Debevoise & Plimpton Private Equity Repo r t Summer 2011 Volume 11 Number 4 The IPO Exit: WHAT’S INSIDE Investing in China: “Recent” Market Trends in IPOs 3 New Risks? of Sponsor Portfolio Companies Rehoboth Beach Reading: 6 Catching Up on Delaware Although it may seem like a dim memory in sponsors should be ready to make the critical Cases light of the recent public market performance, decisions that will ‘set up’ their portfolio during the 19-month period ended July 31, companies for the next realization. 7 GUEST COLUMN 2011, the public equity markets rebounded In our Summer 2005 issue of the Is Russia Ready for resoundingly, with a particular increase in Debevoise & Plimpton Private Equity Report, Serious Attention from sponsor-backed IPOs. Sponsor-backed IPO we published an article entitled “Selected Private Equity Investors? global activity doubled (in deal size) in 2010 Issues to Consider When Taking a Portfolio as compared to 2009 and continued on an Company Public.” In that article, we 9 Doing Business in the UK upward trend during the first six months of discussed the important decisions sponsors Under the Newly-Enacted 2011, with more than 20 sponsor-backed must make regarding the governance profile Bribery Act IPOs for Nasdaq and NYSE listed of IPO candidates. These decisions include Boosting EBITDA: companies, raising approximately $19.6 board composition and designation rights, 11 The Cost Savings billion. We expect that while many sponsors whether to qualify as a “controlled company,” will be contemplating dual track exit routes the treatment of veto, management fees Add-Back for several months, a number will be and other sponsor rights, and the type, Brick by Brick: (somewhat wistfully) anticipating the return combination and magnitude of any anti- 13 A Primer for Due of the IPO window for their portfolio takeover defenses to put into place for the Diligence in Each BRIC companies. When the market returns, newly public company. Country, Continuing with In the wake of the India robust IPO activity discussed above, we have Brazilian surveyed all sponsor-backed 15 Private Equity Funds: IPOs of Delaware Current Developments corporations completed in 2010 and the first seven ALERT months of 2011 that 17 FTC Implements resulted in proceeds in Revisions to the HSR © 2011 Marc Tyler Nobleman / www.mtncartoons.com Nobleman Tyler Marc © 2011 excess of $250 million to Form assess how these issues were addressed. Our survey 19 UPDATE yielded 11 companies that New Proposal to Tax met our search criteria and Carried Interest as reflect the state of the Ordinary Income CONTINUED ON PAGE 20 “Now, that’s a change of control.” Letter from the Editor We all grew up thinking that an endless summer would be heaven, but collaboration between stakeholders, the government and domestic and the combined impact of the volatility in the markets and the brutal international investors. weather have us all longing for autumn. Although our summer issue is Our Asian colleagues caution that, notwithstanding the wide spread technically a bit late, it is uncanningly timely in light of both the use of "VIE" structures to address regulatory hurdles relating to foreign weather and the markets. ownership in certain industries, recent challenges by the Chinese In the current climate, the IPO exit strategy seems aspirational at government raise concerns as to the viability of such structures, best. However, it was not that long ago that sponsored-backed IPOs particularly in certain sensitive sectors, and at a minimum indicate that were making headlines and that is when we started our survey of these structures are likely to be subject to enhanced scrutiny and sponsor-backed IPOs in 2010 and the first half of 2011 to determine additional risk for foreign investors going forward. how the governance profile of those companies looked after the IPO An ongoing focus of the Private Equity Report has been to keep you was completed. On our cover, we report on the results of our up-to-date on relevant legal developments in the courts and from comprehensive survey so that you will be poised for the next IPO regulators. In this issue, we feature a concise primer (together with a window. cheat sheet) on recent cases from Delaware focusing on directors’ Private equity is an ever more international asset class. In this issue, Revlon duties, takeover defenses and going private transactions. Every we continue our series on doing due diligence in the largest emerging director of a portfolio company will find the three minutes it takes to markets, or BRICs, with a focus on India. We caution potential read it well worth the time. We also provide an update on the UK investors in India to be prepared to untangle a web of related party Bribery Act, which finally became law this summer, and offer insight transactions, analyze complex litigation risks, and evaluate Byzantine on its practical implications for private equity firms and their portfolio land title issues as well as deal with targets largely unfamiliar with, and companies. (Beware—The UK Bribery Act is broader in many respects reluctant to fully cooperate in, the due diligence process. than the U.S. Foreign Corrupt Practices Act.) Finally, we alert our Brazil has been one of the largest areas of growth for private equity. readers to recent changes made to the HSR reporting form that expand We report on the differences between the expectations of Brazilian somewhat the burden of HSR compliance particularly for private investors and international investors in the negotiation of the terms for equity firms. Brazil-focused funds as well as on the ways in which inflation, currency If there are any issues that you would like to see covered in future fluctuations and capital controls play a role in fund terms. issues of the Report or any ways in which we can make the publication Elsewhere in this issue, our Guest Columnists, Alexander Pankov more useful to you or the other members of the private equity and Kirill Samsonov, co-founders of the Russian Private Equity community, we would appreciate hearing from you. Initiative, outline the Initiative’s efforts to promote growth in the nascent Russian private equity sector through education and Franci J. Blassberg Editor-in-Chief Private Equity Partner /Counsel Practice Group Members The Debevoise & Plimpton Franci J. Blassberg The Private Equity David J. Schwartz Guy Lewin-Smith – London Private Equity Report is a Editor-in-Chief Practice Group Rebecca F. Silberstein Dmitri V. Nikiforov – Moscow publication of All lawyers based in New Robert F. Quaintance, Jr. Stephen R. Hertz Hedge Funds York, except where noted. William D. Regner Debevoise & Plimpton LLP Kevin A. Rinker Byungkwon Lim Kevin A. Rinker 919 Third Avenue Associate Editors Private Equity Funds Gary E. Murphy New York, New York 10022 Jeffrey J. Rosen Marwan Al-Turki – London 1 212 909 6000 Ann Heilman Murphy Mergers & Acquisitions Kevin M. Schmidt Kenneth J. Berman – Washington, D.C. Managing Editor Andrew L. Bab Thomas Schürrle – Frankfurt www.debevoise.com Erica Berthou E. Raman Bet-Mansour – London Wendy A. Semel – London David H. Schnabel Jennifer J. Burleigh Washington, D.C. Paul S. Bird Andrew L. Sommer 1 202 383 8000 Cartoon Editor Woodrow W. Campbell, Jr. Franci J. Blassberg James C. Swank – Paris Sherri G. Caplan London Please address inquiries Richard D. Bohm John M. Vasily Jane Engelhardt 44 20 7786 9000 regarding topics covered in this Thomas M. Britt III – Hong Kong Peter Wand – Frankfurt Michael P. Harrell Paris publication to the authors or Geoffrey P. Burgess – London Niping Wu – Shanghai David Innes – London 33 1 40 73 12 12 any other member of the Margaret A. Davenport Geoffrey Kittredge – London Leveraged Finance Practice Group. E. Drew Dutton – Hong Kong Frankfurt Marcia L. MacHarg – Frankfurt Katherine Ashton – London Michael J. Gillespie 49 69 2097 5000 All contents © 2011 Debevoise Anthony McWhirter – London William B. Beekman Gregory V. Gooding Moscow & Plimpton LL P. All rights Jordan C. Murray David A. Brittenham Stephen R. Hertz 7 495 956 3858 reserved. Andrew M. Ostrognai – Hong Kong Paul D. Brusiloff David Innes – London Richard D. Robinson, Jr. Pierre Clermontel – Paris Hong Kong James A. Kiernan III – London Gerard C. Saviola – London Alan J. Davies – London 852 2160 9800 Antoine F. Kirry – Paris Peter Hockless – London Shanghai Jonathan E. Levitsky 86 21 5047 1800 Investing in China: New Risks? In the Fall 2010 issue of the Debevoise & indicate which industries fall into this Because the Chinese regulations (namely Plimpton Private Equity Report , we discussed “prohibited” category (and which are Circular 10) promulgated in 2006 have how China-based companies keen on listing encouraged, permitted or partially made it nearly impossible for Chinese outside China have been innovative in restricted). In addition, the Chinese companies looking to list outside China to adopting structures designed to address government limits foreign investment by set up the offshore holding company Chinese regulatory hurdles, including the prohibiting companies with foreign structure required for an offshore listing widely used variable interest entity (“VIE”) investors from obtaining permits to with direct ownership of the Chinese structure. Although long perceived as one conduct certain types of business. operating company, some companies have of the many “gray areas” of Chinese law, Naturally, with the ever-growing opted to use the VIE structure to over the past decade or so, companies using enthusiasm for investing in China and the circumvent the Circular 10 restrictions. VIE structures have not received real determination of Chinese companies to In the past decade, many Chinese negative attention from the Chinese seek foreign capital, it wasn’t long before a companies have successfully used the VIE government or the market. However, the seemingly acceptable work-around of this structure, often referred to as the Sina recent high profile challenges faced by foreign ownership limitation was developed.