place to (e.g. behaviour certain requiring duties statutory to subject is director relevant the where (e.g. caused, prefer would issues indirect have could including (a) failure of it the appointed director to act as director,they expect or appointed its of actions the for liability direct incur not will sponsor PE a Although appointer. her or his of interests best the in only acts director the if director.This can create personal a risk and liability are for the director concerned, they which of company the to duties statutory and fiduciary general broad same the share shareholder(s)) appointing considered “executive” or “non-executive”, and irrespective of their (whether company English an of directors 3.3), question to answer the in (particularly above outlined As 1986. Act Disqualification Directors Company UK the under instance for director, a as acting particular,in including, directors from disqualified not are they that PE investors must ensure that nominee directors are eligible to act as . Arethereanylimitationsorrestrictions onthe 3.5 . Arethereanylegalrestrictionsorotherrequirements 3.6 cin, r y gree saeodr o te ai o unfair of basis are availableintheory. the but successful, on rarely more even and brought, shareholders rarely are prejudice aggrieved derivative by (a or company the action), of behalf on directors PE-appointed in certain cases its shareholders. Successful actions brought against and, company wider the to duties statutory and fiduciary to subject non-compete andnon-solicitprovisions)? portfolio companies? (including (i)governinglawandjurisdiction,(ii) contents orenforceabilityofshareholderagreements equity investorsthatnominatedirectorstoboardsof investors toportfoliocompanyboards,and(ii)private liabilities for(i)directorsnominatedbyprivateequity companies? Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin vis-à-vis their investors due to their failure to failure their to due investors their united Kingdom www.iclg.com 273 united Kingdom 274 united Kingdom © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com seller residual low with often insurance, (“W&I”) indemnity and warranty of use the in growth further (iii) processes; competitive in bids pre-emptive of prevalence increased (ii) timetable; tight a in the number of sale processes being run as competitive auctions on sellers (both PE and non-PE). Recent trends include: (i) an increase The UK PE M&A landscape continues to be generally favourable to Havetherebeenanydiscernibletrendsintransaction 4.2 processes beingpre-emptedbyonebidder which PE transactions are executed, with a rising number of auction of auction processes has also led to a general increase in the speed at auction prevalence The stage. bid binding the competitive at basis funds” “certain a on of way by financing obtain to bidders push to sales able are sellers where processes of prevalence the given consents. or approvals conditionality,particularly financing in reduction a been regulatory has There specific industry antitrust and suspensory filings and mandatory commonly most approvals, regulatory by driven largely are timetables closing transaction UK Whatarethemajorissuesimpactingtimetablefor 4.1 any with accordance in acts she provisions ofthecompany’s articlesdealingwithconflicts. or he if transaction a proposed in interest an declare to conflicts to relation in in duties be of not breach will director A decisions. relevant the in participating of articles the under capable remain to director a for declared, been the relevant company. It is not uncommon, once such interests have or of association of articles the by governed transactions be will transactions such such a for in ability director to participate the in the decision-making process with regard to disclosure, interests a such made generally their Having are arrangements. declare Directors to conflict”. or required “transactional transactions a proposed as known or existing to arrangements of companies they are appointed to. This is generally relation in conflict actual of position a in themselves find may Additionally,directors relevant the relevant. of directors non-conflicted where obtained be should authorisations such so and company(ies), the by authorised a be as appointed been has she director. or It should however be noted he that of a “situational conflict” can which those to to company adverse a another interests has with also companies director with appointed directorship the where occur could conflict” “situational a Clearly, company. may the of possibly interests the or with conflict, conflicts, that interest indirect or direct a have, can or has, she or he which in situation a i.e. conflict”, “situational a avoid to director a on duty a imposes 2006 Act Companies The directors above, 3.6 to thecompaniesofwhichtheyaredirectorsmoregenerally. question to answer appointed by PE sponsors do not only the owe duties to the sponsor, but in explained As Howdodirectorsnominated byprivateequity 3.7 Dechert llp Transaction Terms: General 4 of otherportfoliocompanies? terms overrecentyears? disclosure obligationsandfinancingissues? and otherregulatoryapprovalrequirements, transactions inyourjurisdiction,includingantitrust party nominatingthem,and(ii)positionsasdirectors interest arisingfrom(i)theirrelationshipwiththe investors dealwithactualandpotentialconflictsof ofrain Ieial rpttoa cneune cn follow can from a consequences failure that to owner specific communicated publish post-offer reputational intentions. and Inevitable action of course confirmation. intended the taken has it not an acquisition, a bidder must confirm to of the Takeoverclosing Panel whether or the after year One offer. an make to intention firm for its plans announces bidder a any when disclosed be for to lay-offs and need closures the and target’s Code) the acquisition, regarding following Takeover intentions business the bidder’s a of on application focus increasing the governs which entity the Takeover(iv) and deals; targetson company Panel’s public (the by fees break of payment the becomes on restrictions made (iii) known; being publicly offer an of likelihood the if period 28-day a within company public a for made be offerwill an not or whether announce to need a (ii) deals; such to applicable timetables specific (i) are: deals private to public undertaking sponsors PE to relevant particularly be to likely are that Code Takeover the of Provisions This framework the applicable toprivatetransactions. shareholders. than restrictive more minority substantially is its framework including company, public of information and treatment for all of the shareholders of the target on the conduct of such activity, generally aimed at ensuring equality rules various imposes TakeoverCode The “Takeover are Code”). (the UK the in companies public generally governed by the UK City Code on Takeovers of and Mergers shares the of Acquisitions “Locked-box” consideration structures remain the preferred option preferred the remain structures consideration “Locked-box” hostile certain in the target’s value. or bidder, a situations. Such break fees are then seeking typically limited to a 1% cap of and distress financial in is target the where include can This circumstances. limited very in fees break allow Takeovermay the Panel said, That companies. competing submitting publicly-listed in shareholders for value maximising therefore bids, from bidders potential deter mechanisms protection such that concerns of Takeoverbecause the Code, under prohibited generally are fees, break as such deals, private on used Only somewhat limited protections are available. Normal measures . Whatparticularfeatures and/orchallengesapplyto 5.1 and commerciality speed, other uniqueadvantages. of use making by particularly norms, placed to negotiate positions more advantageous than these industry well are buyers PE and exceptions notable are there trends, all with as However, used. being is insurance W&I whether of regardless cases many in periods, time liability seller shorter (iv) and liability; . What considerationstructuresaretypicallypreferred 6.1 Whatdealprotectionsareavailabletoprivateequity 5.2 rnato em:Pbi custos Transaction Terms: Public Acquisitions 5 Transaction Terms: Private Acquisitions 6 commonly dealtwith? on thebuy-side,inyourjurisdiction? acquisitions? transactions (andtheirfinancing)andhowarethese private equityinvestorsinvolvedinpublic-to-private by privateequityinvestors(i)on thesell-side,and(ii) investors inyourjurisdictionrelationtopublic iclg to: privateequity 2019 united Kingdom eemn wa prin f h dfre cnieain il be will consideration deferred the payable. of portion what to determine order in period) time defined a during criteria financial-based a (usually criteria objective an against measured be the will business of portion acquired the of a growth or performance the where for “earn-out” an to unusual not is it pursuant commonly most basis, deferred a on paid to consideration seller), PE a from not Where an acquisition is made by a PE buyer in a “primary” deal (i.e. a as seller result ofthecompletionaccountsadjustment. the by made be to required is which payment closing post- any for security as closing at agent escrow third-party a with escrow into placed price purchase the of portion a see to common is it used, is structure consideration accounts completion a Where the basis ofthoseaccounts. on deal the “locked-box doing comfortable relevant are they the ensure and diligence accounts” fully to need will advisors) their with (together buyer the as buyer, the to seller the from completion risk a shifting as to seen be generally will compared structure consideration accounts when structure consideration box” “locked- A structure. consideration “locked-box” a for unsuitable deal the makes profile seller the or target the of aspect other some where or audits or accounts with issues historical been have there where maintained, not are accounts separate and business larger a limited circumstances, including where a the target is a carve-out of “locked-box” market, consideration structures seller’s are commonly accepted by a buyers except in is market current the that Given optimise investor/LP returns. to seller PE a allowing closing, following immediately distributed deal is “locked-box” that because there accounts is a no post-closing adjustment, funds of can be completion benefit additional An traditional structure. a consideration to compared when proposal as low as three months post-closing) they present a highly attractive with the shorter leakage periods being obtained by PE sellers (some they provide with respect to the final consideration paid. Combined for PE sellers largely due to the ease of negotiation and the certainty Dechert llp © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 place W&I insurance. in putting by warrantors management the of cap warranties liability the above these for coverage obtain to seek typically will buyer a management, from warranties these to apply generally that caps targetthe of business liability low the Given basis. day-to-day a on the run who individuals the from target the regarding disclosures are more and more being seen as a tool to elicit accurate and fulsome warranties management warranties. These these against disclose to out carried be will process disclosure fulsome a and deed warranty management separate a in contained be will warranties operational proceeds received by management warrantors). These business and deal the on (dependent caps liability low relatively to subject given be will and target the of team management senior the of certain members by given usually are warranties operational and Business is this and circumstances limited becoming rarerunderthecurrentmarketconditions. in target the to as warranties and “fundamental” capacity operational and business shares, provide provide only will to seller only PE A authority. title cases regarding most those being in warranties, will seller PE A What isthetypicalpackageofwarranties/indemnities 6.2 team toabuyer? offered byaprivateequityselleranditsmanagement the policy. The of cap liability relevant the to up policy W&I the against then and usually match the attachment point under the W&I insurance policy) will (which excess relevant the to up warrantor seller/management the against first be will profile recourse buyer usual the warranties, oe eety hr hs en ted oad lwr seller/ lower £1 as low as towards excess an cases, limited some in and, documentation) trend a been management warrantor has excesses (i.e. liability caps in the transaction there recently More target. the of value enterprise the of 40% and 20% between being range common most the with value, enterprise of from 100% and 5% range between these policies, W&I buy-side in obtained being caps liability policy W&I the of terms the In insured. being are above warranties fundamental the liability where except cap, additional liability policy any W&I relevant behind stand to warrantors sellers/management for unusual is It insurer. W&I the by driven often is and policy W&I the and documentation transaction the in under the business and operational warranties will commonly match full suiteofrestrictivecovenants. a give to founders or management of members exiting for common PE sellers are unlikely to give non-compete covenants, whereas it is buyers to“pricein”thesetypesofrisks. pushing are commonly,sellers a More PE crystallising. risk of specific likelihood period. the on view different materially a pre-closing have buyer the the sellers to during give, PE although it is sometimes for seen where the uncommon PE seller and relatively is risks information specific for Indemnification of the regarding covenants provision limited certain (iv) and period; pre- the closing in run be not may or may target the of to business the as how covenants operational (iii) conditions; or other clearances of regulatory satisfaction obtain relevant, if and with, provide assistance to covenants (ii) basis; £-for-£ a on to leakage able any be recover will buyer the where deal) box” “locked a of case the and undertakings to a buyer, including: (i) a covenants no-leakage covenant (in pre-closing certain provide customarily will sellers PE xess n plc lmttos n rslig rcn wl differ will by,of sector,impacted quality insurer,industry be and upon, based pricing resulting and limitations policy and Excesses the fundamentalwarranties. the balance of behind liability above the W&I insurance policy liability cap for standing seller the with cap liability policy insurance fundamental the for coverage warranties as to title to obtains shares, capacity and authority up to the W&I buyer the that insist will also sellers aggressive more by transactions, provided some In are which management. warranties operational and business the post-closing residual for the seller to insist on use of W&I insurance of by the buyer to cover terms process sell-side competitive a in in standard relatively is It liability. buyers and warrantors relevant) management (including where sellers between divide” the with buyers and sellers seeing the benefit of the product in “bridging popularity in increase to continuing is product a as insurance W&I . To whatextentisrepresentation&warrantyinsurance 6.4 Whatisthetypicalscope ofothercovenants, 6.3 arno laiiy a. ih epc t business to respect With cap. liability warrantor diligence, thoroughness of disclosure process and seller/management equity selleranditsmanagementteamtoabuyer? the typicalcostofsuchinsurance? exclusions fromsuchinsurancepolicies,andwhatis excesses /policylimits,and(ii)carve-outs used inyourjurisdiction?Ifso,whatarethetypical(i) undertakings andindemnitiesprovidedbyaprivate de minimis financial limitation that applies to claims united Kingdom www.iclg.com n operational and 275 united Kingdom 276 united Kingdom © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com constitutes which activity in engaging sponsor PE the to deterrent material a is claim largeleakage a for seller PE a to caused damage relation to this risk as most buyers take the view that the reputational box” deals, it is uncommon for PE sellers to provide any security in “locked- in provided covenant no-leakage the low.to With respect very be should warranties these of breach a of risk the as provided to title, capacity and authority, no security (financial or otherwise) is as warranties fundamental provide only generally sellers PE Given Do(i)privateequitysellersprovidesecurity(e.g. 6.6 to additional financial limitations, such as a purchase price. Such fundamental warranties the are not usually at subject capped typically is warranties these for liability seller’s PE to limited authority,a be and capacity title, to generally as warranties fundamental certain will warranties seller’s PE a that Given Whatlimitationswilltypically applytotheliabilityofa 6.5 and buyers ultimately pricedin. by borne is risk potential this instead and exclusions policy such of ambit the within fall which claims warranty behind stand customarily not do warrantors sellers/management market, current the In operates. target the which in industry the to relevant risks particular or out carried diligence of scope the in gaps address certain are there that is insurance W&I of downside major The bonuses transaction of way payable onclosing. by or management against claims the under game” the to offset this potential liability by way of escrow in or retention to fund “skin material seller PE relevant the for common is it deed, warranty management have to required are considered is target the warrantors management Where of insurable. and “clean” particularly business the where obtained be can Dechert llp he yas o cam udr h nntx arnis n between four andsevenyearsforclaimsunderthetaxwarranties. and warranties non-tax the under claims for years three and year one between from range which made be must warranties the under claims which within limitations time (iv) the and towards threshold; count to order in meet must claim warranty a which (C) and basis) relevant the cannot be made (which can be on a “tipping” basis or of “excess only” awareness actual aggregate liability cap, (B) threshold, below (A) which a warranty claim to to as limitations financial (iii) subject group; warrantor management given be can proportionate its for share of liable liability for any claim only and/or its negotiated own breach); is (ii) warranties manager each various (i.e. only basis to subject several a on and given usually be are warranties (i) including: limitations, business can the for warranties warrantors operational management of liability The is covenant a entirely withinthecontrolofseller. such with compliance that given from, benefitted or received leakage of basis the on seller the from recoverable and Seller liability under the “no-leakage” covenant is usually uncapped given closing. typically from years seven are and three between of warranties limitations time to subject fundamental The excess). (i.e. tax liabilities, anti-bribery and corruption) an exclusions, both general to all W&I insurance policies (i.e. secondary the managementteam)? warranties /liabilities(includinganyobtainedfrom (ii) privateequitybuyersinsistonanysecurityfor escrow accounts)foranywarranties/liabilities,and warranties, covenants,indemnitiesandundertakings? private equitysellerandmanagementteamunder de minimis de , being the minimum quantum of liability of quantum minimum the being , d transaction-specific to de minimis or threshold debt financing. the underwrite equity typically not will it equity,i.e. from amounts financing debt such fund to required be to buyer PE a for be typical not would It financing. debt reasonable alternative obtain use to and/or endeavours banks the against enforce to steps certain take to required be may buyer PE the to, required legally are they when fund not do financing debt funds” “certain becomes the under banks transaction the If the documentation. transaction the under extent consideration the pay the to obligations to its with comply to fails buyer the fund and unconditional PE the against directly commitment this enforce to able be usually will seller The “certain funds”debtfinancinginordertocompletethetransaction. the under funds requisite the down draws Bidco ensuring at aimed will letter commitment sponsor PE the equity from commitments certain include also customarily This available. being financing the of satisfaction the the to conditions in the of share purchase only agreement and “certain funds” debt subject portion is relevant which the price, fund purchase to required capital equity the from its investors to capital fund the purchase price, or (ii) fund Bidco required with call equity (i) will fund an the that covenants Such includes and equity itself. an fund of seller the to directly addressed PE be generally will form letter commitment the the from in letter seller commitment the to amount total the consideration of underwrite equity an provide usually will buyers PE issues, including (but notlimitedto): of number a raises IPO an of way by investment an from Exiting hence soistheuseofreversebreakfees). and common more are buyers for rights these of both where USA, the in the to change” opposed (as obtained not adverse is financing debt the “material if or business a of event the in e.g. closing, and signing between right walk-away a have to buyer a for typical not is it market UK the in that fact the of result a as largely market equity private UK current the in uncommon are fees break Reverse . Howdoprivateequitybuyers typicallyprovide 6.7 factor intheriseof W&I insurance. driving major a been had this market, seller’s a largely is market with respect to warranties and covenants. Given the fact the current recourse post-closing meaningful obtain to non-PE) and buyers PE of (both desire general the with odds at clearly is position This in ordertomaximiseeconomicreturnmetrics. of focus returning proceeds to LPs/investors industry as soon as possible post-closing PE the with aligns also position This leakage. . What particularfeaturesand/orchallengesshoulda 7.1 Arereversebreakfeesprevalentinprivateequity 6.8 Transaction Terms: IPOs 7 under anequitycommitmentletter, damages,etc.)? exit? If so,whattermsaretypical? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and private equitysellerbeawareof inconsideringanIPO transactions tolimitprivateequitybuyers’ exposure? iclg to: privateequity 2019 united Kingdom to alesserextent,duringtheorderlymarketdisposalperiod. remains sponsor PE the and, meantime, period “lock-in” the of duration the for risk market to exposed the In expired. lock-up the has once only period but IPO; the of closing the at sponsor PE of the by effected been have will terms investment) the from value realising (in “exit” actual no that means This IPO. an following to transaction but typically applies for a period of at least six months the “lock-in” provided by the PE sponsor will vary from transaction of duration the above, 7.1 question to answer the in mentioned As Dechert llp © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 the of commencement the to prior Immediately process. IPO the not is to relation in show” it “road investor an of commencement deals, the until in tensions competitive least at parallel, in processes such run to dual-tracks on uncommon preserve to order In at anacceptablelevel. are deals such on achieved valuations the that provided above), 7.1 to funds negative aspects of a by IPO exits (as outlined in the answer to question preference general a conclude private deals where possible, in order to avoid some of the also and conditions market of both reflective IPOs. is successful This to opposed as processes, sales private auction-driven or bilateral of way by concluded were deals of number greater a though process, exit dual-track a run to uncommon not was It continued. exits PE successful 2018, During Doprivateequitysellersgenerallypursueadual-track 7.3 Whatcustomarylock-upswouldbeimposedon 7.2 oe arnis n eain o t onrhp f h sae i the in shares the of ownership its to relation least in at warranties with some IPO the underwriting bank investment an providing business, the PE sponsor will find it increasingly challenging to resist PE-invested a of IPO any to relation in However, well-understood. is companies target their of sale the to relation in protections W&I Unclean exit target company’s sharestoosignificantlyasaresultofthedisposal. the of price the affecting avoid to way, staggered a in sold be only can business the in stake sponsor’s PE the of sale the which during an that likely is it “orderly market” period (perhaps period, of up to in” twelve months) will follow, “lock the of end the following And company.listed the in shares its sell to able be not will it time which during IPO, successful a following months six least at for period in” “lock a to subject be would sponsor PE the that typical is It IPO. the generally enable an immediate full exit for the PE fund on day one of exit Incomplete process. This canaddwiderreputationalrisktoadisposal. IPO are inevitably more an “public” than the of failure of a failures private disposal any addition, In exit. an support to available be will capital investor sufficient that guaranteed not is It deal. private a of certainty relative the than risk market greater significantly to sellers Uncertainty the publicmarkets. to properly company a presenting in involved processes various the to due months, six to up perhaps IPO, successful a execute to longer involved, advisers the of together with the fees of fees underwriting the exit. the It is also likely to to take due sale, private a of way by Costs circumstances, inrelationtoanunderlyingbusiness. opn big lae, n eain o tef n, n certai in and, itself to relation in floated, being company : Pursuing an IPO can be considerably more costly than an exit an than costly more considerably be can IPO an Pursuing : private equitysellersonanIPOexit? through asaleorIPO? and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare : Exiting from an investment via an IPO can expose PE expose can IPO an via investment an from Exiting : :

The reluctance of a PE sponsor to provide any ongoing We a IO s ucsfl ta sil os not does still that successful, is IPO an When :

n l leveraged law English in covenants of loosening general a to led loans with both high-yield bonds and U.S. leveraged loans. This has leveraged law English of terms the of convergence the been has – investors (who traditionally invested in high-yield bonds) for leveraged loans institutional of appetite increased the of function a and – years recent in market finance leveraged UK the in theme Akey alongside used market) traditional seniorsecuredbankloans. the in (albeit availability commonly fluctuating is to and subject funds of source important an financing remains bond high-yield financing, loan leveraged from Aside institutional investors. term loan. secured Investors in TLB senior include a mix of non-amortising, traditional bank lenders and a – “TLB”) (or B loan term a as structured often are loans leveraged largertransactions, For PE overall the of portion financing providedbythird-partylenders. small a remains debt, convertible or PIK as such instruments, debt Other interest. of rate blended single, a carrying facility term tranche single a by replaced are tranches debt junior and senior traditional which to pursuant structures, financing n ohr ntttoa ivsos Priiat i mid-market in Participants investors. institutional other and funds lending direct as such sources alternative from sought being increasingly funding with transactions, PE mid-market for lenders “alternative”) (or non-bank and lenders bank traditional competition between increasing been has there years, recent in However, large PEtransactionsintheUK. and mid-market both fund to most used finance debt of the source common remains financing loan leveraged bank-led Traditional Generally speaking, Generally . Pleaseoutlinethemost common sourcesofdebt 8.1 . Arethereanyrelevantlegalrequirementsor 8.2 structures “covenant-lite” borrows, stronger certain for and, ratio) date oflistingandadmissionthetarget. expected the to prior but finished, have roadshows the after period the during abandoned be to track IPO the for rare comparatively is it that say to safe is it available, not is outcomes their and processes dual-track about information public full processes, these of many of nature private the given that Noting feasible. seems sale private a if this avoid to desire a and process, show road the in potential investors with shared be will that target the about information of offer for the asset to be disposed; one reason for this being the level private deliverable) (and acceptable an has it whether consider to road show is usually a reasonable inflexion point for the PE sponsor structures (that is, where the relevant loan agreement contains only a only contains agreement loan relevant the where is, (that structures covenants). (that is, where the loan agreement contains no maintenance financial single on-going or maintenance financial covenan transactions have also increasingly looked to implemen oans, with the market becoming more accepting of “covenant-loose” Financing 8 bonds). financing) ofprivateequitytransactions? for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin debt financing(oranyparticular typeofdebt restrictions impactingthenature orstructureofthe

the UK is an investor-friendly jurisdiction and jurisdiction investor-friendly an is UK the united Kingdom www.iclg.com t, usually t “unitranche” a leverage 277 united Kingdom 278 united Kingdom © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com hold thedebtratherthantosyndicate itaway. bank lenders, perhaps reflecting the fact that they are more likely to to say that the unitranche lenders are a little more conservative than on an acquisition or group initiative. As a general comment it is fair synergies future of way by EBITDA to added be can that amounts the pushed back, however, for example of there is now usually a cap on the favour have lenders the where areas two or one deals. are European There in mainly additional debt baskets and EBITDA been cure rights are back in force in the in have flexibility more ever seeing are We side. borrower/sponsor recently trends The Whatrecenttrendshavetherebeeninthedebt 8.3 certain than (other events limited exceptions)untilaftertheclosingofacquisition. drawstop loan disapply to agree and conditions financing their of all of satisfaction the upfront confirm to required be will lenders transactions, buyout private certain in that means this terms, practical in context, this in requirement legal a not Although transactions. buyout private of feature a become and permeated increasingly also has concept funds” “certain The the exceptions, limited to conditions precedenttotheloan)atbidstage. subject satisfy, (and loan documentation required the executed have and finalise to need will lenders its and bidder the that means this terms, practical In funds). such of availability the confirm must advisor financial bidder’s the (and bid any of announcement public the to prior acquisition, proposed a finance to basis funds certain a on place the in resources have and funds bidder a that UK require principles the These of Code. requirements Takeover confirmation cash the and with compliance funds” ensure “certain to be will issue key a finance, involving debt UK the in transactions buyout public of context the In ties). U.S. limited only have that entities (or entities non-U.S. many by compliance necessitate can which U.S., the in regulations and laws such of reach extraterritorial potential and nature expansive the of laws. sanctions Aside from local and laws, borrowers and sponsors should also corruption be aware anti-bribery, with compliance regulatory to and political sensitive current regards in careful especially be to need participants market climate, the in example, For private equitytransactions. affecting regime regulatory broader the as well as regulations, and laws industry-specific any with, compliance ensure and of, aware be should participants market concerns, practical such from Aside escrow arrangementifbeingusedtofinanceanacquisition. an into funded or loan a by bridged be either typically must hand, other the on issuance, increased bond high-yield a and requirements, disclosure conditions market ever-fluctuating on dependent timing the execution with successful its With aligned itself. acquisition more the of constraints is that timetable shorter much a issuance) is that loans can typically be documented and executed on bond high-yield a than (rather loan a of advantage another context, other things, a detailed offering memorandum). Further, amongst in an acquisition of, disclosure preparation the requires lighter (which issuance bond the valued have high-yield a to compared as loan bank leveraged a of requirements funds PE some For obviously example, structure. financing an ultimate play the dictating concerns in deal role practical important said, That UK. the affect the choice or structure of debt financing of PE transactions in would that restrictions or requirements legal particular no are there Dechert llp financing marketinyourjurisdiction? noprtd u U tx eiet opne ae sometimes non-UK are although companies resident structure tax preferred forstampdutyefficiency. acquisition UK but the resident incorporated and in incorporated UK utilise companies to tend transactions UK treatment onanexit(seequestions9.2and9.3below). tax gains capital achieve to and shares of acquisition on tax income minimise to is objective limitations, key the perspective, management a From further provide of rules 30% particularly whereU.S.investorsareconcerned. anti-hybrid to deductions and interest EBITDA) restrict generally (which rules barrier interest introduced recently relatively rules), capitalisation thin the under as (such interest of deductibility the on on restrictions expense long-standing interest to addition In area. of important an remains financing deductibility maximum the Achieving be can (which otherwise or relevant tobothexternalandinvestor-related debt). relief treaty through withholding interest of rate 20% the reduce to ability the and interest on focus or capital gains, withholding tax concerns in UK transactions tend to factor.dividends to However,withholding no applies UK the since material a often is tax withholding perspective, investor an From structure toinvestors. acquisition the through companies portfolio underlying the from flows payment on leakage tax mitigate particular, in and, structure tax-efficient a establish to is focus tax primary the level, high a At Management will generally be keen to ensure that tax is deferred is tax that ensure to keen be generally will Management tax income minimal a with charge onacquisition. sale future a on treatment tax gains capital delivering of means a as used commonly are and UK the in relevant remain arrangements deferred/vesting and shares Growth share classesandotherinvestors. management the of rights and company the of capital share the to given be should focus particular capital, share ordinary constitutes what of meaning the on guidance (“HMRC”) Customs & Revenue ordinary share capital. Following recent technical changes and HM In the satisfied. of 5% least at hold are must executive an eligible, be conditions to particular, certain provided sale) on tax gains capital of rate 10% a (delivering entrepreneurs’relief claim investment to able be “disguised may management senior investment/co-investment, equity the For under purposes management fee”(“DIMF”)orincome-basedcarriedinterestrules. tax for circumstances. income certain in returns Management will look to interest ensure that carried interest is not treated as carried on available remains 28%) (at tax gains capital interest, carried of treatment tax the to changes adverse introduced has legislation recent Although . Whatarethekeytaxconsiderations forprivateequity 9.1 . What arethekeytaxconsiderationsformanagement 9.3 Whatarethekeytax-efficientarrangementsthat 9.2 Tax Matters 9 off-shore structurescommon? investment intoanewacquisition structure? shares, deferred/vestingarrangements)? investors andtransactionsinyourjurisdiction? Are teams thataresellingand/orrolling-over partoftheir equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate iclg to: privateequity 2019 united Kingdom (see question9.2above). teams management advising those by considered be to need also in management by achieved entrepreneurs’to changes Recent relief interests. carried of respect be can treatment tax gains capital structures. (see rules fund interest question 9.2 above) have further limited the circumstances in which carried equity income-based and private DIMF the in Further, companies to partner challenges additional general present and year tax a within company a by used be can which losses forward brought the limit 2017 April in introduced restrictions loss corporate the to level, domestic a subject On be will transactions whether mandatory disclosuretoHMRC. consider to its advisers and industry equity sixth private the require the Cooperation will which Administrative by (“DAC6”), on Directive proposed EU the rules to disclosure amendment mandatory the adopt On an international level, despite proposed Brexit, the UK intends to The changes to the availability of double tax treaty relief as a (c) Theinterestbarrierrules(seequestion9.1above). (b) deductions disallow potentially which rules anti-hybrid The (a) Particular project. (“BEPS”) measures likelytoimpacttheprivateequityindustryinclude: Shifting Profit and Erosion OECD’s Base the to response in years recent in have rules significantly tax changed UK the jurisdictions, other most in case the is As Havetherebeenanysignificantchangesintax 9.4 neutral rolloverandshouldbefactoredintothetransactiontiming. tax- any with connection in HMRC from required be generally will purposes. Aclearance these tax for used frequently are notes Loan rollover.a on occurring disposal taxable a escape to available often are reliefs Reorganisation relief. entrepreneurs’ of availability the maximise to want will and received are proceeds disposal any until Dechert llp © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 the basic framework of law relating to financial services in the UK), and (providing 2000 Markets Act investors and Services Financial the England), PE affect in law company of framework basic the provides (which 2006 laws Act European and Companies the is these of important most the transactions. Among UK of range As outlined in the previous answers to the questions in this article, a Havetherebeenanysignificantlegaland/or 10.1 0LegalandRegulatoryMatters 10 a ld o h icesn ne fr sbtne i entities in “substance” for seeking treatybenefits. need increasing the to led has This the jurisdictions. participating other with treaties of UK’stax application the overlays which multi-lateral (“MLI”) OECD’s instrument the of adoption the of consequence debt asasourceofinvestorfinance. the through made than rather shares preference of use increasing the to led has been have elections structure. acquisition below,(b) with together measure, This box the check where investors U.S. involving transactions in uncertainty of cause a commonly are rules The instruments. or entities hybrid involving structures in expenses other and interest for teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities anticipated? anticipated? private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting size ofthedealinquestion. the to aligned thresholds materiality by governed be to and basis, “red-flag” issues-focused an on conducted be to tend investigations These compliance. and estate, real property,litigation, intellectual contracts, material assets, title, into investigations to) limited not (but including target, the of aspects business and legal most review will investigations These buying. considering are they assets the on undertaken be to processes diligence due legal detailed require typically sponsors PE them, to sold being business the of condition the to as protection warranty substantive from benefit not may they sponsors, PE other from assets buying when that given Especially their regulate and monitor to activity). order in a framework, into firms regulated investment funds, alternative hedge other place any and to equity looks private that directive EU (an (“AIFMD”) Directive the Managers of Fund rules Investment the Alternative of marketed or all, or some, to subject from be generally will States Member EU managed within are that funds) other (like funds PE failing to implement adequate procedures for its portfolio company, sponsor could incur liability under the Bribery Act 2010 liability for PE a that is above), 10.4 question to answer the to reference (with example such One company. portfolio its for liable held be may sponsor PE a where instances specific very only are There relate. shares the which to the company the for of activities/liabilities underlying liable not is shareholder a law, English under general, In issues intherelevanttargets. of abandonment the corruption cases, or bribery insurmountable to some due transactions proposed in and sponsors, PE by upon due of insisted rights governance day-to-day the documentation, purchase thoroughness the impacted in provisions W&I related has of strength the investigations, diligence UK), the in 2010 Act Bribery the by instance, for (driven, trend This conduct. corporate and practices business various to sensitivities their and PE acquiring, of focus the increased sponsors on the day-to-day business activities of the targets they are further has legislation Anti-bribery 03Howdetailedisthelegalduediligence(including 10.3 Areprivateequityinvestorsorparticulartransactions 10.2 05Arethereanycircumstancesinwhich:(i)aprivate 10.5 Hasanti-briberyoranti-corruptionlegislation 10.4 Europe) andthe Takeover in Code(referredtoabove). the data of worldwide), collection and transmission individuals the governs (which and GDPR businesses UK by corruption and bribery prohibiting at aimed (legislation 2010 Act Bribery the materiality, scopeetc.)? jurisdiction (e.g.onnationalsecuritygrounds)? the liabilitiesofanotherportfoliocompany? diligence, contractualprotection,etc.)? prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors subject toenhancedregulatoryscrutinyinyour and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ united Kingdom www.iclg.com 279 united Kingdom 280 united Kingdom © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com particular no be would there that noted be investment should that from it exit (although desired a of time the at prevail might which UK the in rates now tax and legislation governing the to as arisen have uncertainties inevitable private UK, the making in when investments that equity means Union) European the Brexit in place the of outcome UK’sthe to the as uncertainty consequent the (and 2016 in referendum by imposed environment financial the to uncertainty the that however, noted, be should It sponsors. PE by investment for world the in place premier a remains UK The Whatotherfactorscommonlygiverisetoconcerns 11.1 company). investee the from sponsor PE the by enjoyed proceeds investment (the 2002 Act Crime the being concerned bribery the of crime the of “proceeds” relevant of Proceeds UK the under potentially and Dechert llp tables andlegaldirectories,Dechert’s globalteamhasbeenrecognisedforitscommercialjudgmentandclientfocus. to the most complex issues in evaluating, structuring and negotiating PE transactions. 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LLP,Dechert at associate securities and corporate to contributed all on Markland John Acknowledgments that theymake. equity funds, and general levels of disclosure about the investments private by charged fees around transparency for desire greater a is topic Another which here. is receiving some all prominence in the them UK at the cover time of writing to room not is there and UK the in sponsors equity private by investments influence can which the European Union). Aside from Brexit, many other factors remain from departure a following investment a international for destination as status UK’s the worsen to government UK the for incentive Legal Business. Mr. Darwin advises clients across a wide range of range wide a across clients advises Darwin Mr. Business. 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Chapter 36 USA John LaRocca

Dechert LLP Dr. Markus P. Bolsinger

1 Overview transactions involving non-U.S. investors that might raise U.S. national security issues.

1.1 What are the most common types of private equity 1.3 What trends do you anticipate seeing in (i) the next 12 transactions in your jurisdiction? What is the current months and (ii) the longer term for private equity state of the market for these transactions? Have you transactions in your jurisdiction? seen any changes in the types of private equity transactions being implemented in the last two to three years? Despite the potential for continued market turbulence and economic uncertainty, PE investment activity will likely remain active due to record access to capital. Over the past few years, the concentration U.S. private equity (“PE”) deal activity in 2018 increased in terms of capital in large funds has increased, leading to a corresponding of both deal volume and value relative to 2017, while deal activity increase in the number of megadeals consummated. We expect this for the first quarter of 2019 declined sharply in both respects relative trend to continue as valuations remain high, while other funds to the same period in 2018. Deal activity contrasts with PE increase the number of add-on and alternative transactions pursued fundraising, which increased during 2018 to reach record levels and in order to deploy capital quickly in a competitive market. remained strong during the first quarter of 2019. During the past 18 months, PE sponsors have continued to be confronted with In addition, pension funds, insurance companies and other investors extremely elevated valuations for new platform companies and of large pools of capital will likely increase their allocation to seller-friendly terms created by expedited, competitive auctions. alternative investments – PE, private debt, real estate and These valuations, coupled with the lack of suitable targets, have infrastructure. created a challenging investment environment for buyers that has persisted during this period and negatively impacted deal activity. 2 Structuring Matters As a result, activity during this period has increased for portfolio company add-ons and alternative transactions such as carve-outs, strategic partnering transactions, minority investments, club deals 2.1 What are the most common acquisition structures and take-private transactions. In addition, PE sponsors have adopted for private equity transactions in your focused significant attention on readying existing portfolio jurisdiction? companies for exits at today’s high valuations. Non-traditional PE funds such as sovereign wealth funds, pension The most common acquisition structures are mergers, equity plans and family offices are extending beyond minority positions to purchases and asset purchases in the case of private targets, and one- increasingly serve as lead investors in transactions, which has step and two-step mergers in the case of public targets. created additional competition for traditional PE funds. Historically, most PE sponsors have prioritized control investments, but the current market has increased focus on alternative investment 1.2 What are the most significant factors encouraging or structures. inhibiting private equity transactions in your jurisdiction? 2.2 What are the main drivers for these acquisition structures? The dearth of suitable targets has resulted in extremely competitive auctions, which in turn has resulted in high historical selling The primary drivers include tax considerations, stockholder multiples and seller-favorable terms. Successful bids often include approval, speed and certainty of closing and liability issues. “walk-away” terms with few conditions and recourse limited solely Mergers offer simple execution, particularly where the target has to buyer-obtained representation and warranty (“R&W”) insurance. numerous stockholders, but buyers lack privity with the target’s With bankers and sellers focused on certainty and speed to closing, stockholders, and the target’s board may expose itself to claims by transactions are often required to be signed and closed within days dissatisfied stockholders. Buyers often seek separate agreements or a few weeks. Recent regulatory reforms involving the with stockholders that include releases, indemnification and Committee on Foreign Investment in the United States (“CFIUS”) restrictive covenants. However, depending on the applicable state could lead to increased timing delays and deal uncertainty for law, enforceability issues may arise.

ICLG TO: PRIVATE EQUITY 2019 WWW.ICLG.COM 281 © Published and reproduced with kind permission by Global Legal Group Ltd, London 282 uSa © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com or tootherwisefacilitate obtainingCFIUSclearance. review CFIUS triggering avoid to order in information) non-public that it otherwise would seek (e.g., board representation and access to rights certain foregoing consider might position committee minority a taking investors PE non-U.S. review, and CFIUS to subject transactions For board as and tag-along drag-along rights,registrationrights andpre-emptiverights. rights, inspection such and information representation, protections minority customary seek will shareholder sponsors PE addition, In of equity. issuance and hiring/firing management senior strategy, plans, their protect to seek investors investment through contractual or security-embedded rights. 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Equity is most often comprised IRR of preferred the and/or common and profile risk company portfolio the involved, sponsor PE the on depending varies structuring Equity investments. equity U.S. PE returns typically arise from management fees and returns on Howistheequitycommonly structuredinprivate 2.3 not are law of unwittingly inherited. matter a as buyers to flow that liabilities that and acquired are assets necessary all that ensure to liabilities and assets time- business’the review carefully to need buyers addition, In required. and purchases difficult asset be However, be may consents contract third-party because execute to consuming can transactions) target. carve-out the (especially of liabilities existing 9. section behind See leave may also buyers terms, assets. negotiated the on acquired Depending in basis tax in step-up a obtain Asset purchases provide favorable tax treatment because buyers can and depending on the size privity and character of the target’s stockholder base. avoid agreements These impractical be may mergerbut a in arise that concerns enforcement transaction. the support and to party be to stockholders target all require purchases Stock Dechert llp indebtedness above certain thresholds, annual budgets annual thresholds, certain above indebtedness decisions, including material M&A transactions, affiliate transactions, business major over rights veto or covenants negative include often considerations? position, aretheredifferentstructuring institutional, managementandcarriedinterests)? equity transactionsinyourjurisdiction(including and business and rights, and (viii) limits on certain duties to the extent permitted by permitted extent the to duties repurchase certain on limits (viii) including and rights, equity, management to respect with rights the special (vii) rights, information elect (vi) directors, of board to or manager rights (v) rights, pre-emptive (iv) rights, drag-along and tag-along (iii) refusal, first of rights (ii) restrictions, transfer (i) agreement or LLC agreement. 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Whatarethekeypotentialrisksand appointing itsnomineestoboardsofportfolio that aprivateequityinvestorshouldbeawareofin www.iclg.com uSa 283 uSa 284 uSa © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com the importanceofunderlyingcontracts. or acquired being business the of nature the on depending prudent specific or to necessary be also may Jones Act) relating the (e.g., industries or sectors approvals government or contractual Other forced divestitureorders. voluntary process. Prudent buyers seek CFIUS approval to forestall U.S. national security to concerns – previously, CFIUS was typically a submissions mandatory require raise to likely more are that transactions of types certain for CFIUS now (“FIRRMA”) 2018 of implemented been have pursuant to the Foreign Investment Risk Review Modernization that Act reforms CFIUS recent addition, In States, particularly in the technology and defense-related industries. 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Because many U.S. call public companies to rights and consent written by action stockholder permitted rights, nomination board including provisions, charter favorable and adopt bylaw and rights registration obtain often sponsors PE Seeking to retain control over their post-IPO stake and ultimate exit, agreements commonlyterminatein connectionwithIPOs. public monitoring and management to sponsor PE subject scrutiny. and be disclosure will companies portfolio with transactions affiliate of nature the and rights and interests ownership sponsors’ PE result, a As post-IPO. equity companies’ portfolio of amounts significant own to continue sponsors PE sales, third-party Unlike market conditionsandpresentothersignificantconsiderations. volatile to subject are IPOs through exits However, transactions. sale more third-party through and exits multiples than prices higher market apparent at readily be often will IPOs through Exits Whatparticularfeaturesand/orchallengesshoulda 7.1 sponsors toprovidelimitedguaranteesofreversebreakfees. require commonly sellers closing, at funding equity to prior no assets have typically buyers PE that Given buyer. a against remedy exclusive and sole seller’s a as serve typically fees break reverse may be tiered based on different and triggering events. 6%–7%, Where triggered, around of average an with value, equity target’s the approval. Typical reverse break fees range from around 4%−10% of are triggered under other conditions circumstances, such as a failure to obtain HSR certain be if also may fees break reverse fee terms, the on Depending satisfied. pre-determined a of payment for reverse a exchange in transaction the of for termination allows which fee, break negotiate typically exposure such limit to seeking buyers However, price. purchase full the funding by the transaction close to forced be could they that risk the accept may PE buyers circumstances, certain In financing. buyer’s a of availability In the current market, closings are rarely, if ever, conditioned on the Arereversebreakfeesprevalent inprivateequity 6.8 See question 6.8. commitment. debt the enforce specifically limit to will rights lenders sellers’ committed their and the buyers to PE Often, letters commitment buyer. debt deliver will lenders Committed typically deliversitsownequitycommitmentletter. sponsor PE each deal, club a In beneficiary. third-party a named be will seller the and closing, at equity of amount specified a fund to agrees it which under buyer the to letter commitment equity an deliver will sponsor PE The financing. debt third-party and equity U.S. PE buyers typically fund acquisitions through a combination of Howdoprivateequitybuyers typicallyprovide 6.7 Dechert llp Transaction Terms: IPOs 7 under anequitycommitmentletter, damages,etc.)? exit? private equitysellerbeawareofinconsideringanIPO If so,whattermsaretypical? transactions tolimitprivateequitybuyers’ exposure? funding, righttospecificperformanceofobligations by thebuyingentity(e.g.equityunderwriteofdebt sellers typicallyobtainintheabsenceofcompliance (ii) equityfinance?Whatrightsofenforcementdo comfort astotheavailabilityof(i)debtfinance,and ou mr o sls hog piae utos hr closing where auctions private through certainty andpredictableexitmultiplesaremorelikely. sales on more generally firms focus PE increases, markets IPO in volatility As exit. third-party and IPO an both for prepare portfolio concurrently to resources mid-size to sufficient have to likely less are companies such addition, In IPO. small- for an warrant to insufficient be may likely values equity where companies, less are Dual-track approaches conditions. market attendant and company portfolio the of size the on depended historically have strategies Dual-track private through auction salesremainmostcommon. exits ultimate but process, the of circumstances certainty.execution particular the on depend will pursued path The to more favorable transaction terms and provide sellers with greater lead buyers), on pressure pricing increased or multiples IPO higher exit (through sellers by obtained price the pursuing Dual-track maximize often transactions sales. simultaneously auction private and IPOs are through transactions sponsors PE Increasingly, volume andmannerofsale. timing, on limitations including shares, unregistered of sale the on limitations legal to subject be to continue will sponsors PE period, of etc. lock-up the of expiration Following hedges, post-IPO. days 180 for shares pledges, sales, prohibit that agreements lock-up The underwriters in an IPO typically require PE sellers to enter into junior lien loans are equal in right of payment to holders of senior of holders to payment or of right in lien equal are loans Second lien junior debt. term bases and flow, borrowing cash or of loans) basis (asset-based the on made advances with facilities, is first in line for repayment. Senior secured debt includes revolving Senior debt ranks above all other debt lender.and equity of the the business to and risk associated the and structure capital the in place as “direct lending”) and high-yield bonds. Debt is categorized by its The most common debt sources are bank loans, private debt (known . Doprivateequitysellersgenerallypursueadual-track 7.3 Whatcustomarylock-ups wouldbeimposedon 7.2 as such independent directorrequirements. rules exchange stock under requirements governance to subject are companies public U.S. most companies, private Unlike falls belowspecifiedthresholds. ownership sponsor’s the when expire often rights the their companies, of election ensure public U.S. in can unusual are rights PE favorable these sponsors As nominees. PE States, United the in for unusual are standing which contests, proxy through stockholders third-party directors by nominees of of submission Absent IPO. numbers the following reelection specific nominate to right . Pleaseoutlinethemostcommonsourcesofdebt 8.1 Financing 8 through asaleorIPO? private equitysellersonanIPOexit? bonds). and (ii)weremoredual-trackdealsultimatelyrealised private equitysellerscontinuingtorunthedual-track, exit process?Ifso,(i)howlateintheprocessare for suchdebt(particularlythemarkethighyield current stateofthefinancemarketinyourjurisdiction your jurisdictionandprovideanoverviewofthe finance usedtofundprivateequitytransactionsin iclg to: privateequity 2019 uSa nldn a eepin rm h Vlkr ue ad eif from relief and enhanced prudentialstandardsformid-sizebankingorganizations. Rule, Volcker the from exemption banks, an community including for relief regulatory of range a includes roll- back The banks. Dodd-Frank “small” of on regulations roll-back eased a which was regulations push this own of their result The with bets capital. speculative making from banks prohibit to meant was that Volckerthe regulation including Frank a Act, Rule, Dodd- the is deregulation for push current the of target latest The is guidanceandnoenforcementactionwillbetakenbasedonit. agencies clarified that banks no longer need adhere to the LLG as it U.S. from statements Recent closing. of years seven to five within required that borrowers be able to amortize at least 50% of their debt limits on regulations provided and introduced was loosen “LLG”) (the Lending Leveraged on to aims administration applicable to traditional lenders. In 2013, the Interagency Guidance U.S. current The lenders’ such and flexibility incommitmentamountsandloanterms. generally market the in money of amount the but of light in trend a be to continue will lenders direct from borrowing advantage, this reduce will deregulation bank of atmosphere competitive advantage over traditional bank lenders, who have been their to due players market important become have lenders of Direct ease terms, covenant amendment andlimitedprepaymentpremiums. flexible similar pricing, competitive to due bonds high-yield over favored currently are loans Leveraged facility, one in debt typically withablendedrateofinterest. subordinated is and Unitranche senior combine debt kickers. facilities equity subordinated includes sometimes other and often unsecured debt, senior and of holders to payment Mezzanine of right in subordinated business. the of assets the in security holder’s such behind rank but debt secured Dechert llp © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London iclg to: privateequity 2019 leverage to subject 0%, and 25% to stepdowns (with cash flow excess of 50% than more no at coalesced have increasingly addition to the use of internally generated cash. Sweep percentages in debt revolving with for paid expenditures by sweeps flow cash excess reduce to able are Borrowers Sweeps: Flow Cash Excess ratio prongatalaterdateiftheleverageteststhenaremet. typically the to reclassified be is may basket “freebie” the under incurred Debt prong ratio the basket. other any or “freebie” the of using use the to prior first calculated incurred Debt an acquisition. for used be will incurred debt the if test leverage than” “not worse a be or met to is debt) debt unsecured or lien the junior senior, is whether incurred on (depending test leverage applicable amounts (including loan buybacks), and (3) unlimited amounts if an prepayment (2) EBITDA, of percentage grower upon or agreed amount an on dollar based fixed a of greater the (1) of sum the to equal debt incremental-equivalent and incremental incur to able are Incremental and Incremental Equivalent Debt Capacity: Borrowers in borrowerfriendlyprovisionsandincludethefollowing: increases with consistent are market loan U.S. the in trends Recent What recenttrendshavetherebeeninthedebt 8.3 Arethereanyrelevantlegalrequirementsor 8.2 osrie b cptl eurmn gieie. h curren The guidelines. requirement capital by constrained financing) ofprivateequitytransactions? financing marketinyourjurisdiction? debt financing(oranyparticulartypeof restrictions impactingthenatureorstructureof pro forma leverage for leveraged financings at 6× and also t hr i as a ou i tascin o mxmzn tx ai in basis tax maximizing on transactions in focus a also is There dividend andlong-termgains. certain on exemptions or rates tax reduced for qualifying investors, U.S. non-corporate of case the in and, gains or income the on “doubletax” a minimizing include considerations investors, U.S. For U.S. investorsfromdirectexposuretotaxes. non- shield may treaties tax or exceptions statutory domestic cases, taxes). Holding companies (“blockers”) are often used and, in some as wellstateandlocalincometaxplanning. of reduced tax rates on long-term capital gains (but do have certain have do (but gains capital long-term on rates tax reduced of possibility the with holders provide and company capital), (not in appreciation tax only participate to meaningful holders entitle as and consideration provide no for granted taxed are interests can Profits LLCs management. for efficiencies interests (including profits partnerships tax partnerships), For company portfolio classification. on depend arrangements Tax-efficient direct exposure to U.S. net having income taxes (and filing from obligations) and investors prevents that manner a in investments and fund the structuring include considerations investors, non-U.S. For . Whatarethekeytax-efficientarrangementsthat 9.2 Whatarethekeytaxconsiderationsforprivateequity 9.1 a include deals some and governors), seeking approval. and review are CFIUS to increasingly related parties lenders transaction from foregoing, assurances the to addition In and minimumequityrequirements. limitations time include may and test leverage a include typically Parameters agreement. loan existing favorable a refinance to buyer their equity interests in a portfolio company without the need for the sell loan can sponsors on whereby conditionality), related focused (and portability increasingly are Sponsors Control: of Change complete leverage testatthetimeacquisitionagreementisexecuted. a as may such conditionality limited Borrowers to subject acquisitions, unlimited Acquisitions: Permitted Unlimited and investments “declined proceeds”fromtheexcesscashflowsweep. on returns contributions, equity through grows further amount available flow.The cash excess of portion retained of EBITDA and increase by 50% of Consolidated Net Income or the a fixed dollar amount or grower based on an agreed upon percentage of greater the of basket a with start often Availablebaskets amount payments. debt lien junior or subordinated and payments restricted investments, make to conditionality limited with basket amount” Available Amount Baskets: Borrowers are able to use an “available the sweep. period often count to reduce the the amount required to be paid towards before made fiscal applicable the after prepayments but sweep the for date Debt payment required sweep. the of application minimizes U.S. tax on dispositions or other events (e.g assets and deductibility of costs, expenses and interest o Tax Matters 9 shares, deferred/vestingarrangements)? off-shore structurescommon? equity acquisitions(suchasgrowthshares,incentive typically consideredbymanagementteamsinprivate investors andtransactionsinyourjurisdiction? Are e minimis de www.iclg.com akt before basket ., withholding n borrowings, uSa 287 uSa 288 uSa © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com reforms to CFIUS. In particular, the scope significant of transactions that to could led has 2018 August in FIRRMA of enactment The See Act. Jobs section 9. and Cuts Tax the PE was impacting transactions 2017 and sponsors in adopted legislation significant most The Havetherebeenanysignificantlegaland/or 10.1 from arising deficiencies than partner-level liability). tax income (rather liability partnership-level in result collect to audits tax partnership and assess to mechanism a with IRS the provide rules audit partnership new The to changes significant (v) international taxationofU.S.taxpayers. and businesses; investment or estate real to respect with granted interest carried for gains capital term in placed year the in property service; (iv) lengthening (to certain three years) the holding period for of long- cost the of expensing interest on limitations (ii) rate; expense deductibility and the use of net operating losses; (iii) 100% tax corporate the (i) in their include: reductions temporary) and are funds which PE of (many for companies reform portfolio tax this of provisions Relevant treated aspartnershipsunderU.S.taxlaw. entities for (“IRS”) Service Revenue Internal U.S. the by process audit tax the to changes significant made States United the reform, this to prior addition, In Act. Jobs and TaxCuts the as to referred In 2017, the United States enacted significant tax reform, commonly Havetherebeenanysignificantchangesintax 9.4 not achievableormayintroducesignificantcomplexity. cases (such as phantom or restricted stock unit plans), tax deferral is some In investment. management’s and transaction the of nature the on depending available be may which manner, tax-deferred a Management investors rolling part of their investment seek to roll in for preferentialtaxratesorexemptionsonincome. qualifying on focus investment their selling investors Management Whatarethekeytaxconsiderations formanagement 9.3 types of economically similar arrangements Other (non-ISO stock options, alternatives). tax-efficient less in present not complexities Dechert llp from reducedtaxratesonlong-termcapitalgains. benefit to holder a enable can election) 83(b) an of filing the with (together vesting future to subject is that stock restricted of use the cases, certain In corporations. for available not are interests Profits for thissamecapitalgaintreatment. restricted stock un stock restricted 0LegalandRegulatoryMatters 10 investment intoanewacquisitionstructure? anticipated? private equityinvestorsortransactionsandareany regulatory developmentsoverrecentyearsimpacting anticipated? teams orprivateequitytransactionsandareany impacting privateequityinvestors,management (including inrelationtotaxrulingsorclearances) legislation orthepracticesoftaxauthorities teams thataresellingand/orrolling-overpartoftheir its and phantom equity) do not generally allow generally not do equity) phantom and its control. of absence the in even rights appointment board decision-making substantive other or information, technical non-public material to persons would gain non-U.S. certain rights involving appointment of directors, access which in investments certain also but review), CFIUS to subject of been always have only (which businesses U.S. over not review enable FIRRMA investments in which addition, non-U.S. to investors might be acquiring control In jurisdiction CFIUS’ CFIUS. expanded by scrutiny intense perspective. to now security subject are particular, national in a investors, Chinese from involving Transactions sensitive be to deemed U.S. investors and U.S. businesses that operate in industries that are There is enhanced scrutiny by CFIUS of transactions involving non- bribery andanti-corruptionmatters. typically buyers obtain broad contractual representations PE from sellers regarding anti- violations. FCPA pre-closing target’s a for The DOJ may impose successor liability and sanctions on PE buyers self-reported totherelevantenforcementauthorities. healthcare). Possible profile. and violations identified risk need to be thoroughly the evaluated and potentially on energy based conducted be aerospace, will Diligence defense, (e.g., violations foreign with for risk increased (ii) with industries in (iii) or East), customers, government Middle the and countries Soviet former other and Russia Venezuela,India, foreign China, (e.g., regions conducts risk high target the in (i) conducted is business the of whether any whether so, if and, business things, other among on, depends profile risk (“FCPA”).Practices The Act Corrupt Foreign the including legislation, anti-corruption and anti-bribery to respect with profile risk target’s the evaluate will counsel and buyers PE particular require that areas in expertise. diligence conduct to retained be may advisers Specialized diligence. legal of may bulk the typically handles Sponsors counsel outside but in-house, timeline. diligence certain transaction conduct overall the and business things, the transaction size, the nature and complexity of the target’s other among on, depends acquisitions with connection in sponsors The scope, timing and depth of legal due diligence conducted by PE 02Areprivateequityinvestorsorparticulartransactions 10.2 a in concerns security manner national that might materially impact the structure of the transaction. potential mitigate to measures significant impose to seek might CFIUS whether to increased as uncertainty and review CFIUS require that transactions for delays timing increased to led have particularly changes These on focus industries. sensitive increased an is there and mandatory, now are filings certain expanded, been has review CFIUS to subject be 04Hasanti-briberyoranti-corruptionlegislation 10.4 Howdetailedisthelegalduediligence(including 10.3 jurisdiction (e.g.onnationalsecuritygrounds)? diligence, contractualprotection,etc.)? materiality, scopeetc.)? subject toenhancedregulatoryscrutinyinyour approach toprivateequitytransactions(e.g. impacted privateequityinvestmentand/orinvestors’ prior toanyacquisitions(e.g.typicaltimeframes, compliance) conductedbyprivateequityinvestors iclg to: privateequity 2019 uSa .. niomna lw ad mlye eei lw. The and Compensation laws. Response, benefit employee Environmental and Comprehensive laws environmental U.S. under liabilities to relate concern of areas common securities, most two The to relating liability group control Statutory (iii) ego alter piercing, veil (a) to relating liability law Common (ii) has sponsor PE the extent the to arising liability Contractual (i) under owners. theories which “corporate”formwillbedisregarded. These include: several are from there However, distinct companies. portfolio and of acts for liable be separate not will generally sponsors PE Consequently, are legally entities as operated recognized businesses law, U.S. under Fundamentally, Arethereanycircumstancesinwhich:(i)aprivate 10.5 Dechert LLP © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London ICLG TO: PRIVATEEQUITY 2019 are transactions U.S. in sponsors PE limits, policy public Absent Contract law in the United States embraces the freedom to contract. Whatotherfactorscommonlygiverisetoconcerns 11.1 portfolio other and terminates, providedthatthe80%controltestissatisfied. sponsor plan funded inadequately an when PE liability face may companies) the (including companies a or plan affiliated all result, the a As group. person’scontrolled the of of member sponsor contributing a is plan, a of termination upon who, person any on ERISAliability several and joint imposes total valueofsharesallclassesstocksuchcorporation.” the of 80% least at or vote to entitled stock of classes all of power “the upon affiliates among ownership of stock arise possessing at least 80% of total combined groups voting Control liable. jointly become group control subsidiary the of members all plan, pension benefit defined qualified a terminates employer subsidiary a when (“ERISA”), Act Security Income Retirement Employee the Under opn’ laiiy ne CRL i tee s bss o veil for basis a is there piercing if CERCLA under liability company’s activities. environmental portfolio the for liability derivative or indirect have also can Parents including operations, daily portfolio company’s a of control pervasive portfolio the in themselves involving actually company’sby facility and actual exercise they when held directly liable as “operators” of the portfolio company’s facility be may sponsors PE company. portfolio the by operated or owned formerly or currently facility a at substances hazardous of releases Liability Act (“CERCLA”) can impose strict liability with respect to 1OtherUsefulFacts 11 and consolidatedgrouprulesundertaxlaws. FCPAthe laws, labor and benefit employee environmental, a achieve to looks court certain equitableresultunderegregiouscircumstances. a or purposes wrongful accomplish to certain misused been has form corporate the when occurs this often, Most theories. insolvency-related (c) and and similar theories, (b) agency and breach of fiduciary duty, agreed toguaranteeorsupporttheportfoliocompany. and (ii)oneportfoliocompanymaybeheldliablefor breach ofapplicablelawsbytheportfoliocompanies); the underlyingportfoliocompanies(includingdueto equity investormaybeheldliablefortheliabilitiesof the liabilitiesofanotherportfoliocompany? considering aninvestmentinyourjurisdiction? should suchinvestorsotherwisebeawareofin for privateequityinvestorsinyourjurisdictionor

practice on leveraged finance matters, and matters, finance leveraged on practice her focuses who LLP Dechert at partner securities and corporate oha Milgrim Joshua Tel: +12159942449/Email:[email protected] Envestnet to FolioDynamix of sale (NYSE: ENV). its and FolioDynamix, of Actua Solutions Inc. to CVC Growth and Fund, its US$199 million acquisition KBR); (NYSE: Inc. Velocityof sale BOLTmillion and US$328 EHS its in Corporation KBR, to sale its million in Inc. US$570 Holdings, Wyle MLNK); (NASDAQ: Inc. Solutions, MSD Technologies, IWCO Direct, Inc. in its US$476 million Equity; sale to ModusLink Global Container Ring Private of Capital acquisition its Bain in L.P. to Partners, sale billion US$2 its in Millennium Terra Corporation and Inc., DISA Global Solutions, Inc.; Telecom,Rocket Software, Inc. Association. Momentum City, Smart Bar LLC, Blue, Data of Philadelphia acquisitions its including transactions, numerous in the Partners of Capital Square Court include: transactions Representative Committee VentureCapital & Equity Private the of co-chair as serves currently She summa cum laude a B.A., M&Aborder securities offerings of equity and debt. Ms. Misner obtained also in She sellers sectors. cross- and domestic in banks industry investment and companies and represents of portfolio range buyers wide their a strategic across and as transactions sponsors well PE as represents companies Misner M. Allie LLP, contributedsignificantlytothischapter. Misner M. Allie Acknowledgments chapter. this to contributed LLP,also Dechert at partner trade international section 9. with IRRs and potential risks depending on tax considerations. See operate. Taxes continue to be a key value driver in PE transactions, will that affect both data how diligence is conducted personal and how portfolio companies of protection and the cybersecurity in of expected arenas be should regulations new particular, In States. their Transaction parties should expect increased regulation in satisfy the United that documents of variety acquisition underlying goals. wide in a upon terms agree transaction and negotiate to able generally sponsors regardingforeigninvestmentsin2019.Seesection10. PE for issue key a remain will considerations CFIUS divestment. open a review even after closing has occurred and could even require not to ability the has uncertainty,CFIUS deal as is avoid to order in filing filing voluntary a submit a to advisable if be may Even nonetheless it mandatory, requirements. filing mandatory trigger PE investors should be aware that investing in a U.S. business might concerns, CFIUS potential to particularly given paid recent reforms and the political climate. Non-U.S. be must attention Increased cum laude a a prnr t ehr LP LLP, Dechert at partner tax a , a oprt ad euiis soit a Dechert at associate securities and corporate a , , from Temple University Beasley School of Law. , from the University of Pennsylvania, and a J.D., WWW.ICLG.COM Darshak Dholokia Darshak aa Gelb Sarah

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John LaRocca Dr. Markus P. Bolsinger Dechert LLP Dechert LLP Cira Centre, 2929 Arch Street Three Bryant Park Philadelphia 1095 Avenue of the Americas, New York PA 19104-2808 NY 10036-6797, USA / USA Skygarden, Erika-Mann-Straße 5 Munich 80636, Germany Tel: +1 215 994 2778 Email: [email protected] Tel: +1 212 698 3628 / +49 89 2121 6309 URL: www.dechert.com Email: [email protected]

uSa URL: www.dechert.com

John LaRocca practices primarily in the areas of PE, M&A, carve-outs Dr. Markus P. Bolsinger, co-head of Dechert’s PE practice, structures and alternative investments. He has represented a wide range of PE and negotiates complex transactions – domestic and transatlantic M&A, and corporate buyers and sellers in both domestic and cross-border leveraged buyouts, recapitalizations and going-private transactions – transactions across various industries, including healthcare, and advises on general corporate and corporate governance matters. manufacturing, chemicals, consumer products and retail. Mr. Dr. Bolsinger’s experience extends across industries, including LaRocca has been ranked among the top PE buyouts lawyers in the healthcare, industrial, packaging, agribusiness, consumer, food and United States by Chambers USA, where he is recognized for having beverage, and restaurant sectors. His clients have included leading PE “excellent judgment” and “knowing exactly when to be more flexible firms, such as First Atlantic Capital, ICV Partners, J.H. Whitney & Co., and when to stand firm”. He has been listed as a top lawyer for PE Morgan Stanley Capital Partners and New Mountain Capital. In addition buyouts in The Legal 500 (U.S.), which noted his “very good business- to his core M&A and PE experience, Dr. Bolsinger has extensive sense”. Particularly interested in working capital and complicated expertise in transactional risk insurance, and frequently speaks and purchase price and waterfall mechanics and alternatives, Mr. LaRocca writes on the topic in major media outlets. served as a certified public accountant and senior accountant with He has been listed as a recommended lawyer by the U.S., EMEA and Price Waterhouse prior to joining Dechert. Germany editions of The Legal 500, a legal directory based on the opinions of clients and peers. Recognized for M&A and PE buyouts in 2018, Dr. Bolsinger has been cited as “a trusted adviser” who “takes the time to understand a client’s business and motivations before undertaking any way”. Since 2010, every year Dr. Bolsinger has been recognized and received a pro bono service award.

Dechert is a global law firm focused on sectors with the greatest complexities and highest regulatory demands. We deliver practical commercial insight and judgment to our clients’ most important matters. Nothing stands in the way of giving clients the best of the firm’s entrepreneurial energy and seamless collaboration in a way that is distinctively Dechert. Dechert has been an active advisor to the private equity industry for more than 30 years – long before it was called “private equity”. As a result of our longstanding roots and diverse client base, we have a deep understanding of the latest market terms and trends and provide creative solutions to the most complex issues in evaluating, structuring and negotiating PE transactions. Ranked among the top law firms for PE by prominent league tables and legal directories, Dechert’s global team has been recognized for its commercial judgment and client focus.

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