Private Equity Report What’s Inside Volume 2 Number 2 Winter 2002 Can You Sandbag? The SEC’s “All Holders/Best Price Rule” Can Complicate Management Arrangements When a Buyer Knows that One of the Seller’s Representations or Warranties is Untrue in Tender Offers page 3

A buyer of a business generally assumes that if a representation or warranty made by the Guest Column: Surviving in seller in the purchase agreement survives the closing and is untrue, the buyer will have a right Private Equity’s Brave New World to recover damages (subject to any materiality standards, deductibles, caps, etc. provided for page 4 in the agreement). However, in some situations, a buyer may not be able to recover damages Trendwatch: Does it Matter for a breach of the seller’s representation if the buyer was aware of the breach before closing. Who Your Fund Advisers Are? The relevant case law is confusing, but the purchase agreement can provide buyers (and sellers) page 6 with greater certainty. Caveat Investor: Phase 1s May Four Troublesome Situations tation and that by closing the buyer waived Not Be Adequate for Analyzing Environmental Risk You are a frequent buyer of privately-held its right to be indemnified. Typical rights- page 8 businesses. Here are four situations in reserving provisions include a provision to Employee Leveraged which your knowledge of misrepresen- the effect that the seller’s representations Co-Investment Plans: Should tations by the seller may limit your ability and the seller’s obligation to indemnify You Have One? page 10 to recover damages, and recommenda- the buyer for breaches thereof will not be Troubling Times for Directors tions for preserving your rights. affected by any investigation by or on of Portfolio Companies page 12 The Last-Minute Dump. After you sign behalf of the buyer or by the buyer’s know- the purchase agreement and just before ledge that any such representation is or The New German Tender Offer Law closing, the seller’s lawyer hands you a might be untrue, and a provision to the page 14 effect that any waiver of the buyer’s rights letter listing ten ways in which the seller’s Are Your Fund Marketers Brokers? under the purchase agreement must be representations are not true. The purchase page 15 agreement does not contemplate updating express and in writing. of the seller’s representations. You ignore Sandbagging. Before the purchase agree- Alert: Removal of the U.K. the letter and, relying on your ability to ment is signed, your environmental 20 Partner Limit page 22 recover for the breaches of the representa- consultants inform you of a potential mate- tions pursuant to the indemnification rial liability uncovered in the course of their provisions of the purchase agreement, investigation of the business. Your lawyer close the transaction. Under the law of wants to bring this liability some jurisdictions (including New York), to the attention of the seller unless you have expressly reserved your and negotiate for either a rights (with the concurrence of the seller), purchase price reduction or you may not have a claim for the breaches a special indemnity. You are of the representations. reluctant to raise the point. A buyer should always include in the The seller is touchy, and you purchase agreement provisions reserving do not want to rock the the buyer’s rights. Otherwise the seller boat. You also do not want can argue that because the buyer closed, to scare your lenders. Your notwithstanding its knowledge that a lawyer confirms that the representation was untrue, the buyer liability would constitute a could not have relied on such represen- continued on page 18 “Would everyone check to see they have an attorney?

©All Rights Reserved. Collection from cartoonbank.com. Yorker The New 2002 I seem to have ended up with two.” letter from the editor Happy New Year from The Debevoise & Plimpton may be exactly the right time for financial institutions Private Equity Report. 2002 should prove a challenging with private equity operations to develop employee year for private equity firms seeking to strike the right leveraged co-investment plans. The advice offered by balance between fundraising, investing and operating Richard Hahn and Harold Neu to private equity profes- priorities. We have great faith that the private equity sionals serving on the boards of their firm’s troubled industry will meet those challenges. portfolio companies is particularly timely in the current As busted deals become more common, Robert economic environment. Quaintance, one of our Corporate Partners, explains As the German acquisitions that have been widely what buyers can do when they discover prior to closing predicted are beginning, David Hickok and Thomas that one of the seller’s representations is untrue and Schürrle, Partners in our new Frankfurt office, remind cautions against the dangers of sandbagging. Our Guest U.S. investors more accustomed to U.S.-style takeover Columnist for this issue, Eric W. Doppstadt, Director protections of the distinct features of the new German of Private Equity at The Ford Foundation, outlines Takeover Law. Ann Baker of our Paris office also several guiding principles that have characterized the explains the Fonds Commun de Placement a´ Risque most successful U.S. private equity firms over the last (FCPR), the most common private equity investment 15 years and should be considered by any firm hoping vehicle in France. to create value in the current environment of excess As technological advances and other developments capital, sluggish stock markets, lower returns and in the securities markets have increased the number reduced leverage. and types of persons involved in marketing securities, David Mason and David Lebolt, of our Compensation the SEC has made it more difficult to avoid being a and Benefits Group, highlight the risks sponsors face in broker. Marcia MacHarg, Kenneth Berman and Rachel negotiating compensation terms with target manage- Graham answer some FAQs about how efforts to place ment in advance of a tender offer and offer guidance on interests in private equity funds can implicate U.S. how to structure such arrangements to avoid running broker-dealer regulation and offer guidance on how afoul of the All Holders/Best Price Rule. In this issue’s private equity firms can avoid becoming subject to Trendwatch, Woody Campbell focuses on advisers, registration and reporting as a broker/dealer. analyzing the extent to which the choice of law firms As usual, we welcome any comments you may have and placement agents can affect deal terms. In addi- on how we can focus the publication on subjects of tion, Stuart Hammer warns potential buyers of practical interest to private equity firms and their businesses why Phase1 Environmental Assessments investors. may not be adequate to analyze environmental risk. Franci J. Blassberg Beth Pagel Serebransky and Kenneth Berman explain Editor-in-Chief that, notwithstanding the current environment, now

Private Equity Partner/ Counsel Practice Group Members

The Debevoise & Plimpton Franci J. Blassberg The articles appearing in this Private Equity Funds Colin Bogie – London Private Equity Report is a Editor-in-Chief publication provide summary Ann G. Baker – Paris Richard D. Bohm publication of information only and are not Kenneth J. Berman – Washington D.C. Geoffrey P. Burgess – London Ann Heilman Murphy Debevoise & Plimpton intended as legal advice. Woodrow W. Campbell, Jr. Margaret A. Davenport Managing Editor 919 Third Avenue Readers should seek specific Sherri G. Caplan Michael J. Gillespie New York, New York 10022 Please address inquiries regarding legal advice before taking any Michael P. Harrell Gregory V. Gooding (212) 909-6000 topics covered in this publication action with respect to the Marcia L. MacHarg – Frankfurt Stephen R. Hertz to the authors or the members www.debevoise.com matters discussed herein. Andrew M. Ostrognai – Hong Kong David F. Hickok – Frankfurt of the Practice Group. David J. Schwartz James A. Kiernan, III – London The Private Equity Washington, D.C. Rebecca F. Silberstein Antoine Kirry – Paris All other inquiries may be Practice Group London Marc A. Kushner directed to Deborah Brightman Mergers & Acquisitions/ Paris All lawyers based in New Robert F. Quaintance Farone at (212) 909-6859. Venture Capital Frankfurt York except where noted. Thomas Schürrle – Frankfurt Moscow All contents © 2002 Debevoise Hans Bertram-Nothnagel – Frankfurt Andrew L. Sommer – London Hong Kong & Plimpton. All rights reserved. E. Raman Bet Mansour James C. Swank – Paris Paul S. Bird John M. Vasily Franci J. Blassberg The Debevoise & Plimpton Private Equity Report l Winter 2002 l page 2 The SEC’s “All Holders/Best Price Rule” Can Complicate Management Arrangements in Tender Offers

Nearly every sponsor’s negotiated of the equity (or deferred equity right) The risk here – in so far as it relates acquisitions will involve reaching that management is to receive in the to a sponsor’s arrangements with agreement with the future portfolio roll-over will be agreed to as well. management – is that some item(s) in company’s management team. If the None of these agreements are gener- the sponsor’s agreements with the acquisition is structured as a tender ally improper or inappropriate. They are management team are re-characterized offer, however, great care must be disclosed to the target board and to the as disguised payment for shares held by taken at all stages of the process to try public, and are necessary for both the management, and that “extra” payment to minimize the risk that an aggressive sponsor and the target company. If the must then be paid to the public share- plaintiff lawyer could claim that the discussions with management cannot holders. Perhaps more technically, the agreements violate the so-called “All start until after the sponsor has already risk to keep in mind is that this issue Holders/Best Price Rule” (Rule 14d-10 acquired the company, the management might get to a jury, although this risk under the Williams Act provisions of team may well try to extract some can sometimes be reduced somewhat the Securities Exchange Act of 1934). hold-up value from the sponsor. An with proper planning. What Agreements with understanding of the post-acquisition For example, let’s say that someone Management are Typical? compensation and other incentive purchased a company through a tender arrangements will also help minimize offer and, in connection with that tender At a minimum, the sponsor and the management concerns during the offer agreed with the Chairman of the management team will usually reach crucial period before the consummation target (who was also a shareholder) agreement on the broad parameters of the acquisition, thus helping to avoid that he would receive $5 million for of the equity incentive plan that the a melt-down of target management a non-competition agreement. A jury sponsor will put in place after the before the acquisition is completed. subsequently determines that $2.3+ acquisition. Often, however, the discus- million of this was actually a payment sions with management will be much What’s at Stake? for the tender of his shares. Assuming more specific and can cover a much The “All Holders/Best Price Rule” there are 2,300,000 shares outstanding, broader range of topics, including the imposes two requirements on tender this would translate into an additional terms of new, post-acquisition employ- offers that are meant to prohibit discrim- $1.00 per share that the other share- ment agreements for key members ination among holders of the shares holders had not received in the tender of management (including severance), that are subject to the tender offer: offer, and the purchaser would be annual bonus plans, etc. If the acquisi- • the tender offer has to be open to ordered to pay that additional $1.00 to tion involves a “roll-over” of option each holder of the class of securities the other shareholders, plus interest. gains or other similar items, the terms for which the tender offer is being Something like this actually happened. All Holders made (“ ”); and (Gerber v. Computer Associates, on appeal) • the consideration paid to every security It is easy to see how this area can holder pursuant to the tender offer send visions of BMWs and vacation Philipp von Holst Adele M. Karig – Frankfurt David H. Schnabel must be the highest paid to any holder homes dancing in the minds of plaintiff Peter F. G. Schuur Best Price Acquisition/High during the tender offer (“ ”). lawyers (and give acquirors, and their – London Yield Financing If a court determines that the person lawyers, nightmares). William B. Beekman Employee Craig A. Bowman Compensation making the tender offer violated this rule The Legal Landscape – London & Benefits – for example, by paying one shareholder Lawrence K. Cagney Until the SEC clarifies how the All David A. Brittenham more for his shares than was being paid Paul D. Brusiloff David P. Mason Holders/Best Price Rule should apply in A. David Reynolds Elizabeth Pagel to the public – the result would be an Serebransky the area of management compensation Tax order to pay the “extra consideration” to Estate & Trust arrangements or until the Supreme Andrew N. Berg Planning all of the other shareholders. Robert J. Cubitto continued on page 23 Jonathan J. Rikoon Gary M. Friedman Friedrich Hey – Frankfurt The Debevoise & Plimpton Private Equity Report l Winter 2002 l page 3 guest column Surviving in Private Equity’s Brave New World

The U.S. private equity industry has grown to a staggering size in recent years. From 1995 through 2000, annual fundraising by U.S. buyout funds multiplied almost fourfold, from $19 billion to $74.1 billion, with the amount of capital raised in the year 2000 almost double the annual average of the prior five years. Over the same period, annual fundraising by domestic venture funds rose an astonishing sixteenfold, from $4.7 billion to $75 billion. More than 500 buyout firms, and over 1,500 venture firms, operate in the U.S. today. And, as the industry’s investment pace has slowed, its uninvested capital has soared, and is now estimated by some sources to be as high as $100 billion in buyouts, and $50 billion in venture capital. Private equity has truly become a full-fledged capital market in its own right, comparable in size and complexity to many segments of the liquid capital markets.

Despite private equity’s explosive tum investing in venture – are likely is difficult to scale such firms without growth, however, there is little or no to yield still lower returns in the future, eroding returns. Thus, firms that have evidence to date that the industry’s as leverage declines, product markets scaled ambitiously may find it increas- ability to create value has grown in become more competitive, and ingly difficult to produce the results proportion to the growth in its assets product lifecycles grow shorter. needed to keep their asset base under management. Almost all of All this suggests that the coming growing, particularly without the levi- the most successful U.S. buyout and decade is likely to be a much more tating effect of a bull market. A more venture investments of the last fifteen difficult operating, investing, and fund- sustainable strategy would be to ensure years were made when average fund raising environment for U.S. private that the firm’s assets under manage- size, and capital under management, equity firms. Firms that succeed in ment do not grow faster than its ability in those sectors was a fraction of what this new world are likely to be those to deploy those assets at consistently that follow some key principles that high rates of return. it is today. Competition for transactions have made the industry’s best firms is as intense as ever, with most trans- Focus on company-building, not financial successful over time: actions now involving auctions or engineering. Relatively few private multiple bidders. And with many U.S. Size is usually the enemy of performance. equity firms possess the kind of oper- industries having been consolidated As average fund sizes have ballooned ating expertise that enables them to or rationalized, the flow of attractive in recent years, many firms in both build fundamentally better and more opportunities may even be smaller the buyout and venture sectors have valuable assets, as opposed to relying today than it was five years ago. All this adopted an asset-gathering business on financing structures, or rising model, patterned after those of other market multiples, to generate returns. suggests that the venture and buyout large money management firms. The In today’s financial world, however, sectors may be facing a problem of key driver of such businesses is steady financial engineering and market excess capacity, the consequence of fee income, spread over an expense momentum are weak factors, unlikely an “overbuilding” spree fueled by cheap base that grows more slowly than assets to generate acceptable investment and readily available investor capital. under management. For the managers returns in isolation. Financial engi- In light of this excess capacity, it is of private equity funds that follow neering skills are now widespread, but not surprising that returns on capital this “asset maximization” model, the are less and less important to buyout are falling throughout the industry. U.S. annuity-like fee stream that is generated returns as debt availability declines. buyout returns have fallen steadily for as new funds are layered on top of prior And venture capitalists following a much of the last decade, and, in the funds dilutes the incentive effect of the market momentum strategy offer little aftermath of the Internet-telecom-tech general partner’s carried interest. Over of value in today’s equity markets. bubble, the U.S. venture industry is time, such managers become less The key to superior performance in the facing its steepest losses ever. There is concerned with achieving significant future is likely to be operating expertise also a growing realization that the way outperformance than with avoiding that enables investors to fundamentally many private equity firms create value significant underperformance. Since the improve the cash flow generating power – through investment structuring and success of a private equity firm is highly of the assets in which they invest. financial leverage in the buyout industry, dependent on the idiosyncratic skills of Thus, every private equity firm should and through public market – momen- its investment professionals, however, it

The Debevoise & Plimpton Private Equity Report l Winter 2002 l page 4 place top priority on enhancing its Low cost capital is a dangerous illusion. invest consistently at each part of the operating skills, no matter what sector A phenomenon closely related to the cycle. The drastic acceleration in the the firm invests in. fallacy of composition is the lure of industry’s investment pace during the Find your niche, and stick to it. The cheap capital. At the height of the spec- last few years, particularly in much of rising tide of the 1990s bull market ulative froth of 1999-2000, seemingly the venture industry, was in retrospect enabled many private equity firms to limitless capital from limited partners, a form of market timing, the dangers pursue undifferentiated, generalist and from the IPO and merger and of which have become all too apparent. investment strategies, or even to switch acquisition markets, caused many Treat your investors like partners, and strategies from time to time, without private equity firms to lower their risk your partners like investors. As the suffering adverse consequences. But perceptions and to make investments financial world becomes ever more “plain vanilla” investment strategies based on little more than market transaction-driven, private equity (such as the generic “middle market momentum. In retrospect, that artificially remains one of the few areas that is still buyout firm”) are likely to generate cheap capital was a trap, luring firms largely driven by long-term relationships increasingly disappointing results in into making investments that far overran between firms and their investors. The an environment in which deals are economic rationality, as more companies most successful private equity firms will hotly competed for, leverage is often got funded in each sector than there be those that treat their investors like unavailable, and market multiples may were employees to manage them or long-term partners, by creating fund shrink, rather than expand. A more customers to buy their products. terms that maximize transparency and effective approach in this environment Be a thoughtful contrarian. It is widely alignment of interests between the firm is, instead, likely to be based on a deep accepted that in public market investing, and its investors. One very important familiarity with a particular strategy a “good company” is only a good way to align interests is for private (such as turnarounds of underper- investment if the investor’s view of the equity fund managers to make signifi- forming businesses) or sector (such company’s prospects is not yet reflected cant personal investments in their own as financial services or consumer in the market consensus. Likewise, in funds, alongside their limited partners. products) that enables an investor today’s competitive private equity envi- Following these principles cannot to identify value-added opportunities ronment, investing on the basis of the guarantee investment success. But not obvious to others. consensus view of a company or sector’s ignoring them is riskier. In today’s post- Avoid the “fallacy of composition.” prospects is unlikely to produce superior “bubble” environment, the building In classical economics, the “fallacy returns, because the consensus view blocks of limited partner asset alloca- of composition” describes a situation is likely to be already incorporated in tions to private equity – its expected in which otherwise rational investors the price. Private equity firms that can, returns, estimated risks, and antici- pursue opportunities without consid- instead, develop a view apart from the pated correlation with other assets – ering the effects of similar investments market consensus, based on specialized have all become less favorable than by others. Recent instances of this knowledge of a company or an industry they might have appeared in recent phenomenon at work in the private sector, can create opportunities for years. Thus, private equity firms that equity markets include the massive significant returns. ignore these principles are very likely overinvestment in Internet retailers, Diversify across market cycles. Private betting their future on their investors’ telecom service providers, communi- equity is a cyclical business, and continued willingness to accept falling cations equipment companies, movie multiple funds managed by the same returns, and flawed fund terms, at a theater chains, and, more recently, private equity firm have performed very time when investor allocations to biotechnology companies (it has been differently, based on the time period in private equity may be shrinking. For reported, for example, that 12 anthrax- which those investments were made. private equity firms focused on risk related biotech firms have been funded For this reason, spreading investment and return, the principles above offer since September 11). These episodes dollars across various economic and a surer route to success. make clear that it is insufficient to look market cycles is the most important — Eric W. Doppstadt at a prospective investee’s potential form of diversification in private equity Director, Private Equity, market; evaluating the activities of com- investing. Within reasonable bounds, The Ford Foundation petitors is equally important. private equity firms should thus seek to

The Debevoise & Plimpton Private Equity Report l Winter 2002 l page 5 Caveat Investor: Phase 1s May Not Be Adequate For Analyzing Environmental Risk

This article is Part 1 of a two-part series on environmental issues of critical importance to private equity investors. In this article, we address the inadequacies of traditional Phase1 Environmental Site Assessments as a due diligence tool. In Part 2, we will analyze shareholder liability under environmental laws.

Over the past 18 months, as numerous and several, investors have routinely and waste disposal areas. When dot com, telecom and other “new commissioned Phase 1s as the corner- matters of environmental concern are economy” businesses have faltered, stone of their environmental due identified, the consultant may recom- many private equity firms have recali- diligence. mend a subsurface investigation brated their investment mix in favor of Phase1 reports are prepared by an (commonly referred to as a “Phase 2” traditional, “old economy” businesses. outside environmental consultant and environmental investigation). The resurgence in old economy invest- generally consist of the following: Limitations of a Phase 1. While a ments has prompted a need on the • A review of relevant federal and state Phase 1 is an important tool for iden- part of private equity firms to evaluate environmental databases to deter- tifying potential contamination issues, the greater environmental risks often mine whether the facility at issue has it does not address other important inherent in these more traditional been the subject of a cleanup order elements of environmental risk that businesses, particularly in the case of or for which regulators are proposing may bear upon a potential private distressed companies that may lack cleanup. These databases will also equity investment: the cash flow necessary to address reveal other potential environmental • Phase 1s generally do not include environmental concerns. issues, including the generation an analysis of environmental com- In analyzing environmental risk, of hazardous waste, the presence pliance issues. Costs associated private equity firms have come to of underground storage tanks and with environmental compliance can rely heavily on the findings of a Phase 1 reported releases of hazardous mate- sometimes exceed costs associated Environmental Site Assessment rials. In addition, these databases with contamination. Compliance (“Phase 1”). Where a Phase 1 reveals can identify environmental concerns is a particularly important issue for no significant environmental issues, at nearby facilities that could affect distressed or highly leveraged com- private equity investors often mis- the target property. panies that have lacked the capital takenly assume that there are no • Interviews with knowledgeable site necessary to purchase pollution environmental liabilities or obligations personnel and a review of on-site envi- control equipment and address other impacting the subject facility. As dis- ronmental documentation in order to compliance issues. Costs necessary cussed below, we believe this reliance identify any environmental concerns. to bring a facility into compliance is misplaced. Phase1s may not address The consultant will also review aerial with environmental regulations, par- important elements of environmental photographs and fire insurance maps, ticularly those associated with the risk that can significantly undermine which provide information on histor- federal Clean Air Act, can be millions a private equity investment. ical usage of the property. of dollars. Overview of Phase 1s. Phase 1s have • An inspection of the facility to • Phase1s do not identify environ- been part of the lexicon of investors determine whether there are any indi- mental liabilities or obligations since the 1980 passage of the federal cations of potential contamination, associated with formerly owned or Superfund law, which empowered the such as discolored soil or distressed operated facilities. A target company federal government and private parties vegetation. Particular attention may have assumed (whether by to recover costs incurred in cleaning will be paid to possible sources of contract or by operation of law) envi- up contaminated facilities. Confronted contamination, including lagoons, ronmental liabilities associated with with the prospect of environmental settling ponds, landfills, storage tanks prior operations or facilities that it no liability that is retroactive, strict, joint longer owns or operates. Remediation

The Debevoise & Plimpton Private Equity Report l Winter 2002 l page 8 Rather than merely commis- obligations associated with former often understate environmental facilities may be significant. problems at a facility. In some seller- sioning a traditional Phase1 • Phase 1s generally do not identify commissioned Phase 1s, consultants report, private equity firms liabilities associated with the target’s may not be provided with all relevant off-site disposal of hazardous wastes. environmental documentation. should consider commissioning Where cleanup of an off-site disposal Similarly, for confidentiality purposes, facility is ordered, the target could consultants may not be given access a more comprehensive to knowledgeable facility personnel. be required to contribute to cleanup environmental due diligence costs. These costs could be signifi- Moreover, some sellers retain inexpen- cant, particularly if the target is sive and often unqualified consultants assessment that evaluates all one of the largest generators of whose reports are inadequate for hazardous waste at the facility. assessing environmental risk. relevant environmental risks, To alleviate concerns associated • Most Phase1s do not address with a seller-commissioned Phase 1, including risks not ordinarily pending or threatened environmental the scope of work for the Phase 1 litigation. Not surprisingly, environ- identified in a Phase1. should be reviewed in order to assure mental litigation can significantly that no significant limitations were undermine a private equity invest- imposed on the consultant’s review. ment. Toxic tort claims and asbestos In addition, the private equity investor Depending upon these factors, exposure lawsuits can result in should obtain a “reliance letter” from the environmental assessment multi-million dollar liability verdicts. the seller’s consultant, which provides commissioned for a private equity Actions brought by regulators or the investor with recourse against the investment may need to address environmental protection groups consultant for certain deficiencies in the following issues: could expose the target not only the Phase 1. • regulatory compliance, including to expenses, but also to negative an estimate of the costs necessary to publicity. Additional Investigation. Rather than bring the target company’s facilities merely commissioning a traditional • Phase 1s do not address certain into compliance with environmental Phase 1 report, private equity firms substantive environmental issues laws; should consider commissioning a that could affect an investment more comprehensive environmental • the impact of any impending environ- decision. For example, Phase1s due diligence assessment that evalu- mental regulations and, in certain do not estimate the costs necessary ates all relevant environmental risks, instances, the impact of any proposed to remove asbestos at a facility. including risks not ordinarily identified environmental regulations; Asbestos removal projects can be in a Phase1 costly, particularly if removal is . The scope of this assess- • liabilities associated with off-site waste required at multiple locations. ment will depend on several factors, disposal practices, including an under- including (i) the structure of the trans- Similarly, Phase 1s do not address standing as to which off-site facilities action (e.g., stock purchase vs. asset issues associated with wetlands, used by the target are expected to purchase), (ii) the nature of the which can be important, particularly require clean-up; business (e.g., whether the business if future development of the wetlands • environmental obligations related to typically has significant environmental areas is planned. former facilities and discontinued issues), (iii) the extent to which the Relying on a Seller’s Phase 1. operations; In auction seller is retaining liability for environ- • pending or threatened environmental situations, it is fairly common for mental matters, (iv) the time and 1 litigation, including complaints by sellers to commission Phase s of the funds available for performing the regulators, private parties and envi- target’s facilities in order to facilitate investigation, and (v) the level of ronmental protection groups; and the bidders’ due diligence. Private environmental risk the private equity equity firms should be cautious before investor may be willing to accept. • health and safety issues, including relying on these reports, which can complaints raised and compensation continued on page 22

The Debevoise & Plimpton Private Equity Report l Winter 2002 l page 9 Employee Leveraged Co-Investment Plans: Should You Have One?

Employee Leveraged Co-Investment relief (in many respects the first of sufficiently large, the reporting require- Plans have become an increasingly its kind) for a group of co-investment ments of the Securities Exchange Act popular and attractive recruitment and funds exempting them from these of 1934 (the “34 Act”), as well as state retention (and wealth creation) vehicle public reporting requirements. blue sky laws, are all potentially impli- for many financial firms involved in Implementing a Co-Investment cated by the fund offering. private equity investing. These plans Plan raises many of the same issues If you expect 100 or more partici- give employees – including those not involved in setting up any private pants, the co-investment vehicle will directly involved in the employer’s equity fund, as well as numerous generally need to be structured as an private equity business – the opportu- special issues due to the involvement “employee securities company” (or nity to use part of their compensation of employees. ESC) and the employer will need to to invest in private equity opportunities In most plans, employees invest apply for the 40 Act exemption avail- with leverage provided by their employer. after-tax funds directly into a co-invest- able for ESCs. The application for Even in the current economic climate, ment vehicle structured to provide exemption must be filed with the SEC the availability of such a plan is often flow-through tax treatment to the prior to closing the co-investment a major consideration for prospective employee. You can also structure a fund (and the ESC must operate as employees who may have other oppor- fund to permit investment of pre-tax described in the application), but tunities where they can participate dollars, although it is more difficult the order need not be obtained until directly in a carried interest. Most of to achieve flow-through tax treatment after the fund closing.1 the larger investment banks and many in that structure. Many Co-Investment Plans are other financial institutions and This article focuses on plans for limited to accredited investors consulting firms have implemented U.S. employees. (The tax and securities (employees with at least $200,000 in Leveraged Co-Investment Plans or law considerations are substantially annual income or $1 million of net similar plans for their key employees. different in each country, and imple- worth) to fit within the ESC precedents The funds can also help to focus menting a multi-country fund can be and the exemption from 33 Act regis- private equity employees on long term done, but raises complex structuring tration provided under Regulation D. returns, align the interests of employees issues and can substantially increase Regulation D permits sales to an unlim- with both their employer and its the costs of implementing a plan.) ited number of accredited investors 2 investors, increase the potential for 1. Which Employees Should Participate? and up to 35 non-accredited investors. referrals to the private equity group There are four primary factors that from participating employees outside 1 The order will generally not provide a blanket exemption drive employee selection – the desired from all of the provisions of the 40 Act. For example, certain of the private equity group and increase fund size, how much capital the transactions with the employer or its affiliates which would the sources of capital available for otherwise be prohibited by the 40 Act are permitted subject employer is willing to invest in the to compliance with safeguards designed to protect employees. private equity investment. fund, the overall compensation levels The books and records of the ESC will be subject to SEC inspection. Notwithstanding a somewhat unfa- desired for employees, and legal and vorable private equity environment, related cost factors. 2 The SEC’s ESC orders generally require the 35 non- there is another reason to consider accredited investors to satisfy other conditions relating to Offering U.S. employees the oppor- income level, education or business experience. It is possible implementing a Co-Investment Plan. tunity to invest in a co-investment to structure a co-investment plan that includes more non- accredited investors and may avoid the need for a 40 Act The SEC has recently given sponsors vehicle, like any fund offering, is exemption and 34 Act registration through a fund in which the opportunity to open up the plan to the employer has a very significant (i.e., majority) equity subject to compliance with the U.S. interest or through a deferred compensation or phantom a greater number of employees. Under securities laws. The registration plan arrangement. However, unless the investing employees current law, funds with 500 or more also provide services directly to the fund, or the fund is requirements of the Securities Act of consolidated on the employer’s balance sheet, the deferred participants may become subject to the 1933 (the “33 Act”), the requirements compensation and phantom plans would not permit a public periodic reporting requirements. direct investment in the co-investment vehicle and distribu- of the Investment Company Act of tions to employees participating in those plans would be We recently obtained SEC no-action 1940 (the “40 Act”) and, if the fund is taxable at ordinary income rates.

The Debevoise & Plimpton Private Equity Report l Winter 2002 l page 10 Under current law, co-investment returns from a successful co-investment be particularly important for a co- funds with 500 or more participants vehicle (but increases the risk for unsuc- investment fund of funds. may become subject to the reporting cessful investments). Funds of funds typically invest in requirements of the 34 Act and be The amount of leverage provided other fund vehicles that are exempt required to publicly file annual and and the amount of employee recourse from the 40 Act under either Section quarterly reports as to the fund’s activi- on the leverage varies. Leverage to 3(c)(1), the exemption for funds with ties. Because of the costs involved in investment ratios are generally within 100 or fewer investors, or Section public reporting, as well as the strong a range of 1:1 to 5:1. Leverage and 3(c)(7), for funds owned exclusively desire of sponsors to keep confidential interest charges (or preferred equity by qualified purchasers. These exemp- the terms of the plan, its investments returns) are repaid through investment tions contain attribution provisions and its investment performance, most earnings. Leverage is frequently that require the exempt fund to “look employers try to structure the plans recourse to the employee (i.e., the through” investing entities and count to avoid reporting. This is not always employee is personally liable to repay the investing entity’s security holders possible, particularly for larger financial the leverage or contribute additional in certain circumstances. To avoid the institutions. We recently obtained SEC funds to the investment vehicle if attribution rules, co-investment plans no-action relief for a group of co-invest- investment returns are not sufficient that intend to invest in 3(c)(7) funds ment funds exempting them from these to do so), with greater recourse where must have more than $25 million in public reporting requirements. The there is greater leverage. investments3 and cannot be formed employer was required to fully describe 3. Vesting and Forfeiture. Most plans for the specific purpose of acquiring the plan in its request for no action contain vesting provisions, whereby the the 3(c)(7) fund. To avoid attribution relief and the relief was subject to a employee’s right to the earnings on the standards contained in the 40 Act or number of conditions. For example, leveraged amount of the investment is developed by the SEC staff, co-invest- employees may not transfer their inter- subject to vesting, generally based on ment vehicles structured as 3(c)(1) ests in the fund to third parties. The continued employment. funds (rather than employee securities funds must provide annual and semi- Unvested amounts are usually for- companies) cannot own more than annual reports to investors. In addition feited if employment terminates (with 10% of the voting securities of a 3(c)(1) to financial statements that funds some exceptions in the case of death, fund, or invest more than 40% of their generally provide as a condition to disability or retirement). In addition, capital in a single 3(c)(1) fund. obtaining 40 Act exemptions, the “bad leaver” provisions are frequently continued on page 21 reports will contain additional informa- provided under which the return on the tion concerning fund investments, leveraged amount of the investment 3 Investments means investments and capital commit- the factors that materially affected the ments net of any loans. Leverage provided through a (either the unvested amount or all vested preferred equity investment would not be considered a loan. fund’s performance and certain other and unvested amounts) is forfeited if the information. employee joins a competitor, solicits 2. Employer Leverage. Most employers employees or is terminated for cause. enhance the investment potential to 4. How Large Should the Fund Be? The Notwithstanding a somewhat employees from the co-investment size of the fund is primarily determined vehicle through employer-provided by the business concerns relating to unfavorable private equity leverage, either through recourse and/or the number of employees selected to environment, there is another non-recourse loans to the employee or participate, their compensation levels the co-investment vehicle or a preferred and the amount of leverage the employer reason to consider imple- equity investment in the co-investment is willing to provide. The fund also vehicle. The employer-provided leverage needs to be large enough to be able menting a Co-Investment substantially enhances the potential to participate in the intended invest- Plan. The SEC has recently ments. The size of the fund may given sponsors the opportunity to open up the plan to a greater number of employees.

The Debevoise & Plimpton Private Equity Report l Winter 2002 l page 11 Troubling Times for Directors of Portfolio Companies

Serving as a director of its portfolio companies is central to a private equity sponsor’s task of actively managing its fund’s invest- ments. In good times, concerns as to personal liability for one’s actions as a director remain peripheral. In difficult times, such as these, directors of troubled companies naturally seek to right their foundering enterprise, but must do so with a careful eye on poten- tial sources of personal liability. When a storm appears on the horizon, directors should seek advice concerning the scope of their legal duties and consider how best to aid in the recovery without unduly exposing themselves to liability.

While those who have served as a corpo- for potential plaintiffs to recover from action fees and on-going monitoring rate director will be familiar with these directors personally. fees should be reviewed for continuing principles, it is helpful to review the Participation of “interested” directors appropriateness. In addition, it may basic ground rules under Delaware in the Board’s decision making, however, be appropriate to approach outside corporate law. (Of course, other juris- strips directors of the protection of the sources of capital as a market check dictions may follow different principles. business judgment rule and results in the for the proposed investment. In particular, the insolvency law of many application of a higher standard of review To Whom are Fiduciary Duties Owed? foreign jurisdictions differs markedly known as the “intrinsic fairness” test. For solvent companies, director’s duties from the U.S. framework.) Of course, the intrinsic fairness test is not run to the shareholders of the corpora- unique to troubled companies, but it may Back to Basics: Duties tion. Creditors are only entitled to the be more relevant to directors of troubled of Care and Loyalty benefit of their contractual rights. When portfolio companies because of the likeli- Directors of a corporation have two a corporation becomes insolvent or hood that a restructuring transaction will primary fiduciary duties: the duty of care approaches the “vicinity of insolvency,” render investor directors “interested.” and the duty of loyalty. The duty of care the directors’ fiduciary duties shift from Intrinsic fairness requires that the requires that each director exercise the the corporation’s shareholders to its Board’s actions must be both substan- degree of care that an ordinary careful shareholders and creditors. With respect tively and procedurally fair. Substantive and prudent person would use in similar to many decisions that come before the fairness inquires whether the terms of circumstances. This entails informing Board, this shift in duties is insignificant, the transaction were fair (i.e., was the oneself of all material information and directors should simply think price, fee, asset valuation, etc. fair to the reasonably available and acting with in terms of the best interests of the corporation). Procedural fairness neces- the requisite care. The duty of loyalty “community of interests” constituting sitates a fair decision making process in demands that a director act in good faith the corporation rather than the interests which material information is adequately in the best interests of the corporation of the shareholders exclusively. In some disclosed, and the transaction is negoti- and its shareholders and prohibits self- instances, however, the interests of the ated by disinterested directors properly dealing and exploitation of corporate corporation’s shareholders and creditors counseled by qualified advisors in an opportunities to personal advantage. will diverge. In such cases, the Board environment free from inappropriate need not slavishly follow the demands of Standards of Review: Business time and other pressures. the corporation’s creditor constituencies. Judgment and Intrinsic Fairness In contemplating a follow-on invest- However, the directors of a troubled Generally, in exercising these duties, ment to shore-up a portfolio company company cannot subject creditors to directors are protected by the familiar that has unaffiliated investors, consider- undue risk in the pursuit of a recovery “business judgment rule,” which estab- ation should be given whether to form a for the shareholders. lishes a presumption that in making a special committee of independent direc- business decision the directors acted tors to review and negotiate the terms of How are Insolvency and the on an informed basis, in good faith, the investment. The special committee Vicinity of Insolvency Defined? and in the honest belief that the deci- should have separate counsel and finan- Courts define insolvency in two ways: sion was in the best interests of the cial advisers, and the process should be an equity test and a balance sheet test. corporation. In practice, the business run formally with careful attention paid The equity test inquires whether the judgment rule establishes a high bar to establish a record of procedural and corporation is able to pay its debts as substantive fairness. In particular, trans-

The Debevoise & Plimpton Private Equity Report l Winter 2002 l page 12 they become due in the ordinary Protections for Directors to advancing defense costs, applica- course of business. The balance sheet Directors of all corporations benefit bility of the deductible to directors and test finds insolvency when the liabili- from certain protections against officers’ claims, coverage in the event ties of the corporation exceed the personal liability. The impact of financial of bankruptcy or insolvency and exclu- reasonable market value of the corpora- trouble and bankruptcy on these protec- sions for claims of fraud. tion’s assets. Because each company’s tions should be carefully assessed. Common Issues circumstance will vary, court decisions Indemnification. Generally directors are As a liquidity crisis nears, officers and provide no bright line test and direc- entitled to indemnification from the directors of troubled companies often tors should assume that their duties corporation under statute, the charter confront a variety of issues outside their have shifted when the corporation has or bylaws of the corporation or pursuant previous experience. For example, if the entered the “vicinity of insolvency.” to contractual indemnification rights. company’s stock is publicly traded, what Should I Stay or Should I Go? In addition to state law principles that should be said in the MD&A of the Each director of a troubled company will may limit indemnity payments to direc- Form 10-Q or Form 10-K, which requires need to weigh the advantages and disad- tors, bankruptcy imposes limitations on disclosure of known trends and uncer- vantages of continuing to serve versus a director’s ability to collect, including tainties about the business? Oftentimes, resignation. For individual directors an automatic stay of claims against the corporate officers and directors will representing a controlling stockholder, debtor, a requirement to share pro-rata find themselves struggling to balance remaining in control of the board is with other unsecured claims and a concerns as to compliance with the critical to maintaining any value in the disallowance of contingent indemni- securities laws and fears that poor fund’s investment. The choice is less fication claims. In addition, in some disclosure will make a difficult situation clear if the Board seat is tied to a minority circumstances, indemnification claims worse by impairing relations with interest in the troubled company. may be equitably subordinated if the employees, customers and suppliers. director engaged in inequitable conduct Advantages of Continuing. Once the Similarly, the company’s revolving injuring creditors or giving himself an restructuring process has commenced credit facility likely requires that represen- unfair advantage. Similarly, indemnifi- and counsel and financial advisers tations and warranties be repeated prior cation claims relating to securities law have been retained, the risk of liability to each draw, which raises the question claims can be subordinated to a level generally is lessened. The Board’s whether the company can meet the below the underlying security. actions are subject to heightened conditions to borrowing. If the company scrutiny from creditors and in some Indemnification Trusts. An irrevocable likely will need covenant relief, what is the cases a bankruptcy court. As a practical trust can be established to fund best way to approach the lending group? matter, however, this enhanced review indemnification claims against direc- If the company needs cash, can it fully tends to shield the directors from tors to avoid potential impediments tap its revolver without first discussing liability. In addition, a continuing to successful recovery for directors’ with its lenders that it may need an director is in a better position to indemnification claims. However, accommodation, or will borrowing under orchestrate a consensual plan of indemnification trusts must be struc- those circumstances poison relations reorganization. In consensual restruc- tured carefully to avoid the reach of the with the company’s lenders? turings, continuing directors often Bankruptcy Code and may be subject As these examples demonstrate, benefit from releases of liability by to attack in bankruptcy court as a managing a distressed company can the company’s institutional lenders. fraudulent conveyance or preference. be expected to raise many challenging issues for its directors. At the same Disadvantages. Continuing as a director D&O Insurance. Whether directors and time, the fiduciary duties remain the of a corporation in financial stress will officers insurance will protect the direc- same. As such, with sound judgment require devotion of a great deal of time tors adequately will be a function of the and the assistance of experienced legal and energy. In addition, while the risk specific policy terms. Some policies and financial advisers, these challenges of additional liability is lessened, there combine D&O coverage with coverage can prove to be a remarkable opportunity is a limited possibility of incurring new for the company, which can raise an to save an enterprise and create value for liability for actions taken or omitted after issue as to whether the policy is an a portfolio company’s many constituen- commencement of the restructuring. “asset” of the debtor’s estate and, therefore, not available to the directors. cies, including the fund’s investors. Policy terms also may raise issues as — Richard F. Hahn and Harold A. Neu

The Debevoise & Plimpton Private Equity Report l Winter 2002 l page 13 The New German Tender Offer Law

On the heels of extensive tax reform certain to clash with (and may ulti- consummate the offer is in place, and legislation and as previously predicted mately trump) certain provisions of the offer may not be subject to condi- in our Private Equity Report last the new German Tender Offer Act, tions that are within the bidder’s control. summer, a new German Tender Offer Germany and a number of other The target board is obliged to act in Law came into force on January 1, 2002. member states will likely continue to the interest of the target generally but We believe that this legislation will be oppose the adoption, or at least delay certain defensive measures may be of interest to private equity firms inter- the transposition and application, of permitted if previously authorized by ested in the acquisition of German-listed any wide-sweeping EU takeover direc- the general assembly of shareholders companies and will have a significant tive for at least a few years. In the at least 18 months prior to the offer. impact on mergers and acquisitions of interim, investors interested in Germany Investors accustomed to U.S. or by listed companies. should understand the new German practice will be particularly struck by Germany, one of the first EU coun- Tender Offer Law (the “New Law”). the Supervising Authority’s mandatory tries to enact a new tender offer law, Private equity investors and others review of the terms of all takeover has been eager to pre-empt several familiar with Delaware law will applaud offers in which the bidder expects to other European member states and the the advent of an effective mechanism acquire at least 30% of the target’s European Commission, who have been to squeeze out minority shareholders equity or voting rights. In particular, haggling for nearly a dozen years over following an acquisition. However, the Supervisory Authority will have more aggressive reforms aimed at investors accustomed to U.S. practice the power to review the offer price levelling the takeover playing field in will be struck by a number of features for “adequacy.” Although the criteria Europe by means of an EU directive of the New Law, including the right of defining the “adequacy” of a given concerning takeover bids. As of January government agencies to review the purchase price are to be defined in 2002, it appeared that the EU debate price and other terms of each offer and more detail in forthcoming regulations, over takeover reform might be rekin- the requirement that bidders launch their current draft form the regulations dled by the publication of an extensive a compulsory offer for all remaining generally require that the offer be based report by a “High Level Group of shares once a controlling interest on the average trading price of the Company Law Experts” mandated by (defined as 30% of the voting power) target shares and take into account the EU Commission to draft proposals has been secured. previous tender offers. for modernizing the company law The New Law applies to target If a shareholder so requests, consid- statutes of the member states and companies domiciled in Germany eration must be payable in cash or creating pan-European takeover rules. whose stock is traded on an EU stock securities which may be traded in the While such an EU directive is almost exchange or regulated markets. Bidders EU. This may mean that U.S. offerors are now required to publish a tender proposing a share-for-share exchange offer announcement before submitting may find it beneficial to be listed on an The New Law also requires a draft offer statement to the Super- EU stock exchange prior to making an visory Authority for Securities Trading offer. In order to prevent a bidder from bidders to make an offer to (Bundesaufsichtsamt fuer den gradually acquiring a material interest, Wertpapierhandel) for review of its the New Law provides that the offer all remaining shareholders terms. If the Supervisory Authority does price must be paid in cash if the bidder once a controlling interest not object to the offer, the bidder will has acquired more than 5% of the have 10 days in which to make an offer target in the 3 months preceding the of at least 30% has been to shareholders that must generally offer. The New Law effectively prevents remain open for at least 4 weeks but a control premium by providing that acquired, regardless of no more than 10 weeks. Additionally, the price paid for a privately sold stake a qualified financial institution must of 30% or greater will be the floor whether such stake has certify that financing sufficient to price for further purchases in the year been acquired privately or on the open market. The Debevoise & Plimpton Private Equity Report l Winter 2002 l page 14 following acquisition of such control- expected to complicate transactions such consideration will still be subject ling interest. involving reverse take-overs and to court review, some of the uncertainty The New Law also requires bidders mergers of privately held companies will be eliminated by the New Law to make an offer to all remaining share- into listed stock corporations insofar insofar as a squeeze out purchase price holders once a controlling interest of as the acquisition of more than 30% of which is equal to or greater than the at least 30% has been acquired, regard- the shares of a listed stock corporation consideration offered to 90% of the less of whether such stake has been may now require the controlling share- other shareholders may no longer be acquired privately or on the open holders of the merging company to contested. market. The requirement to make an make an offer for all the shares of the While the New Law may fall short offer to remaining shareholders would receiving corporation – a result clearly of U.S.-style takeover legislation and also appear to apply where a German not intended by the legislature. does not necessarily dove-tail with the public company exchanges 30% or As part of the New Law, the German investment invitation afforded foreign more of its shares or voting shares Stock Corporation Act will be amended investors by recent German tax reform, for shares of the target. In such case, to provide for a minority squeeze-out it is clearly a major step in the right if a former shareholder of the target mechanism once 95% of the out- direction. It remains to be seen if the acquires 30%, such shareholder standing shares has been acquired. New Law will make life easier for those will be required to make an offer to The squeeze out will be effected by investing in the German market. the remaining shareholders of the obtaining the approval of the AG share- — David F. Hickok and acquiring public company. This is holders to a cash-only buyout. While Dr. Thomas Schürrle

Are Your Fund Marketers “Brokers”?

Private fund sponsors generally tion. Set forth below are some questions out as a broker, as executing trades or as understand that certain marketing frequently asked by fund sponsors assisting others in completing securities techniques, including press releases concerning U.S. broker-dealer regulation. transactions; and participating in the and website postings, may endanger FAQ #1: Who is a broker for purposes securities business with some regularity. the exempt status of their funds under of the U.S. federal securities laws? If employees of a private fund the Securities Act of 1933 and the sponsor receive commissions for the It is a somewhat common mispercep- Investment Company Act of 1940, and sale of fund interests, they will be tion that only firms involved in the sale the sponsor’s exempt status under the deemed “brokers.” If employees of a of publicly traded securities need to Investment Advisers Act of 1940. They fund sponsor are “brokers,” they must worry about broker-dealer registration. In may not, however, be accustomed to be “associated persons” of an entity the broker-dealer context, the law does thinking that their efforts to place inter- that is a registered broker-dealer – and not distinguish between privately placed ests in their funds can implicate U.S. in the absence of a registered place- securities and registered securities. broker-dealer regulations. ment agent, the signs may point to the Section 3(a)(4) of the Securities Sales efforts by fund sponsors, even fund sponsor as the entity that needs Exchange Act of 1934 (the “Exchange in private placements, can trigger to be registered because it is exercising Act”) defines the term “broker” to broker-dealer registration requirements, control over the activities of the brokers. include “any person engaged in the depending largely on the activities of (The private fund itself, like any issuer, business of effecting transactions in the sponsor’s employees in marketing is not a broker because it is not selling securities for the account of others.” interests in the fund and how those securities for the account of “others” Factors indicating that a person is employees are compensated. This is an but rather selling interests in the fund “engaged in the business” include, area in which the SEC staff has leaned for itself.) among others, receiving transaction- toward regulation rather than deregula- continued on page 16 related compensation; holding oneself

The Debevoise & Plimpton Private Equity Report l Winter 2002 l page 15 Are Your Fund Marketers “Brokers”? (continued)

FAQ #2: What can a sponsor’s investment commitments obtained or placement agents that specialize in personnel do and be compensated facilitated by the individual. serving as brokers for for without becoming brokers? The rule is a “safe harbor;” there fund sponsors. Another alternative is There is a safe harbor rule that most may be other means to establish that a to form an affiliated broker and employ fund sponsors rely on to avoid character- person is not a broker. Because demon- as registered representatives those izing their fund marketing personnel as strating that an employee who engages individuals responsible for selling the brokers, and exposing the firm itself to in selling efforts is not a broker requires fund’s shares. The advantage to this registration as a broker-dealer. Rule 3a4-1 a detailed analysis of the relevant facts, approach is that those individuals can under the Exchange Act permits the part- sponsors prefer to rely on the safe be rewarded with transaction-based ners, officers, directors or employees harbor, if possible. compensation. The major disadvantage of a private fund or of its general partner Assuming that the safe harbor is is the burden imposed by additional to avoid regulation as brokers if they not available, another common issue regulation, discussed in detail below. satisfy several conditions. An employee is the extent to which employees of FAQ #3: Isn’t there a third alternative? engaging in selling efforts: the fund sponsor can be involved in Can’t we use a finder that is not a regis- • must not have been associated with a presentations to prospective clients tered broker to identify fund investors? that are designed to solicit investment broker or dealer during the preceding Private fund sponsors may be able in a private fund. As long as the spon- twelve months; to identify potential investors with the sor’s employees are present to discuss • must not participate in selling an help of a “finder” – that is, a person the investment objectives and policies offering of securities for any issuer who assists a sponsor in identifying of the fund and leave to others (prefer- more than once every twelve months; potential investors and receives ably registered personnel) the tasks • must primarily perform substantial compensation from the sponsor for of delivering offering documents and duties for the sponsor other than doing so. However, the SEC has subscription agreements, negotiating selling efforts; and recently limited further the activities and accepting subscriptions and making in which a finder may engage without • must not be compensated for his direct solicitations, fund sponsor being considered a broker. or her activities by “the payment of employees would not be considered As with Rule 3a4-1, the scope of commissions or other remuneration brokers. Of course, compensating fund activities in which a finder may engage based either directly or indirectly on sponsor employees based on their without becoming subject to broker- transactions in securities.” “success” in bringing in specific dealer registration and regulation has This last condition often creates some commitments is likely to be seen to always been narrow. For example, in confusion. What constitutes transac- be a form of transaction-based one no-action letter, the staff of the tion-based compensation is not always compensation. SEC’s Division of Market Regulation obvious. For example, would a bonus A private fund sponsor that is concluded that registration as a broker scheme not directly tied to sales efforts offering a number of funds and is was not required where the activities but reflecting the overall success of the regularly engaged in marketing activi- of the finder (Paul Anka – yes, that Paul sponsor in raising capital be viewed ties may wish to explore having those Anka) were limited to furnishing an as transaction-based compensation? activities conducted by a registered issuer (a partnership that was acquiring Not all bonus schemes implicate trans- broker-dealer. One avenue is to market the Ottawa Senators hockey club) with action-based compensation. If bonus shares through an already registered the names and telephone numbers of programs are implemented, it is best broker-dealer. persons with whom he had a bona fide, that they not have any elements that While fund sponsors may rightfully pre-existing business or personal rela- might be seen to be a form of disguised seek to save placement fees, they need tionship and whom he believed would commission, such as a stated compo- to be careful; instead it may be appro- be interested in purchasing partnership nent tied to the amount or size of the priate to work with established private units. The letter contains a litany of

The Debevoise & Plimpton Private Equity Report l Winter 2002 l page 16 Private fund sponsors may activities in which Mr. Anka would not tering as a broker, which generally takes be involved (e.g., negotiations between several months, is typically viewed as be able to identify potential the Senators and any potential very burdensome. In general, a broker investors with the help of a investors and the preparation of any must register with the SEC, the NASD sales or analytical materials). and the securities commission in each “finder”– that is, a person In more recent no-action letters, the state in which the broker will operate. SEC staff has narrowed the scope of the The SEC and NASD maintain web sites who assists a sponsor in “finders” exception. The SEC staff is that provide useful information concerned that, because of technolog- concerning the registration process and identifying potential investors ical advances and other developments other matters. (http://www.nasd.com/ and receives compensation in the securities markets, “more and membinfo/fr_MBR_1.html for the NASD different types of persons [have] and http://www.sec.gov/divisions/marke- from the sponsor for doing so. become involved in the provision of treg/bdguide.htm for the SEC) securities-related services.” Making While the registration requirements However, the SEC has introductions to persons personally differ among these regulators, each recently limited further the known to the solicitor without any requires the filing of Form BD, the further participation in negotiations or Uniform Application for Broker-Dealer activities in which a finder in structuring the private placement Registration. Form BD seeks informa- may pass muster if it is not part of an tion about the applicant’s business, its may engage without being ongoing pattern of such activity for a regulatory and disciplinary history, its sponsor. direct and indirect owners and its exec- considered a broker. If the sponsor believes that it will utive officers and its affiliations with require a concerted and broad certain entities (e.g., securities or marketing effort by a third party and investment advisory firms, banks). The A registered broker and its associ- that commission-based compensation SEC may deny registration to any appli- ated persons are subject to fairly broad will motivate successful sales persons cant that has been subject to certain regulatory requirements, including to solicit investors for a private fund, disciplinary proceedings. antifraud rules, the NASD’s Conduct the sponsor should retain a registered The NASD registration process is Rules and detailed reporting and broker-dealer or bite the bullet and much more involved and requires the recordkeeping obligations. The Conduct register itself or a subsidiary as a applicant to submit a variety of mate- Rules, for example, require the broker broker-dealer and qualify its sales rials for NASD review. In addition to to have reasonable grounds for persons with the National Association the Form BD, the NASD requires back- believing a security is suitable for a of Securities Dealers, Inc. (NASD). ground (including disciplinary) particular investor before making the sale. Brokers must comply with net FAQ #4: How tough can it be information with respect to each of the capital requirements, although the to register as a broker? firm’s partners, officers and directors and each employee who effects transac- requirements are fairly de minimis for Pretty tough, although a motivated tions in securities. The applicant must brokers that do not carry customer fund sponsor can achieve registration also submit, among other things: a accounts. The sponsor’s offices and and employee qualification if it has detailed business plan; copies of employees must pass exams adminis- patience and a willing “sales force.” agreements relating to its securities tered by the NASD, a prospect that Moreover, registration is something business; information concerning the many might find unappealing. Finally, that a private fund sponsor with a dedi- nature and source of the applicant’s brokers are subject to inspections by cated in-house sales force and plans to capital; and descriptions of its financial regulators. offer a number of funds must consider. controls, communications and opera- — Marcia L. MacHarg, Kenneth J. For a private fund sponsor tional systems, supervisory system, Berman and Rachel H. Graham accustomed to minimal regulatory written procedures and recordkeeping requirements, the process of regis- system.

The Debevoise & Plimpton Private Equity Report l Winter 2002 l page 17 Sandbagging (continued)

breach of the seller’s representation pattern, and the relevant cases provide seller bear the burden of proof of the regarding environmental matters. You ambiguous guidance. buyer’s knowledge and that the buyer’s decide not to raise the issue. Under Anti-Sandbagging. The seller requests rights only be limited if the buyer has the law of some jurisdictions (including that a provision be included in the actual knowledge of the breach. New York), you may not have a claim purchase agreement to the effect that Updating. The seller wants to include for the breach of the representation. you will not be entitled to be indemnified a provision in the purchase agreement If a buyer knows prior to the signing for any breach of the seller’s representa- entitling it to update, between signing of the purchase agreement that one tions if you are aware of such breach and closing, the disclosure schedule of the seller’s representations is untrue, before closing – a so-called “anti-sand- setting forth exceptions to the seller’s the buyer should seek a purchase price bagging” provision. Sometimes a seller representations. The updated disclo- reduction or indemnification for the is motivated to demand the anti-sand- sure will not affect the conditions to specific event or circumstance that bagging provision because of suspicions closing – if any such updated disclo- causes the representation to be untrue. raised by the buyer’s request to include sure is materially adverse you will not If the buyer depends on its ability to the rights-reserving provisions described have to close – but if you do close, you recover for the breach, the buyer could above. If you agree to a broad anti-sand- will not be indemnified for the updated be found not to have relied on the bagging provision, you will be limiting matters. You successfully resist this seller’s representation when the buyer your rights more than even the most provision on the grounds that limiting struck the bargain and therefore be seller-favorable cases, and you will create your rights to the ability to walk away unable to sustain one element of its an extra element of proof (or give the from the deal does not guarantee you indemnity claim. If for any reason a seller a potential defense) on every the full benefit of your bargain. Under buyer does not want to or cannot obtain indemnity claim. the law of some jurisdictions (including a purchase price reduction or specific Buyers should always strongly resist New York), unless you have expressly indemnity, it should make sure that the “anti-sandbagging” provisions. They reserved your rights, your rights could purchase agreement includes the rights- limit the buyer’s rights more than be limited anyway. reserving provisions described above. the most unfavorable New York cases Whether a buyer accepts a provision It is not certain, however, that these (principally because they limit the permitting a seller to update its disclo- provisions will preserve the buyer’s rights buyer’s rights even when the buyer sures is a matter of taste and, accordingly, where its knowledge of the breach was acquired knowledge of the breach after can be handled in different ways. A buyer acquired prior to signing; none of the signing from a source other than the who feels that “a deal is a deal” and that New York cases presents this fact seller – see “The Cases” below). They if one of the seller’s representations is create an extra element of proof (lack untrue – no matter what the reason – the of buyer’s knowledge) or a potential buyer should have the option of walking defense for the seller in connection away from the deal or closing and seeking If a buyer knows prior to the with every indemnity claim. They indemnity should resist any such provi- signing of the purchase agree- encourage the seller to play games – sion (and make sure that the purchase such as giving the buyer information agreement includes the rights-reserving ment that one of the seller’s the significance of which does not provisions described above). Other become clear until the buyer seeks buyers may wish to compromise by representations is untrue, the indemnity, or withholding information allowing updating to reflect events that until just before the closing when the occur after signing (perhaps with the buyer should seek a purchase buyer is so committed to the transac- further limitation that the occurrence of price reduction or indemnifica- tion that exercising its walk-away right such events not be attributable to the is difficult. A buyer who compromises fault or breach of the seller) but not to tion for the specific event or on this provision should insist that the correct errors – such an approach keeps circumstance that causes the representation to be untrue.

The Debevoise & Plimpton Private Equity Report l Winter 2002 l page 18 Buyers should always strongly pressure on the seller to get its represen- tion…, but ‘whether [it] believed [it] was tations right in the first place. A buyer who purchasing the [seller’s] promise [as to resist “anti-sandbagging” accepts a version of this provision should its truth].’” The Court of Appeals found provisions. They limit the make sure that if it walks away it retains that the inclusion of the representation the right to recover damages for represen- in the purchase agreement “as part buyer’s rights more than the tations that were untrue at the time the of the bargain between the parties” original contract was signed or that evidenced the required reliance and most unfavorable New York became untrue through fault or breach that “the right to be indemnified… does cases (principally because of the seller. not depend on proof that the buyer thereafter believed” the representation. The Cases they limit the buyer’s rights Accordingly, the court decided (on this In the leading New York case, CBS Inc. point) in favor of CBS. Although the even when the buyer acquired v. Ziff-Davis Publishing Co. (1990), CBS court mentioned in its statement of entered into an agreement to purchase facts the survival provision in the orig- knowledge of the breach certain businesses of Ziff-Davis. The inal purchase agreement and the “no after signing from a source agreement provided that each party’s waiver” provision in the agreement representations would “survive the subsequently entered into between the other than the seller…). closing, notwithstanding any investiga- parties, neither provision was cited in tion made by or on behalf of the other the court’s presentation of the rationale party.” After signing and prior to closing, for its decision. The court emphasized Circuit distinguished Ziff-Davis on the CBS concluded, on the basis of its due that the knowledge of the breach arose basis that in Ziff-Davis, unlike in Galli, diligence investigation, that one of Ziff- after signing and that the issue was not there was a dispute about the accuracy Davis’s representations was untrue. The whether the buyer was relying on the of the seller’s representation. The court purchase agreement excused CBS from seller’s representation when the buyer said “where a buyer closes on a contract its obligation to close the transaction if decided to enter into the purchase in the full knowledge and acceptance of Ziff-Davis’s representations were not agreement. facts disclosed by the seller which would true at closing. Ziff-Davis did not agree Three subsequent cases, each constitute a breach of warranty under that the representation was breached, decided by federal courts applying New the terms of the contract, the buyer and, after negotiation, the parties agreed York law, limited the Ziff-Davis rule and should be foreclosed from later asserting that they would close the transaction held that a buyer was not entitled to the breach. In that situation, unless the but that closing “would not constitute recover for breaches of representations buyer expressly preserves his rights a waiver of any rights or defenses.” of which it was aware prior to closing. under the warranties (as CBS did in Ziff- Following the closing, CBS brought In Galli v. Metz (1992), Galli and Davis), we think the buyer waived the suit for breach of the representation. Metz simultaneously signed a purchase breach.” Apparently Metz had not Ziff-Davis argued, among other things, agreement and closed the sale of Galli’s expressly reserved his rights. that because CBS had knowledge of business to Metz. Galli made one or In Rogath v. Siebenman (1997), the alleged breach prior to closing CBS more representations in the purchase Siebenman sold a painting, supposedly could not have been relying on the truth agreement that were untrue. Metz sued. by Francis Bacon, to Rogath. In the bill of the representation when it closed One of Galli’s defenses was that he or of sale, which was presumably delivered and that the absence of such reliance his agents had told Metz of the facts upon the closing of the sale, Siebenman doomed CBS’s claim. giving rise to the breaches prior to represented that he had no knowledge New York’s highest court, the Court closing (and therefore prior to signing). of any challenge to the authenticity of of Appeals, said that “[t]he critical ques- Metz cited Ziff-Davis and argued that his the painting. This was untrue. However, tion is not whether the buyer believed knowledge was irrelevant. The United Siebenman maintained that he had told in the truth of the warranted informa- States Court of Appeals for the Second Rogath the relevant facts. Although the continued on page 20

The Debevoise & Plimpton Private Equity Report l Winter 2002 l page 19 Sandbagging (continued)

sale of a painting, unlike the sale of they have to reserve their rights, what- called upon to interpret Ziff-Davis have a business, is subject to the Uniform ever the source. distinguished it by reference to facts that Commercial Code article governing Finally, in Coastal Power may not have mattered to the Ziff-Davis sales of goods, the court (again the International, Ltd. v. Transcontinental court. In Galli, the seller did not dispute United States Court of Appeals for the Capital Corporation (1998), the United that the representation was untrue; in Second Circuit) purported to follow States District Court for the Southern Rogath, the buyer learned that the repre- the law established in Ziff-Davis and District of New York held that a buyer sentation was untrue from the seller, not Galli and held that if Siebenman had of a business that learned of breaches from a third party; and – probably the told Rogath, Rogath was not entitled of the seller’s representations from the controlling factual difference – in each to recover. The court elaborated on its seller, after signing and before closing, of the three cases the buyer did not analysis of Ziff-Davis set forth in Galli by but closed without expressly reserving reserve its rights. Until the three federal stating that if the buyer’s knowledge of its rights, had waived its right to recover court decisions were handed down, one the inaccuracy of the seller’s warranties for those breaches. The purchase agree- might reasonably have predicted that comes from the seller, “it cannot be ment in Coastal required the seller to the Ziff-Davis court would also protect a said that the buyer – absent the express inform the buyer if any of the seller’s buyer’s rights if the buyer acquires its preservation of his rights – believed representations became untrue and knowledge before signing (i.e., if it he was purchasing the seller’s promise conditioned the buyer’s obligation to sandbags), but the narrow interpreta- as to the truth of the warranties.” close on the continued accuracy of the tions in Galli, Rogath and Coastal leave Apparently Rogath had not expressly seller’s representations, but apparently considerable doubt that a court – at reserved his rights. Although the court did not contain any rights-reserving least a federal court – would reach the suggests that a buyer who knows that a provisions. same conclusion. representation is untrue does not need Analysis and Conclusion Buyers have to live with, and be to reserve its rights if the source of its guided by, all the cases. So: (1) Sandbag Ziff-Davis, which was decided by New knowledge is not the seller, none of the before signing at your peril – you may York’s highest state court, was a good cases actually presents those facts. not have a claim. (2) Do not accept an decision for buyers. It stands for the Accordingly, buyers should assume that anti-sandbagging clause just because principle that a buyer who knows that you do not intend to sandbag – you do one of the seller’s representations not want to have to prove what you do is untrue may close the transaction not know, and you do not want knowl- and still recover, so long as the buyer edge acquired after signing to interfere Ziff-Davis, which was decided believed it was buying the right to with your rights. (3) Above all, reserve recover when it signed the purchase by New York’s highest state your rights! agreement and so long as it acquired its — Robert F. Quaintance, Jr. court, was a good decision for knowledge that the representation was untrue after signing. Unfortunately for buyers.…Unfortunately for buyers, the federal courts that have been buyers, the federal courts that have been subsequently called upon to interpret Ziff-Davis have distinguished it by reference to facts that may not have mattered to the Ziff-Davis court.

The Debevoise & Plimpton Private Equity Report l Winter 2002 l page 20 Employee Leveraged Co-Investment Plans (continued)

5. Taxation. A Co-Investment Plan compensation income, and the Because vesting and forfeiture involves complicated tax issues, employer has a corresponding deduc- provisions are typical in co-investment including both compensation tax and tion and withholding obligation. The plans, employees who do not or cannot tax issues generally applicable to all tax is payable (and fair market value make an 83(b) election may have a private equity funds. Like most determined) on the later of the date taxable event upon vesting. Until that investors, employees want capital of acquisition and the date any forfei- time, the employer would be consid- gains (or flow-through) tax treatment ture or transfer restrictions lapse (i.e., ered the owner of the property, income on their investment; and employers will at vesting). and losses on the investment would often accommodate their desire. This An employee may be able to elect be recognized by the employer and any is easier to achieve when employees to be taxed at the time of acquisition distributions made to the employee invest their after-tax dollars. Where pre- rather than at vesting by filing what is would be considered compensation tax dollars are used, ordinary income known as an “83(b) election” with the (taxed at ordinary income rates). To treatment (with corresponding Internal Revenue Service at the time avoid the complications of such delayed employer deductions) is more typical.4 of the initial investment. In most cases, income recognition, many employers Whether pre-or-post-tax dollars the market value at acquisition will be require all U.S. employees who are used, Section 83 of the Internal the same as or close to the amount purchase fund interests to make the Revenue Code will generally govern paid, and no or minimal tax will be due 83(b) election, and structure their the tax treatment because the plan as a result of the election.5 The 83(b) funds accordingly. interests are being offered as a election may, however, only be made Employee Leveraged Co-Investment compensation tool. Under Section 83, if the employee is sufficiently at risk for Plans are complicated to implement whenever an employee receives “prop- his or her investment (including the but, with the enhanced investment erty” in connection with his or her non-recourse leverage) to be consid- potential provided by leverage, together performance of services, the excess ered the owner for tax purposes. If the with the vesting and forfeiture provi- (if any) of the fair market value of the non-recourse leverage constitutes too sions, such plans can be a powerful property over the purchase price paid high a proportion of the total invest- incentive for your key employees. is taxable to the employee as ordinary ment, the employee’s investment may — Elizabeth Pagel Serebransky and not be substantial enough to qualify. Kenneth J. Berman 4 It is possible to structure a hybrid plan funded with pre-tax dollars where gains in excess of the initial invest- 5 Certain action, such as appreciation in value of any ment and the returns on the leveraged amount receive investments made by the fund prior to the date an flow-through tax treatment. Implementation of such a employee receives his or her interest, transferring appre- plan is complicated and creates an additional adminis- ciated warehoused investments to the fund at their trative burden for the employer. original cost or below-market interest rates on the leverage, may cause the fair-market value to exceed the amount paid by the employee. Careful planning can Under current law, funds reduce the risk of employee tax recognition. with 500 or more partici- pants may become subject to the public reporting requirements. We recently obtained SEC no-action relief… for a group of co- investment funds exempting them from these public reporting requirements.

The Debevoise & Plimpton Private Equity Report l Winter 2002 l page 21 alert Alert: Removal of the U.K. 20 Partner Limit

The U.K. Government recently Most professional partnerships The U.K. Department of Trade announced its intention to eliminate are already exempt from the 20 and Industry proposes to remove the 20 partner limit for partnerships partner limit. In investment partner- the restriction by way of a Regula- and limited partnerships. The prohibi- ships, this restriction is commonly tory Reform Order made under tion on the formation of partnerships avoided by establishing a series of the Regulatory Reform Act of 2001. with more than 20 partners dates back parallel partnerships, each of which This new parliamentary procedure to 1856. The original justification for has no more than 20 partners. Private is designed to fast-track the removal the limit, namely the difficulty of suing equity sponsors and their investors of red tape in business. The abolition a fluctuating body of partners at a will now be relieved of the administra- of the 20 partner limit is likely to time when it was necessary to join all tive burden and costs of running a become law in mid-Summer 2002. the partners in an action, has long large number of parallel partnerships. — Colin Bogie and Sherri G. Caplan since disappeared.

Caveat Investor (continued)

claims filed by workers concerning early in the sales process to take respon- tions), are more suited to an environ- exposure to hazardous materials. sibility for all pending litigation (which mental attorney (who may be able Because only limited information it might do in order to make it easier for to “smoke out” useful information may be available in the initial stages of bidders to price the deal), less analysis through carefully drafted environ- a private equity investment, private of pending environmental litigation will mental representations). equity firms (and their representatives) be necessary. Comprehensive environmental may be unable to narrow the scope In preparing a comprehensive assessments can be significantly more of the environmental assessment. In environmental assessment, certain costly than traditional Phase1 reports. most instances, for example, little will investigative functions will be more A comprehensive assessment will be known at the early stages of a trans- suited to the skills of an environmental generally add approximately 50% to the action about how environmental risk consultant, while other functions will cost of a traditional Phase 1, though will be allocated among the parties. In be more suited to the skills of an such additional costs will vary by trans- such instances, a broad assessment environmental attorney. For example, action. In heavily regulated industries that accounts for all types of environ- estimating costs necessary to bring a in which environmental compliance mental risk may be necessary. facility into compliance with environ- is a major concern, a comprehensive However, certain information about mental, health and safety laws evaluation can double the cost of a the transaction may allow the private (including the cost of pollution control Phase 1. equity firm to narrow the scope of the equipment) and investigating the use In sum, a comprehensive evaluation assessment. If, for example, the parties of off-site waste disposal facilities are of the environmental risks posed by a agree early in the sales process that the functions more suited to the environ- contemplated investment, rather than transaction will be structured as an asset mental consultant. Other tasks, such a traditional Phase 1 report, will be the sale, there generally will be a lesser need as evaluating environmental, health best way for a private equity firm to for the private equity firm to analyze envi- and safety litigation exposure and protect against unanticipated environ- ronmental issues associated with former analyzing environmental indemnifica- mental costs. facilities. Similarly, if the seller agrees tion obligations (such as those that — Stuart Hammer may be associated with former opera-

The Debevoise & Plimpton Private Equity Report l Winter 2002 l page 22 The SEC’s “All Holder’s/Best Price Rule”(continued)

Court weighs in on this topic (if they Courts in the Second and Seventh Keep in Mind were to choose to do so), we are faced Circuits, as well as the Fourth and As a practical planning matter, if an with some starkly different guiding Eleventh Circuits, have followed this acquisition is to be structured as a principles under the All Holders/Best bright line approach, although the line tender offer, it may be easy to avoid Price Rule, depending on which is the brightest in the Seventh Circuit. certain obviously problematic payments Federal Circuit’s law applies to the Blurry Lines for management (such as a payment particular case. Because the plaintiff to tender shares in the tender offer – Courts in the vast Ninth Circuit – which will often be able to pick the Federal a definite “NO”). Beyond that, given includes California and many of the Circuit in which the suit is brought, the legitimate needs for the sponsor Western States – and the Third and Sixth plaintiffs will almost assuredly try to and management to have some level Circuits reject a bright line approach to bring suit in a Circuit where the law is of understanding and agreement on the All Holders/Best Price Rule. These more favorable to the plaintiff. Therefore, certain post-acquisition compensation- courts instead direct the inquiry to it is not really practical to try to structure related matters, it may not be possible whether the additional consideration the arrangements solely in order to to structure the arrangements with paid was an “integral part” of the tender comply with the laws of a particular management in a manner that is offer. A payment might be viewed as an Circuit that might be more favorable invulnerable to attack under the All “integral part” of the tender offer if the to the purchaser in the hopes of having Holders/Best Price Rule, given the amount of the consideration was tied to litigation end up there. However, at a potentially all-inclusive reach of the the final tender offer price or whether the minimum, one would be well advised “integral part” test. Through aware- payment was contingent on successful to work within the guidelines of that ness of the issue and attention to all completion of the tender (or support more favorable law. of the various and nuanced struc- for the tender offer). Not surprisingly, turing, timing and other factors, it is Bright Lines a payment in exchange for actually possible to reduce risk significantly. The All Holders/Best Price Rule by its tendering the shares in the tender offer — David P. Mason and David S. Lebolt terms applies only to consideration would also be a violation of the Rule. paid in connection with a tender offer This approach will, of course, create and “during a tender offer.” Reaching far greater opportunities to argue that the conclusion that the statute means payments made outside the tender The risk here – insofar as it what it says, and no more, some courts offer are nevertheless a violation of have found that additional considera- the Rule. Indeed, a few bad facts and relates to a sponsor’s arrange- tion will violate the Rule only if it is an adept plaintiff lawyer can probably ments with management – paid literally during the tender offer. bring almost anything into the fray. Customary management agreements Some courts have not gone quite so is that some item(s) in the will almost certainly not run afoul of far as the courts that have adopted the the All Holders/Best Price Rule under “integral part” test, and instead have sponsor’s agreements with this interpretation. Special retention found that only payments that are bonuses that are intended to help retain intended as an “inducement” to the the management team are employees through the closing of the recipient to tender his or her shares or to re-characterized as disguised acquisition would, however, be trouble- support the tender offer is a violation of some if paid upon completion of the the Rule. This test is somewhat narrower payment for shares held tender offer, even under this most favor- than the “integral part” test, looking only able reading. (In this regard, payment at the intentions of the purchaser, but by management, and that following completion of the back-end still open to considerable latitude as to “extra” payment must merger would seem more sensible.) what payments may or may not in fact be brought under scrutiny. then be paid to the public shareholders.

The Debevoise & Plimpton Private Equity Report l Winter 2002 l page 23 Upcoming Speaking Engagements

February 14 Margaret A. Davenport Doing Deals, Understanding the Nuts & Bolts of Transaction Practice in an Uncertain Market: Acquiring a Privately Held Company New York, NY

February 28 - March 1 Franci J. Blassberg Special Problems When Acquiring Divisions and Subsidiaries: Negotiating the Acquisition of the Private Company San Francisco, CA

Recent Publications

Books “Certain Tax Considerations for Client Memos Insurance and Investment Organizing U.S. Hedge Funds” “Private and Public Acquisitions Management M&A by Byungkwon Lim, Adele M. Karig, under the New Tender Offer Act in the United States Huey-Fun Lee and Jonathan Boyarin in Germany: A Brief Outline” by Paul S. Bird, Meredith M. Brown, (Oct.-Nov. 2001, 516 PLI/Tax 611) by David F. Hickok and John Dembeck, Wolcott B. Dunham, Jr., “Private Funds and Recent Dr. Thomas Schürrle Thomas M. Kelly, Ivan E. Mattei, Consumer Privacy Regulations” (December 26, 2001) Steven Ostner, Edward A. Perell, by Kenneth J. Berman, Woodrow W. “New Chinese Venture Nicholas F. Potter, Seth L. Rosen, Campbell, Jr., Shannon Conaty and Capital Regulations” Peter F. G. Schuur and James S. Scoville Michael P. Harrell by Andrew M. Ostrognai, (Debevoise & Plimpton, 2001) (October 2001, Insights) Jeffrey S. Wood and Richard Xu Takeovers: A Strategic Guide “Germany: A Primer for (September 28, 2001) to Mergers & Acquisitions Private Equity Funds” “Developments in China’s by Meredith M. Brown, by Dr. Friedrich E.F. Hey, New Venture Capital Fund Ralph C. Ferrara, Paul S. Bird and Dr. Thomas Schürrle Rules; Tax Treatment May and Gary W. Kubek (October 1, 2001, International Be the Critical Path” (Aspen Law & Business, a division Financial Law Review) by Jeffrey S. Wood of Aspen Publishing, 2001) “A Primer for Private Equity (January 10, 2002) Fund Sponsors: Part I” Articles by Kenneth J. Berman, Rachel H. For copies of these articles or for “Taxation of Tax-Exempt Graham and Marcia L. MacHarg information on how to order books, and Foreign Investors in (October 2001, Insights) please contact Rowena Lui at U.S. Private Investment Funds” [email protected]. “A Primer for Private Equity by Adele M. Karig Fund Sponsors: Part II” (2001, Practising Law Institute) by Kenneth J. Berman, Rachel H. Graham and Marcia L. MacHarg (November 2001, Insights)

The Debevoise & Plimpton Private Equity Report l Winter 2002 l page 24