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Tender Offers Poised to Become an Acquisition Structure of Choice for Private Equity Buyers

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Tender Offers Poised to Become an Acquisition Structure of Choice for Private Equity Buyers Debevoise & Plimpton Private Equity Re p ort Spring 2013 Volume 13 Number 3 Tender Offers Poised to Become WHAT’S INSIDE Dividend Recaps: an Acquisition Structure of Choice 3 Used With Care, for Private Equity Buyers a Useful Tool GUEST COLUMN Every so often the Delaware legislature order to consummate this type of squeeze- 5 ILPA Ten Years On: adopts a change to the Delaware General out merger. Last year, less than 40% of Our Focus in 2013 Corporation Law (DGCL) that has far- large ($500 million +) U.S. LBOs of public reaching consequences in the practice of companies were effected via tender offer. We Delaware Court Decision mergers and acquisitions. Everyone in the expect this number to increase significantly 7 Could Reduce Litigation deal community, and especially those in upon adoption of the amendment. Exposure in Going Private the private equity world, should be tracking The Benefits Transactions an anticipated amendment to the DGCL of Two-Step Tender Offers that will make acquisitions structured as As is commonly known, a tender offer The IRS Has Been Busy tender offers more inviting. The amendment followed by a back-end merger provides 8 will greatly simplify the deal process acquirers of public companies with several Social Twist: Emerging once a bidder acquires more than 50% advantages as compared to one-step, long- 9 ESG Policies Could Present of the outstanding shares of the target by form mergers, accelerated timing being chief More Opportunities Than permitting the use of a short-form, squeeze- among them. The primary reason for the Challenges for Private out merger to acquire the remaining shares, timing advantage is that a bidder does not Equity without a stockholder vote. Under current need to file the disclosure documents with law, a bidder must reach a 90% threshold in CONTINUED ON PAGE 18 How Will the AIFMD 11 Impact Non-E.U. Fund Managers? Answers to Frequently Asked Questions © 2013 The Cartoon Bank Club Deals Class Action 13 Survives Summary Judgment ALERT 15 New Banking Guidance May Impact Leveraged Lending UK Take Privates: 17 “I’m afraid I have some bad news. The company has been taken over by the little Recent Changes to the kid who sells lemonade down the street.” Takeover Code Letter from the Editors The past few months have seen a flurry of court decisions, acquisitions of UK companies subject to the Code. legislative proposals and administrative pronouncements that Dividend recaps became prevalent once again in 2012 and impact private equity dealmakers. In this issue, we round up the their popularity continues. We review the factors that are driving most noteworthy of these developments. this trend, as well certain ways to mitigate the risks that these Two recent developments in Delaware spell good news for transactions pose for the company, its shareholders and its officers, private equity firms. First, on our cover we explain proposed and directors. Another trend is interest among private equity fund changes to Delaware law, which will level the playing field for investors in a fund’s environmental, sustainability and governance sponsors seeking to utilize the speedier tender offer structure to practices, so-called ESG programs. We review what is driving such acquire public Delaware companies by making this structure easier initiatives and argue how developing a program in advance of your to execute in a leveraged transaction. In addition, a recent decision next fundraising could be advantageous. by the Delaware Chancery Court provides added comfort to private In our Guest Column, Michael Elio, a Managing Director equity buyers who partner with controlling stockholders or other at ILPA, discusses the changing role of the Institutional Limited insiders to acquire publicly-traded Delaware companies by reducing Partners Association over its ten-year history, growing from their exposure in the now nearly inevitable shareholder litigation an informal sounding board for institutional investors into a that accompanies public to privates. sophisticated advocate for its LP members in promoting best Elsewhere in this issue, we review the spate of recent rulings practices, developing research and benchmarks and creating and announcements by the IRS on topics ranging from spin-offs industry leading education programs. to management fee waivers to the medicare tax, and report on the In other news, as part of our ongoing effort to make the Private status of the long-running class action litigation challenging club Equity Report the most relevant and useful resource for up-to-date deals and other practices on antitrust grounds. We also update information and analysis for private equity professionals, we are you on two ongoing European legislative initiatives impacting revamping the electronic version of the Report to make it more user private equity funds. First, we follow up on our extensive previous friendly, whether viewed online, on your tablet or on your other reporting on the European Alternative Investment Fund Managers mobile devices. We hope to launch this new product with the next Directive (AIFMD), which is to be implemented by July 22, 2013, issue and look forward to your feedback. with a more detailed discussion of its impact specifically on fund Kevin A. Rinker managers based outside the EU and on the marketing within the on behalf of the Editorial Board EU of funds organized outside the EU. We also update you on some recent changes to the UK Takeover Code that will affect Private Equity Partner /Counsel Practice Group Members The Debevoise & Plimpton Franci J. Blassberg The Private Equity David J. Schwartz Alan V. Kartashkin – Moscow Private Equity Report is a Michael P. Harrell Practice Group Rebecca F. Silberstein Antoine F. Kirry – Paris publication of Stephen R. Hertz All lawyers based in New Dmitriy A. Tartakovskiy Jonathan E. Levitsky Kevin A. Rinker York, except where noted. Guy Lewin-Smith – London Debevoise & Plimpton LLP Hedge Funds Jeffrey E. Ross Dmitri V. Nikiforov – Moscow 919 Third Avenue Private Equity Funds Byungkwon Lim Editorial Board William D. Regner New York, New York 10022 Marwan Al-Turki – London Gary E. Murphy Kevin A. Rinker 1 212 909 6000 Ann Heilman Murphy Gavin Anderson – Hong Kong Mergers & Acquisitions Jeffrey J. Rosen www.debevoise.com Managing Editor Kenneth J. Berman – Washington, D.C. Andrew L. Bab Kevin M. Schmidt Washington, D.C. Erica Berthou David H. Schnabel E. Raman Bet-Mansour – London Thomas Schürrle – Frankfurt 1 202 383 8000 Jennifer J. Burleigh Cartoon Editor Paul S. Bird John M. Vasily London Woodrow W. Campbell, Jr. Franci J. Blassberg Please address inquiries Peter Wand – Frankfurt 44 20 7786 9000 Sherri G. Caplan Colin Bogie – London regarding topics covered in Jane Engelhardt Leveraged Finance Paris Richard D. Bohm this publication to the authors Sally Gibson – London Katherine Ashton – London 33 1 40 73 12 12 Thomas M. Britt III – Hong Kong or any other member of the William B. Beekman Matthew James Griffin – London Geoffrey P. Burgess – London Frankfurt Practice Group. David A. Brittenham Michael P. Harrell Margaret A. Davenport 49 69 2097 5000 Geoffrey Kittredge – London Paul D. Brusiloff All contents © 2013 Debevoise Michael A. Diz Moscow Timothy S. Long Pierre Clermontel – Paris & Plimpton LLP. All rights E. Drew Dutton – Hong Kong 7 495 956 3858 Marcia L. MacHarg – Frankfurt Alan J. Davies – London reserved. Michael J. Gillespie Peter Hockless – London Hong Kong Anthony McWhirter – London Gregory V. Gooding Pierre Maugüé 852 2160 9800 Jordan C. Murray Stephen R. Hertz Margaret M. O’Neill Shanghai Andrew M. Ostrognai – Hong Kong David Innes – London 86 21 5047 1800 Richard D. Robinson, Jr. Nathan Parker – London Dividend Recaps: Used With Care, a Useful Tool Dividend recaps are all the rage. 2012 saw memory, there is a near-continuous flow re-emergent PIK toggle features in dividend a record volume of recap transactions (over of such deals in the U.S., and the activity recap financing (in which interest may, at $60 billion, according to data provider S&P has been spreading worldwide. In Europe, the borrower’s option, be paid in the form of Capital IQ LCD), and 2013 is shaping up to despite a traditional reluctance toward additional debt instead of in cash). be another big year in the U.S. and abroad. dividend recaps, the market in 2013 has …But There Are Still A recent report from Thomson Reuters noted already witnessed several major transactions, Associated Risks that the dividend recap volume in 2Q 2013 including loan-funded dividends for Pets-at- While a dividend recap can provide clear ($18.4 billion completed and $5.4 billion Home and Mivisa. And PE fund Investcorp benefits for shareholders and financial currently in the market as of the June 17 recently announced that it would scrap sale sponsors, there are still risks for the company, report) may exceed the previous market high plans for its portfolio company, Armacell, in its shareholders, and its officers and of $19.3 billion seen in the last quarter of favor of a dividend recap. Even Asia, where directors. If the debt-funded dividends are 2012. This frenzy of activity isn’t surprising, this financing mechanism had been almost too large relative to the company’s earnings as dividend recaps have turned out to be a unheard of, has recently seen a handful of and available capital, the company will be powerful tool for private equity firms focused dividend recap transactions, led by the recent vulnerable after the transaction to downturns, on returning capital. offerings of Nord Anglia Education that were as it may be left without the ability to As with all power tools, however, there used, in part, to channel funds to sponsor adequately fund day-to-day working capital are certain precautions that anyone involved Baring Private Equity Asia.
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