MERGERS & ACQUISITIONS
Objective
As an acquisitions lawyer, you may be involved in a private equity transaction from a number of perspectives. You may be involved in a team drawing up the terms of a private equity investment, be representing the managers
taking an equity stake or involved in an acquisition or disposal by a private equity provider.
The key document in a private equity transaction is the Investment Agreement as it sets out the relationship between the parties to the investment. It will cover the terms of the investment, the running of the target and the
ultimate realisation of the investment.
A private equity transaction can be quite complex and confusing for clients. A key skill of any lawyer is the ability to address particular concerns in a clear and concise manner without the use of “jargon”.
The objective of this task is for you to demonstrate that you understand the principal documentation involved in a private equity buyout and can explain to a client the significance of some common terms within an Investment
Agreement.
Assumed Knowledge and Skills
Your preparatory tasks have provided you with the ability to
1. Identify the principal documentation involved in a buyout.
2. Identify the common terms to be included within an Investment Agreement.
3. Identify the common commercial and legal concerns of the various parties to an Investment Agreement.
Scenario
This task relates to an approach that has been made to an existing director in a company by a private equity provider which is bidding to acquire the shares of that company.
Your firm acts for Sanjit Bedi, the Finance Director of Tanjet Limited, who has been asked to participate in a private equity bid for Tanjet Limited. Following an initial telephone interview, the client has requested some general
guidance on the documentation to be entered into, potential restrictions on managerial freedom and the onward sale of the shares.
Instructions
Your task is to prepare an email to your client, Mr Bedi, outlining the role of the Investment Agreement and to address his particular concerns in relation to the proposed terms of the Investment Agreement.
To do this you need to:
1. Identify the client’s concerns from the attached telephone attendance note.
2. Compile the information that will be relevant to the client.
3. Structure the information in a clear and concise manner for the client.
The email written to Mr Bedi should be between 1600 and 1800 words. The email is to an experienced company director and should focus on the particular concerns raised in the attached telephone attendance note. The email
should conclude with a reminder of the need to seek additional professional advice and should have sections covering the following matters:
1. The role of the Investment Agreement.
2. The purpose of management warranties.
3. Managerial freedom, securing directorship and loss of shares.
4. Provisions on exit from the investment.
You should aim for each section of the email to be reasonably even in length (ie do not weight the number of words heavily in favour of one section at the expense of the others).
Telephone attendance note with Sanjit Bedi
Sanjit Bedi (“SB”) who is the Finance Director at Tanjet Limited called to instruct the firm in relation to a proposal that has been made to him by the private equity provider ABC Ventures (“ABC”) in relation to an auction bid
that ABC is putting forward for the purchase of Tanjet Limited and its subsidiaries (“Target”). The law firm Lewis Harvey are acting for Saldridge plc (the sole shareholder) in relation to the auction sale and have advised SB that
he needs to seek independent legal and financial advice about the proposal being made by ABC. SB is an existing client and has been referred to me by TK in the property department who previously dealt with some property
development work for SB.
SB indicated that he, along with 3 other directors of Target, has been approached by ABC in connection with a bid by ABC to acquire the shares of Target. ABC has made an indicative bid and has been accepted as a shortlisted
bidder with access to the directors of Target. ABC has approached the selected directors with a proposal for those directors to remain with Target after the sale and to invest in the investment vehicle that will be acquiring Target.
SB has only received outline details of the proposed terms of the deal and ABC are awaiting his confirmation of interest and the details of his advisors before sending out any draft documentation.
SB set out the basic terms of the transaction as he understands it:
• The indicative bid by ABC for Target was £60 million. It is understood that £20 million of this will be raised by equity finance and the remaining £40 million (together with working capital requirements) will be raised
through a mixture of senior debt to be provided by Midwest Bank plc and mezzanine debt by Riskit Finance which will be secured through charges on Target and its subsidiaries. ABC will take most of the equity finance through
redeemable shares with fixed rights on returns on dividends and capital.
• The equity investment will be made into a corporate vehicle that will be set up for the purpose of the investment (Newco 1). A wholly owned corporate vehicle (Newco 2) will then be set up to enter into the debt
financing and using this money and funds provided by Newco 1( ie from the equity investment) it will acquire the shares of Target. Newco 1 will be the ultimate holding company of the newly formed group comprising of Newco
1, Newco 2, Target and its subsidiaries.
• Each of the directors who have been approached is being asked to invest £200,000 in ordinary shares in Newco. Although the amount of investment to be made by ABC may vary depending on the auction process,
ABC has indicated that the amount of the investment by the directors will remain constant, as the aim of the investment is simply to ensure the financial commitment of the directors to the commercial success of the venture.
These shares will be classified as ordinary shares and will rank behind all shares held by ABC. Each director’s holding will amount to no more than 3% of the ordinary share capital. The directors will also benefit from increased
benefits on their existing terms of employment under their employment contracts although these will remain on 6 months’ notice and contain restrictive covenants.
SB indicated that he felt confident about the financial and tax aspects of the deal and had already discussed the proposal with his own independent financial advisor and his accountant. However, SB indicated that he requires
some guidance as to how the involvement with ABC would work in the long term in order to help him assess whether he wishes to pursue this opportunity further.
In particular, ABC has referred to a number of matters with which SB is not familiar:
1. ABC has indicated that SB will need to be party to an Investment Agreement. This is not a document that SB has come across before so he would like to know in general terms what this Agreement will cover and its
role in governing the investment.
2. SB has been informed that those directors taking an equity stake will need to give warranties about the business plan and accounts and will need to comment on the financial and legal due diligence reports that will be
undertaken for ABC in connection with the acquisition. Although SB is familiar with the concept of warranties, as he has dealt with a number of acquisitions in his position as a director, he would like clarification of the key issues
he will need to consider in these particular circumstances.
3. SB is concerned that the directors may not be given the managerial freedom they require in order to achieve success as sometimes commercial risks have to be taken. ABC has indicated that it wants directors to run
the business but that it will reserve contractual rights to remove and appoint directors as well as vetoing specified events and the provision of information. Although SB will have an employment contract, SB would like to know if
there is any other way he could secure his directorship.
4. SB has been informed that the shares would have to be sold if SB leaves his position as director. SB has heard of provisions which provide for only a minimum return on the sale of the shares if you are classified as a
“bad leaver”; he would like some explanation of the likely provisions on leaving.
5. ABC has indicated that it plans to exit from the investment, either by sale or listing on a market (flotation) within 4 years and that the constitution will provide for a “drag along”. SB wants confirmation that he will be
able to participate in any exit and details of what a “drag along” provision is.
Unfortunately time scales are very tight and ABC has indicated that it requires a confirmation of interest by tomorrow morning. SB is meeting with both his financial advisor and accountant this afternoon. It was agreed that an
email could be sent to his personal email account, sanjitbe@newmail24, later today giving an outline of:
1. The role the Investment Agreement.
2. The purpose Management warranties.
3. Managerial freedom, securing directorship and loss of shares.
4. Provisions on exit.
If SB decides to proceed with the investment, then SB will inform ABC that the firm will be acting as his legal advisor and a meeting will be arranged to review the precise details of the proposal together with any documentation
received from ABC.
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