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The Debevoise & Plimpton Private Equity Report, Winter 2003

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The Debevoise & Plimpton Private Equity Report, Winter 2003 Private Equity Report What’s Inside Volume 3 Number 2 Winter 2003 Questions to Ask Before You Join a Club Shark Repellants That Can Bite page 3 Despite the recent flurry of large transactions in which a consortium of private equity firms have Private Equity and the teamed up to make joint bids and acquisitions, “club deals” themselves are not breaking news. Proposal to Exclude Dividends In fact, they have been a staple of small- and middle-sized private equity M&A transactions for From Income page 4 years. Recently, however, there has been a growing trend toward large club deals with enterprise How to Ensure that Your 1 values over $1 billion. Due to their size, complexity and, often, international dimension, these Special Committee is Special transactions have generated considerable attention in the business press and have prompted much page 5 discussion among private equity professionals and the limited partners whose money they manage. A Comparison of U.S. and UK Private Equity Funds page 6 The increased number of very large club increase its chances of acquiring an interest transactions arises from a number of in a “prized property” that it would otherwise Guest Column: factors, including the tremendous growth not have sufficient equity to obtain. In What’s Good for the Goose… in the availability of private equity capital addition, sharing judgments about valuation Turning the Due Diligence and the popularity of auctions in the sales and limiting the other number of compe- Spotlight on Sponsor process. Even more importantly, perhaps, titors are added benefits of being part of Infrastructure page 8 because of difficulties in the debt markets, a club bid. Minority Equity Investments the percentage of equity needed to complete Diversification and Risk-sharing. Club in German Companies page 10 transactions has increased to such a degree transactions are also a way of spreading You’re Not in Delaware: that in the largest transactions even large investment risk by permitting firms to use Directors’ Liabilities in Major private equity firms cannot complete a their available equity to participate in a larger European Countries page 12 transaction without running afoul of the number of transactions and to spread the diversification limitations in their limited risk of a single transaction among similarly Update: Removal of the UK partnership (fund) agreements. (Most situated private equity firms. 20-Partner Rule Limit page 17 buyout funds limit the amount that can be Greater Leverage with Financing Sources. invested in any portfolio company to 20% Alert: Goodbye to Lockups? Teaming up with another private equity or 25% of the fund’s committed capital.) page 24 firm may well make it easier for club Therefore, a club deal may be the only way members to get the best financing terms to raise the required equity to finance a available. Financing sources would gener- very large transaction. ally find club deals attractive, Club deals offer private equity firms: especially since they will be The Chance to be a Winner, Especially in able to serve more than one Very Large Transactions. By participating client in a single transaction. in a club deal, a private equity firm may Running on the “Inside Track” and Breaking New Ground. 1 Notable recent examples include: the acquisition by Texas Pacific Group, Inc. (the lead investor), Bain Capital, Inc. and Club deals might also permit Goldman Sachs Partners, LP of Burger King Corporation from a private equity firm to benefit its British parent, Diageo plc for $1.5 billion in December 2002; the acquisition by The Carlyle Group, LP (50% equity) and from the industry (e.g., telecom) Welsh, Carson, Anderson & Stowe (50% equity) of QwestDex, expertise or prior relationships a subsidiary of Qwest Communications International, Inc. for $7.05 billion in August 2002; and the acquisition by funds (e.g., with management or the managed by Providence Equity Partners Inc. (49% equity and seller) of its co-bidders. lead investor), Soros Private Equity Partners, LP and Goldman Sachs of Eircom plc for $2.5 billion in June 2001. continued on page 14 © Nobleman / www.mtncartoons.com Tyler 2003 Marc “I never said it was the world’s most exclusive club.” letter from the editor In this, the first issue of the Debevoise & Plimpton simpler U.S. fund model that uses parallel vehicles Private Equity Report for 2003, we focus on new and less frequently and relies on a single, integrated proposed legal developments that impact the partnership agreement for both U.S. and non-U.S. private equity industry – from tax laws to takeover investors. In our private funds formation practice defenses. We also highlight several key respects in in both London and New York, we are pleased to which U.S. private equity firms operating in Europe be participating in this transition. need to get accustomed to different ground rules. In that connection, we are happy to announce In our cover story, we outline the issues that the arrival of our newest partner in London, Marwan private equity firms participating in club deals ought Al-Turki, a leading English fund formation and finan- to consider – both vis-à-vis the private equity firms cial services regulatory lawyer. The addition of Marwan with whom they partner as well as their own limited to our international practice further strengthens the partners. We also report on a recent Delaware firm’s commitment to European private equity clients Supreme Court case that may potentially limit private and U.S. funds seeking to organize and invest abroad. equity investors’ exit opportunities from public In our Guest Column, Steven Millner, a managing transactions. On the tax front, we describe how the director at DML, a specialist in accounting, admin- most recent version of President Bush’s tax proposals istrative and advisory services for the private equity to eliminate taxes on corporate dividends may impact industry, cautions that institutional investors are private equity. focusing the due diligence spotlight on private equity Jim Kiernan, who heads our European practice, fund managers and proposes guidelines to help fund explains how serving on the boards of a fund’s managers develop the infrastructure, processes and European portfolio companies can expose a spon- controls that investors expect. sor’s employees to civil and criminal liabilities that The Trendwatch column is taking a brief hiatus would be unlikely in the U.S. and suggests how to this issue as we update our database in order to protect against that liability. provide you with the most current analysis of trends Also from the European perspective, Geoff Kittredge in the financial terms of private equity funds. describes the basic differences between private We continue to strive to make the Debevoise & equity funds organized as English versus Delaware Plimpton Private Equity Report a useful and informa- limited partnerships – most of which relate to form tive resource for our private equity clients and friends rather than substance. We believe that the elimina- and welcome any suggestions you might have on tion of the 20-partner limit for English partnerships topics of interest to you and your colleagues. should allow UK private equity funds and their Franci J. Blassberg sponsors to move closer to the administratively Editor-in-Chief Private Equity Partner/ Counsel Practice Group Members The Debevoise & Plimpton Franci J. Blassberg The articles appearing in this Kenneth J. Berman – Washington D.C. Colin Bogie – London Private Equity Report is a Editor-in-Chief publication provide summary Jennifer J. Burleigh Richard D. Bohm publication of information only and are not Woodrow W. Campbell, Jr. Geoffrey P. Burgess – London Ann Heilman Murphy Debevoise & Plimpton intended as legal advice. Sherri G. Caplan Margaret A. Davenport Managing Editor 919 Third Avenue Readers should seek specific Michael P. Harrell Michael J. Gillespie New York, New York 10022 Please address inquiries regarding legal advice before taking any Marcia L. MacHarg – Frankfurt Gregory V. Gooding (212) 909-6000 topics covered in this publication action with respect to the Andrew M. Ostrognai – Hong Kong Stephen R. Hertz to the authors or the members www.debevoise.com matters discussed herein. David J. Schwartz David F. Hickok – Frankfurt of the Practice Group. Rebecca F. Silberstein James A. Kiernan, III – London The Private Equity Washington, D.C. Antoine Kirry – Paris All other inquiries may be Practice Group Mergers and Acquisitions/ London Marc A. Kushner directed to Deborah Brightman All lawyers based in New Venture Capital Paris Robert F. Quaintance Farone at (212) 909-6859. York except where noted. Andrew L. Bab Frankfurt Kevin M. Schmidt Hans Bertram-Nothnagel – Frankfurt Moscow All contents © 2003 Debevoise Private Equity Funds Thomas Schürrle – Frankfurt E. Raman Bet Mansour Hong Kong & Plimpton. All rights reserved. Marwan Al-Turki – London Andrew L. Sommer – London Paul S. Bird Shanghai Ann G. Baker – Paris James C. Swank – Paris Franci J. Blassberg The Debevoise & Plimpton Private Equity Report l Winter 2003 l page 2 Shark Repellents That Can Bite When private equity firms use IPOs as shareholders. Second, for whatever rights other than those held by the exit strategies (as they sometimes reason, IPO investors just don’t seem bidder become exercisable to buy stock have, and might again, in better market to be bothered by them. That’s odd, in the target company at half price. At conditions), the portfolio company because institutional investors tend to the same time, the bidder’s pill rights going public often includes a full disfavor antitakeover devices – to the become void – thereby causing massive complement of “shark repellents”– extent that it is often impossible to economic and voting dilution. A poison that is, charter and by-law provisions obtain shareholder approval for meas- pill is stronger than a business combi- intended to guard against unwanted ures such as a staggered board after a nation statute because a pill punishes or abusive takeover attempts.
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