Private Equity - Association of Corporate Counsel · 2015-03-17 · range in particular rising 58...

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Private Equity

Private EquityIn 29 jurisdictions worldwide

Contributing editorBill Curbow

2015

Private Equity 2015Contributing editor

Bill CurbowSimpson Thacher & Bartlett LLP

PublisherGideon [email protected]

SubscriptionsSophie [email protected]

Business development managers Alan [email protected]

Adam [email protected]

Dan [email protected]

Published by Law Business Research Ltd87 Lancaster Road London, W11 1QQ, UKTel: +44 20 3708 4199Fax: +44 20 7229 6910

© Law Business Research Ltd 2015No photocopying: copyright licences do not apply.First published 2005Eleventh editionISSN 1746-5508

The information provided in this publication is general and may not apply in a specific situation. Legal advice should always be sought before taking any legal action based on the information provided. This information is not intended to create, nor does receipt of it constitute, a lawyer–client relationship. The publishers and authors accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of February 2015, be advised that this is a developing area.

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CONTENTS

2 Getting the Deal Through – Private Equity 2015

Global Overview 7Bill Curbow, Kathryn King Sudol, Atif Azher and Peter H GilmanSimpson Thacher & Bartlett LLP

Fund Formation

Australia 10Adam Laura, Deborah Johns and Peter FerosGilbert + Tobin

Austria 17Martin Abram and Clemens Philipp SchindlerSchindler Rechtsanwälte GmbH

Brazil 23Alice Cotta Dourado and Clara Gazzinelli CruzCampos, Fialho, Canabrava, Borja, Andrade, Salles Advogados

Canada 30Bryce Kraeker, Myron Dzulynsky, Alan James and Timothy WachGowling Lafleur Henderson LLP

Cayman Islands 36Andrew Hersant, Chris Humphries and Simon YardStuarts Walker Hersant Humphries

Chile 44Felipe Dalgalarrando HDalgalarrando, Romero y Cía Abogados

China 50Caroline BerubeHJM Asia Law & Co LLC

Colombia 57Jaime TrujilloBaker & McKenzie

Denmark 63Eskil Bielefeldt, Kristian Tokkesdal and Peter Bruun NikolajsenDelacour Law Firm

Germany 69Thomas Sacher and Guido RuegenbergBeiten Burkhardt

India 75Ashwath RauAmarchand & Mangaldas & Suresh A Shroff & Co

Japan 80Makoto Igarashi and Yoshiharu KawamataNishimura & Asahi

Luxembourg 86Marc MeyersLoyens & Loeff

Nigeria 95Ajibola DalleyGRF Dalley & Partners

Peru 101Roberto MacLean and Juan Luis AvendañoMiranda & Amado

Singapore 106Low Kah Keong and Felicia Marie NgWongPartnership LLP

Spain 112Carlos de Cárdenas, Alejandra Font and Víctor DoménechAlter Legal

Switzerland 120Shelby R du Pasquier and Maria ChiriaevaLenz & Staehelin

Turkey 127Şafak HerdemHerdem Attorneys At Law

United Kingdom 132Anthony McWhirter and Richard WardDebevoise & Plimpton LLP

United States 139Thomas H Bell, Barrie B Covit, Peter H Gilman, Jason A Herman, Jonathan A Karen, Glenn R Sarno and Michael W WolitzerSimpson Thacher & Bartlett LLP

Transactions

Australia 149Rachael Bassil, Peter Cook and Peter FerosGilbert + Tobin

Austria 156Florian P Cvak and Clemens Philipp SchindlerSchindler Rechtsanwälte GmbH

Brazil 162Alice Cotta Dourado and Clara Gazzinelli CruzCampos, Fialho, Canabrava, Borja, Andrade, Salles Advogados

Canada 168Harold Chataway, Kathleen Ritchie, Daniel Lacelle and Ian MacdonaldGowling Lafleur Henderson LLP

Cayman Islands 176Andrew Hersant, Chris Humphries and Simon YardStuarts Walker Hersant Humphries

Chile 180Felipe Dalgalarrando HDalgalarrando, Romero y Cía Abogados

China 186Caroline BerubeHJM Asia Law & Co LLC

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CONTENTS

Colombia 194Jaime TrujilloBaker & McKenzie

Denmark 200Eskil Bielefeldt, Kristian Tokkesdal and Peter Bruun NikolajsenDelacour Law Firm

France 205Pierre Lafarge, Jean-Luc Marchand and Anne-Cécile DevilleLatournerie Wolfrom Avocats

Germany 212Thomas Sacher and Guido RuegenbergBeiten Burkhardt

Hong Kong 218Robert Ogilvy Watson, Chin Yeoh and Adrian CheungAshurst Hong Kong

India 224Rupinder Malik, Sidharrth Shankar and Shantanu JindelJ Sagar Associates

Indonesia 231Joel HogarthAshurst LLP

Italy 237Marco Gubitosi and Filippo TroisiLegance – Avvocati Associati

Japan 243Asa Shinkawa and Masaki NodaNishimura & Asahi

Korea 249Do Young Kim and Jong Hyun ParkKim & Chang

Mexico 254Carlos del Río, Carlos Zamarrón and Andrea RodriguezCreel, García-Cuéllar, Aíza y Enríquez, SC

Nigeria 259Tamuno Atekebo, Eberechi Okoh, Omolayo Longe and Adebisi SandaStreamsowers & Köhn

Peru 264Roberto MacLean and Nathalie ParedesMiranda & Amado Abogados

Singapore 268Ng Wai King and Jason ChuaWongPartnership LLP

Slovenia 276Aleš Lunder and Saša SodjaCMS Reich Rohrwig Hainz

Switzerland 280Andreas Rötheli, Beat Kühni, Felix Gey and Dominik KaczmarczykLenz & Staehelin

Taiwan 287Robert C Lee, Candace Chiu and Jack ChangYangming Partners

Turkey 293Duygu Turgut and Ali Selim DemirelEsin Attorney Partnership

United Kingdom 300David Innes, Guy Lewin-Smith and Richard WardDebevoise & Plimpton LLP

United States 305Bill Curbow, Kathryn King Sudol and Atif AzherSimpson Thacher & Bartlett LLP

Simpson Thacher & Bartlett LLP GLOBAL OVERVIEW


Global OverviewBill Curbow, Kathryn King Sudol, Atif Azher and Peter H GilmanSimpson Thacher & Bartlett LLP

Global private equity deal activity was robust in 2014. Private equity spon-sors overcame strong competition from strategic buyers and high valua-tions of attractive assets. The year ended strong with US$3.23 trillion-worth of mergers and acquisitions deals, approximately 44.7 per cent above 2013’s total of US$2.233 trillion and approximately 11.8 per cent below the previous annual high of US$3.66 trillion set in 2007 (Mergermarket). PricewaterhouseCoopers reported that private equity transactions accounted for approximately 11 per cent of deal value and approximately 18 per cent of deal volume in 2014. In addition, 2014 saw the highest deal count record of cross-border transactions and the second highest value, with 5,501 deals worth US$1.4 trillion, an increase in value from 2013 of 82.6 per cent (Mergermarket). With respect to raising capital, total fun-draising values reached US$247.8 billion in 2014, up 8.4 per cent from US$228.7 billion in 2013, with large funds accounting for 72 per cent of fun-draising this year (Ernst & Young).

AmericasAnnounced mergers and acquisitions deal volume in 2014 in the Americas totalled approximately US$1.77 trillion, reflecting an increase of 47.8 per cent from 2013 levels (Thomson Reuters). US-based buyout trans-actions increased to approximately US$262.1 billion, which represented an increase of approximately 70.6 per cent from the US$153.6 billion of US-based buyout transactions in 2013 (Mergermarket). The number of US private equity deals that closed in 2014 remained relatively flat compared to 2013, though activity in the middle market increased substantially last year, with the total value of deals in the US$100 million to US$1 billion range in particular rising 58 per cent over 2013 levels (Pitchbook). In addi-tion, private equity investors continued to focus their mergers and acquisi-tions activity on add-on acquisitions which accounted for 60 per cent of all control investments in 2014 compared with 40 per cent of all control investments in 2013. We also saw an increase in minority investments, with 636 growth and minority investments made in 2014 (Pitchbook). Notable private equity acquisitions in the Americas included the acquisi-tion of PetSmart Inc by a consortium comprising affiliates of BC Partners and several of its limited partners, including La Caisse de dépôt et place-ment du Québec and StepStone, for approximately US$8.7 billion; the acquisition of Gates Corporation by affiliates of the Blackstone Group LP for approximately US$5.4 billion; the acquisition of Acosta Inc by affiliates of The Carlyle Group for approximately US$4.8 billion; the acquisition of TIBCO Software Inc by affiliates of Vista Equity Partners for approxi-mately US$4.3 billion; the acquisition of Riverbed Technology, Inc by a consortium comprising affiliates of Thoma Bravo, LLC, Teachers’ Private Capital and Ontario Teachers’ Pension Plan for approximately US$3.6 bil-lion; the acquisition of the Industrial Packaging Group from Illinois Tool Works by affiliates of The Carlyle Group for approximately US$3.2 billion; and the acquisition of Sedgwick Claims Management Services Inc by affili-ates of KKR & Co LP for approximately US$2.4 billion.

Europe, Middle East and AfricaAnnounced mergers and acquisitions deal volume in Europe, the Middle East and Africa (EMEA) totalled approximately US$936.7 billion in 2014, an increase of approximately 45.9 per cent from the 2013 volume (Thomson Reuters). This represents the first year in the past four that there has been an overall increase in EMEA mergers and acquisitions activity. Europe accounted for approximately US$869.8 billion of total announced mergers and acquisitions deal volume (Thomson Reuters). The

year-on-year increase in overall EMEA mergers and acquisitions activ-ity was brought down by a 16.9 per cent decrease in mergers and acqui-sitions activity involving Africa and the Middle East (Thomson Reuters). According to Mergermarket, most of the inbound investment in Europe came from US-based companies, which accounted for 60.7 per cent or US$194.6 billion-worth of inbound deals, an 80.6 per cent increase from 2013. In Europe, private equity sponsors achieved US$165.5 billion of exit activity, which represented a 94.5 per cent increase compared with 2013 levels. In Africa and the Middle East, private equity transactions repre-sented a key component of deal activity in 2014, accounting for approxi-mately 10.5 per cent of total mergers and acquisitions activity, which represented a 4.2 per cent increase from 2013. In addition, private equity sponsors in Africa and the Middle East experienced significant exit activity in 2014. Private equity sponsors achieved the most sponsor exits within a single year on record in 2014 with 38 deals worth US$5.5 billion, represent-ing an increase in deal value of approximately 48.3 per cent compared to US$3.7 billion for 29 deals in 2013 (Mergermarket). Notable European pri-vate equity transactions in 2014 included the acquisition of SIG Combibloc Group AG by affiliates of Onex Corp for approximately €3.7 billion; the sale of the Siemens Audiology Solutions business by Siemens to affiliates of EQT and Germany’s Strüngmann family for approximately €2.15 bil-lion and an earn-out; the acquisition of Germany-based packaging group Mauser AG by affiliates of Clayton, Dubilier & Rice LLC for approxi-mately €1.49 billion; the acquisition of SkillSoft Limited by affiliates of Charterhouse Capital Partners for a reported $2 billion; the acquisition of the US and UK building products unit of Germany’s HeidelbergCement AG, known as Hanson Building Products Ltd, by affiliates of Lone Star Funds for approximately US$1.4 billion; and the acquisition of ParexGroup SA by affiliates of CVC Capital Partners for approximately €880 million.

Asia-PacificAnnounced mergers and acquisitions deal volume in Asia-Pacific totalled approximately US$781.1 billion in 2014, which represented an increase of approximately 48.2 per cent from comparable deal volume in 2013 (Thomson Reuters). Announced mergers and acquisitions deal volume in Japan totalled approximately US$64.9 billion, representing a decrease of approximately 16.5 per cent in 2014 compared to 2013 (Thomson Reuters). Asian buy-side financial sponsor mergers and acquisitions activ-ity totalled US$77.8 billion in value and was largely supported by four-teen deals valued at over US$1 billion, compared to only four such deals in 2013 (Thomson Reuters). Private equity activity in Asia in 2014 also saw records in buyouts and exits in terms of both value and volume of deals. Asian sponsor exits totalled US$34.5 billion with 185 deals, which represented an increase of approximately 21.1 per cent from 2013’s pre-vious record value of US$29.2 billion from 138 deals (Mergermarket). In Japan, the value of private equity exits hit a three-year high as it increased to 33.6 per cent above 2013 levels with deals valued at approximately US$6.3 billion (Mergermarket). Notable private equity transactions in Asia included the investment of approximately US$17.4 billion in Sinopec Marketing Co Ltd by a consortium comprising affiliates of CICC Qian Hai Development Fund Management Co Ltd, Tencent Holdings Ltd, Harvest Capital Management Co, HOPU SPM Special Fund LP, ENN Energy China Investment and China Life Insurance Company Ltd; Temasek Holding’s US$5.7 billion acquisition of a 25 per cent interest in AS Watson Group; the sale of China Network Systems by affiliates of MBK Partners to affiliates of Ting Hsin International Group for a reported US$2.4 billion; the sale of an

GLOBAL OVERVIEW Simpson Thacher & Bartlett LLP


interest in China Huarong Asset management Corporation to a consortium of investors including affiliates of China International Capital Corporation, China Life Insurance Company, CITIC Securities, Fosun International, Goldman Sachs and Warburg Pincus for a reported US$2.36 billion; the acquisition of ADT Korea from Tyco by affiliates of The Carlyle Group for approximately US$1.93 billion; and the acquisition of Singaporean-listed Goodpack Limited by IBC Capital Limited, an affiliate of KKR & Co LP, for approximately US$1.4 billion.

Debt-financing marketsThe debt-financing markets remained generally strong throughout the course of 2014, experiencing some choppiness near the end of the year. On the whole, financial sponsors found relatively easy access to debt-financing markets during the year. In the US in 2014, debt to EBITDA multiples for private equity investments averaged approximately 5.8, which represented a slight drop from 6.5 in 2013. In addition, the median debt percentage for US buyouts in 2014 stayed quite flat in 2014 at 65.3 per cent compared to 65.1 per cent in 2013 (all of the above statistics provided by Pitchbook).

However, according to Bloomberg, arrangers are forecasting a 37 per cent decline in US-leveraged loan volumes to US$325 billion for 2015. This may partly be the result of regulators pushing for tighter leveraged loan lending limits and intensifying scrutiny of funds that buy the debt. In Europe, Bloomberg forecasts that private equity firms will fund transac-tions with a record amount of covenant-light loans, following 2014’s jump to €17.7 billion of covenant-light loans compared with €7.7 billion of such loans in 2013.

Portfolio company sales and IPOsGlobal financial sponsors exited US$371.8 billion of investments in 2014, which represented a 69 per cent increase from 2013 levels and was the highest volume on record. Real estate (US$47.7 billion), retail (US$39.9 billion) and technology (US$36.6 billion) were the top three financial spon-sor exit sectors in 2014. The decline in secondary buyout activity continued in 2014, with a volume of US$68.8 billion, accounting for an 18 per cent share of global financial sponsor exits, the lowest percentage of secondary buyout activity since 2001 (all of the above statistics provided by Dealogic).

The United States led total financial sponsor exits with US$175.4 bil-lion, followed by the United Kingdom at US$50 billion, each the largest volume on record per nation. In the US, the value of the reported sales was up nearly 40 per cent from the US$125.8 billion in exits in 2013. More than 60 per cent of those deals were exits via trade sales, with the value of sales to trade buyers increasing 40 per cent to US$136.1 billion from US$97.5 bil-lion in 2013 (all of the above statistics provided by Dealogic).

Notable portfolio company sales included the sale of a 55 per cent stake in Alliance Boots Holdings by affiliates of KKR & Co LP to Walgreens for US$25.1 billion; the sale of Biomet Inc to Zimmer Holdings Inc for approxi-mately US$13.35 billion by a consortium comprising affiliates of AlpInvest Partners, GS Capital Partners, TPG, The Blackstone Group and KKR & Co LP; the sale of Grupo Corporative Ono SA for approximately US$10 bil-lion to Vodafone Group plc by a consortium comprising affiliates of TH Lee Partners, Providence Equity Partners, CCMP Capital Advisors and Quadrangle Capital Partners; and the US$6.8 billion divesture of Athlon Energy by affiliates of Apollo Global Management to EnCana Corp.

According to PricewaterhouseCoopers, as of 4 December 2014, finan-cial sponsor-backed IPOs remained a key driver of global IPO activity, raising US$83.9 billion in proceeds through 238 IPOs. 2014 was the busi-est year for private equity-backed IPOs since 2007 with proceeds raised approaching 2000s levels of US$92.6 billion (PricewaterhouseCoopers). In addition, private equity-backed companies raised another US$103.1 bil-lion through follow-on sales in 317 deals in 2014 (Dealogic).

Financial-sponsor-backed IPOs accounted for 63 per cent of IPOs by number and 72 per cent by value in the United States in 2014. Average pro-ceeds from both US private equity- and venture capital-backed IPOs were significantly higher in 2014 at US$377 million compared to US$287 mil-lion in 2013. With total proceeds reaching approximately US$59.2 billion, proceeds from US IPOs of private equity-backed companies almost dou-bled from the US$30.2 billion in total proceeds in 2013. In particular, the number of IPOs surged following Alibaba’s September listing. There were only 19 IPOs in the United States in September, but 29 IPOs in October and 27 IPOs in November. Overall, companies that have listed on US stock exchanges in 2014 have averaged returns of 27.8 per cent (all of the above statistics provided by Ernst & Young). Ernst & Young also reported that

private equity-backed IPOs in Europe reached their highest levels since 1998 with 43 private equity-backed IPOs worth €44 billion closing in 2014. While Ernst & Young expects the European private equity market to improve steadily in line with progress made in the last two years, they are expecting to see fewer private equity-backed IPOs in 2015.

Notable private equity portfolio company listings in 2014 included the listing of IMS Health on the New York Stock Exchange for approximately US$1.5 billion; the listing of Rice Energy on the NASDAQ Stock Market for approximately US$1 billion; the listing of Axalta Coating Systems Ltd for approximately US$975 million on the NASDAQ Stock Market; the listing of La Quinta for approximately US$750 million on the NASDAQ Stock Market; the listing of Pets at Home Group Plc for approximately £490 million on the London Stock Exchange; and the listing of The Michaels Companies, Inc for approximately US$446 million on the NASDAQ Stock Market.

Lastly, Ernst & Young has reported that more than 100 companies are preparing for an IPO in the United States, and it is expected that 60 IPOs will be completed in the first quarter of 2015, raising an estimated US$22 billion. This pipeline of IPO activity reflects continued optimism among practitioners that the equity capital markets will remain available for pri-vate equity exits in the first half of 2015.

Strong year in private equity fundraising2014 was another strong year for private equity fundraising. Capital raised by US private equity funds totalled approximately US$266 billion, repre-senting a 12 per cent increase over 2013. Capital raised by private equity funds globally totalled approximately US$495 billion, down slightly from the US$528 billion raised globally in 2013, but still sufficient to make 2014 one of the most successful years for global private equity fundraising since the financial crisis.

Overall, conditions for private equity fundraising are vibrant, but competition among fund sponsors continues to increase. The number of private equity funds closed in 2014 dropped by approximately 17 per cent globally, increasing the average size of today’s private equity funds to record levels. First-time sponsors continue to face significant headwinds raising capital and accounted for only 7 per cent of capital raised. These trends reflect the continued consolidation in the private equity industry in favour of larger, established sponsors with institutional limited partners continuing to make larger commitments to fewer funds and with many seeking to consolidate their relationships with fewer managers.

Contributing to the strength of the private equity fundraising market in 2014 was robust private equity deal activity and private equity-backed exits, with distributions to investors in 2014 reaching record levels (repre-senting a 30 per cent increase over 2013 levels). This substantial increase in distributions provided an additional source of ongoing liquidity for inves-tors and has led many investors to seek to redeploy such amounts back into private equity by making new or additional commitments to private equity funds, further contributing to the record growth in assets under manage-ment and ‘dry powder’ among today’s private equity funds (currently at US$1.2 trillion as of December 2014).

It is expected that fundraising will remain strong and that the trends and developments witnessed in 2014 will continue in the near-to-medium term as many of the larger institutional investors continue to consolidate their relationships with fund managers. Competition for limited partner capital among private equity funds will continue to increase, with alterna-tive fundraising strategies (eg, customised separate accounts, co-invest-ment structures, ‘umbrella’ funds and ‘anchor’ investments) continuing to play a substantial role in fundraising. As a result, established sponsors with proven track records should continue to enjoy a competitive advantage.

Outlook for 2015Practitioners are cautiously optimistic that the global economic dynam-ics that made 2014 a record year for dealmaking will continue. Private equity sponsors face some early challenges in 2015. Increasing pressure on US-regulated financial institutions to comply with tighter leveraged loan lending limits and global economic market uncertainty have cre-ated instability in the debt financing markets, which may create near-term headwinds for private equity sponsors. Until lenders and other financial institutions work their way through these issues, we may see increased financing costs and more complicated financing structures (including, for example, mezzanine financing) on the part of financial sponsors. In addition, if the end-of-year market instability that we experienced in 2014

Simpson Thacher & Bartlett LLP GLOBAL OVERVIEW


continues, it could impact the ability of private equity firms to complete successful portfolio company IPOs and dividend recapitalisations early in 2015. Also, some caution that an expected rise in interest rates in mid-2015 may impact buyout activity and could slow private equity exits later in the year.

However, we do note that the overall strength in the global economy and lower energy costs, coupled with companies seeking growth opportu-nities, provide the necessary ingredients for another robust year of merg-ers and acquisitions activity in 2015. Interestingly, as noted by Bloomberg, acquirers’ valuations often rose on deal announcements in 2014, which

may potentially encourage companies to be more acquisitive during 2015. If the debt-financing markets return to the levels seen during most of 2014, we would expect continued strength in private equity buyout activity. In addition, with equity markets at near all-time highs and many companies flush with cash, private equity sponsors may continue to pursue portfolio company sales in 2015. Lastly, we would not find it surprising if sponsor-to-sponsor portfolio company sales improve in 2015, as private equity spon-sors are seeking to monetise many of their 2007 and 2008 pre-financial crises investments, and many financial sponsors have raised large buyout funds in the past few years that they are now looking to deploy.

Gilbert + Tobin AUSTRALIA


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1 Types of private equity transactions

What different types of private equity transactions occur in your jurisdiction? What structures are commonly used in private equity investments and acquisitions?

Private equity acquisitions in Australia commonly involve a private equity fund acquiring 100 per cent or a controlling interest in a private or a pub-lic company. Acquisitions of private companies are usually structured as a share purchase, asset purchase or share subscription while acquisitions of public companies tend to be structured as a takeover, members’ scheme of arrangement or shareholder-approved acquisition of, or subscription for shares. Where 100 per cent of a public company is acquired, the transaction is referred to as a public-to-private transaction. Acquisitions of interests in public companies require significantly greater disclosure than acquisitions of private companies and are more highly regulated.

Most private equity acquisitions are structured as leveraged acquisi-tions, such that they are funded through a combination of equity and third-party debt. The level of leverage depends on a number of factors, including the stage of life cycle of the acquired business and tax limitations on gear-ing. Recent trends show that leverage levels have fallen from the highs experienced in 2005 and 2006.

2 Corporate governance rules

What are the implications of corporate governance rules for private equity transactions? Are there any advantages to going private in leveraged buyout or similar transactions? What are the effects of corporate governance rules on companies that, following a private equity transaction, remain or become public companies?

The ASX Listing Rules and Corporations Act 2001 (Cth) (Corporations Act) impose various restrictions on corporate transactions involving public companies as well as a number of ongoing obligations.

Where a private equity transaction involves the acquisition of an inter-est in a public company, then:• the acquisition of an interest that takes the bidder’s overall interest in

the company to 20 per cent or more can only be conducted through limited types of regulated transactions. The most common forms of regulated acquisitions are takeover offers and members’ schemes of arrangement;

• any acquisition of a pre-bid stake in circumstances where the bidder has received non-public information about the target may be restricted under insider trading laws. This issue is further complicated when a consortium of private equity sponsors is bidding for a public company and needs to be carefully considered;

• forming associations (such as voting arrangements) with existing shareholders must also be carefully managed so as not to prematurely give rise to disclosure obligations or restrict the bidder’s ability to acquire pre-bid stakes;

• prior to announcing a transaction, a bidder needs to have a reasonable expectation that its funding will be in place in order to pay any cash consideration to shareholders. In order to deliver a higher degree of deal certainty it is common for bidders to arrange debt finance on a certain funds basis; and

• the involvement of management and the directors of a public target needs to be carefully managed so that management and the directors

do not breach their duties and to ensure that the transaction does not constitute unacceptable circumstances. Public company boards can be very sensitive to management participation in any proposed buyout and the potential conflicts of interest that might arise (see question 3).

The ongoing requirements associated with an investment in an entity that remains listed include:• complying with the continuous disclosure regime. Public companies

must immediately disclose all material price sensitive information unless there is a relevant exemption (such as where the information is confidential and forms part of an incomplete proposal);

• obtaining shareholder approval for certain transactions (such as trans-actions involving related parties, issuing more than 15 per cent of share capital in any 12-month period or in certain circumstances changing the nature or scale of the business); and

• complying with principles of good corporate governance. The ASX provides recommendations of the corporate governance principles to be adopted by boards of listed entities; however, compliance with those principles is generally not mandated. A listed entity that does not satisfy the recommended principles must disclose the extent to which it does not comply and the reasons for its non-compliance. The corporate governance recommendations include a requirement that a majority of the directors be independent and that the chair of the audit committee be independent.

Once taken private, there is greater freedom in terms of conducting cor-porate transactions, greater flexibility over the company’s capital structure including increased flexibility to make cash distributions to holding compa-nies to service debt and significantly less onerous disclosure requirements.

Where a private equity sponsor seeks to exit its investment by taking the portfolio company public, some considerations will include:• putting in place a capital structure that is appropriate for a listed

entity. Generally, ASX-listed entities will have only one class of ordi-nary shares on issue, although performance rights and options are commonly used as part of management and director remuneration packages;

• the level of ownership and control that a sponsor might retain in the listed entity (if any) and any escrow restrictions that will apply to that holding; and

• the additional expense associated with complying with the ongoing requirements of a listed entity (as set out above).

3 Issues facing public company boards

What are the issues facing boards of directors of public companies considering entering into a going-private or private equity transaction? What procedural safeguards, if any, do public companies use when considering transactions? What is the role of a special committee in such a transaction where senior management, members of the board or significant shareholders are participating or have an interest in the transaction?

Target directors have fiduciary duties, and executive directors have duties as employees and specific contractual duties under their employment con-tracts. A conflict of interest will arise if directors cannot fulfil such duties or their interests do not align with those of the company (or its shareholders).

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In public-to-private transactions, particularly where management will be retained and given the opportunity to participate in the ownership of the target by a private equity bidder, or where a director is also a signifi-cant shareholder, maintaining target board independence is vital. While there is no express duty on directors to actively conduct an auction pro-cess or otherwise seek the best price for a company, the directors must act in accordance with their general duties to act in the best interests of the company and avoid conflicts of interest. Furthermore, the Takeovers Panel has jurisdiction to ensure that control transactions do not constitute unac-ceptable circumstances (which can occur where a transaction is not con-ducted in an efficient, competitive and informed market) and accordingly is concerned with ensuring that consideration of a bid by a target board and management is free from any influence from insiders. The Takeovers Panel has issued guidance on insider participation in control transactions and, while that guidance has broader application, it specifically notes that private equity buyouts frequently have features that make the guidance rel-evant to such transactions.

Some of the key considerations for the target’s management and directors are:• when to notify the board of an approach from a potential bidder;• when to disclose confidential due diligence information to a potential

bidder;• whether or not to provide equal access to information to a rival bidder;• when management or directors should stand aside from negotiations;

and• when information concerning an approach should be disclosed to

shareholders and how much information should be disclosed.

From a practical perspective, where there is potential participation from management or directors, target boards commonly adopt conflict proto-cols and establish an independent committee to oversee the considera-tion of the transaction and will generally appoint an independent financial adviser to assist in determining their recommendations.

Where a transaction involves a bidder that has a 30 per cent (or greater) stake in the target or where the target and bidder have common direc-tors, the target board is required to obtain an independent expert report. In practice, many target boards are reluctant to make a recommendation without such a report.

4 Disclosure issues

Are there heightened disclosure issues in connection with going-private transactions or other private equity transactions?

As noted above, public-to-private transactions require higher degrees of disclosure than acquisitions of private companies. The disclosure require-ments for a takeover offer and a members’ scheme of arrangement are broadly comparable and include details of the bidder’s intentions, funding arrangements for cash consideration, prospectus-level disclosure concern-ing the bidder and the merged entity if the offer consideration includes securities and all information known to the bidder that is material to a target shareholder’s decision of whether to accept the offer. A members’ scheme of arrangement requires a report from an independent expert giv-ing an opinion on the fairness of the scheme. A target board may choose to include a similar independent expert report in a target’s statement in the context of a takeover offer.

If a bidder is given access to due diligence information, that fact is usually disclosed in the bidder’s statement (for a takeover offer) or the explanatory memorandum (for a scheme). Where a bidder comes into pos-session of inside information in the course of due diligence, the prohibi-tion on insider trading would generally prevent the bidder from acquiring securities until the information is made public or ceases to be material. In practice, the bidder’s statement or explanatory memorandum would be used to disclose any potential inside information so as to release the bidder from that restriction.

Target boards are not obliged to provide equal access to information to rival bidders. Accordingly, in a takeover context the target board, provided that it acts in accordance with its fiduciary duties and in the best interests of the company, may choose what information it discloses and to whom.

In relation to public companies, bidders will be required to notify the market if they acquire an interest of 5 per cent or more or become associ-ated with someone who has an interest of 5 per cent or more. Additional disclosure is required for any change to that interest of 1 per cent or more.

Copies of agreements that ‘contributed’ to the change in the person’s inter-est or that gave rise to the association are required to be disclosed.

Shareholdings of less than 5 per cent can also be discoverable where a listed company issues a tracing notice to its registered holders to require identification of any person that has an interest in or can give directions in respect of that holding. For this reason equity derivatives are becoming increasingly popular as a way of accumulating economic exposure to the target stock (of less than 5 per cent) without risk of identification.

A listed target is required to immediately notify shareholders once a takeover has been launched. Under the continuous disclosure regime, a listed target would also be required to notify its shareholders once an agreement is reached with a bidder to conduct a scheme of arrangement.

5 Timing considerations

What are the timing considerations for a going-private or other private equity transaction?

Public-to-private transactions tend to involve 100 per cent of the target securities being acquired through either:• a takeover offer, subject to a 90 per cent minimum acceptance condi-

tion (in general, once the 90 per cent threshold is achieved, the bidder is able to compulsorily acquire the remaining shares); or

• a court-approved members’ scheme of arrangement (this typically involves the target securities being transferred to the bidder, condi-tional on approval of the scheme by 75 per cent of shareholder votes cast on the resolution and a majority in number (50 per cent) of the shareholders present and voting (either in person or by proxy) on the resolution.

Prior foreign investment approval (FIRB approval) is required by foreign persons for acquisitions of 15 per cent or more of an Australian company with total assets valued at A$252 million or more and for certain foreign companies that hold Australian assets valued at A$252 million or more. The treasurer is empowered to make orders objecting to the proposed acquisition where the acquisition is contrary to the national interest. In many cases, it is a criminal offence to fail to obtain prior approval for such acquisitions. The treasurer is also empowered to take certain actions (such as ordering the divestiture of acquired shares) in relation to certain other acquisitions where the acquisition is contrary to the national interest. There is effectively a higher threshold of A$1,094 million for acquisitions out-side sensitive industries by US, NZ, Korean and Chilean non-government investors, with higher thresholds expected to be extended to Japanese and Chinese non-government investors during 2015. Generally, the approval process takes up to 40 days, but may be extended to 90 days. Acquisitions by entities that are owned 15 per cent or more by foreign governments or their agencies, such as sovereign wealth funds and state owned enterprises (including where such entities are limited partners in a private equity fund), require prior approval for all direct investments (being all acquisi-tions of 10 per cent of more of the shares on issue (regardless of the size of the target), as well as acquisitions of less than 10 per cent where there are other indicia of control) investments in land and establishment of new businesses, regardless of the value of the investment. The media industry is identified as a sensitive sector, and any investment by any foreign person of 5 per cent or more in media requires prior FIRB approval.

Australia also has an antitrust regime, regulated by the Australian Competition and Consumer Commission (ACCC), which aims to ensure that mergers and acquisitions activity in Australia does not result in a sub-stantial lessening of competition.

Takeover offers typically take a minimum of three to four months from announcement to completion. Once the takeover is announced, the spon-sor would need to seek the relevant regulatory approvals (such as FIRB or ACCC); prepare and lodge the ‘bidder’s statement’ (being both the princi-pal statutory filing for the bidder and the offer document, which is mailed to target shareholders); and open the offer period (which must be for a min-imum of 30 days; however, in order to obtain the desired level of accept-ances from shareholders, the offer period is often extended). Takeover bids commonly contain minimum acceptance conditions to ensure the bidder achieves the desired level of ownership. A 90 per cent minimum acceptance condition is the most common condition as this is the required threshold for the bidder (provided certain other conditions are met) to compulsorily acquire any outstanding shares on issue. A 50 per cent mini-mum acceptance condition can be used where the bidder is only looking to achieve a controlling interest.



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As schemes of arrangement are put to shareholders by the target, not the bidder, they can generally only be undertaken when the acquisition is friendly. The notice of meeting and explanatory memorandum for the scheme are prepared by the target. Two court hearings are involved, the first to approve the notice of meeting and explanatory memorandum and to make orders for the target to convene the shareholders’ meeting, and the second to approve the scheme itself after its approval at the shareholders’ meeting. While there is significant lead time in preparing documentation prior to the initial court approval, in general schemes take approximately the same length of time to implement as takeover offers.

Because schemes of arrangement provide certainty to bidders of obtaining 100 per cent of the target’s securities (if approved) while impos-ing a 75 per cent approval threshold, most public-to-privates in Australia occur by way of a scheme of arrangement.

6 Dissenting shareholders’ rights

What rights do shareholders have to dissent or object to a going-private transaction? How may dissenting shareholders challenge a going-private transaction? How do acquirers address the risks associated with shareholder dissent?

As described in questions 2 and 5, public to private transactions in Australia are usually conducted by way of a takeover offer or members’ scheme of arrangement.

In relation to a takeover offer, shareholders can object to a transaction by electing not to tender their shares into the offer. A bidder can compul-sorily acquire a dissenting shareholder’s shares if the bidder and its associ-ates have relevant interests in 90 per cent of the securities in the bid class and the bidder and its associates have acquired at least 75 per cent of the securities that the bidder offered to acquire under the bid (whether the acquisitions occurred under the bid or otherwise). Accordingly a 10 per cent shareholding can operate as a blocking stake to a 100 per cent acquisi-tion under a takeover offer. In relation to a members’ scheme of arrange-ment, the scheme must be approved by 75 per cent of shareholder votes cast and a majority in number (50 per cent) of the shareholders present and voting (either in person or by proxy). The size of blocking stake required under a scheme of arrangement is therefore dependant on the level of vot-ing participation. Voting participation for resolutions relating to change of control transactions in Australia has traditionally been approximately 62–65 per cent, however it has also been significantly higher and lower in some transactions. Given average voting levels of 65 per cent it is gener-ally considered that a 15 per cent stake could act as a blocking stake on a scheme vote.

Bidders can require the target to obtain a public statement from a major shareholder that it intends to accept the takeover offer or that it intends to vote in favour of the scheme in the absence of a superior offer (as applicable). Public statements of intention in connection with a control transaction are binding under Australia’s ‘truth in takeovers’ policy unless clearly qualified. This gives the bidder comfort that it has the support of one or more major shareholders. Such arrangements need to be carefully structured and implemented so as not to create an association or other arrangement between a bidder and shareholder that would breach the takeovers laws or that would impact voting classes in a scheme.

Bidders sometimes look to increase their chances of success by obtain-ing a pre-bid stake. While such a shareholding counts towards the 90 per cent threshold in a takeover and can act as a blocking stake against a rival bid, a bidder’s shares cannot be voted on the scheme.

7 Purchase agreements

What purchase agreement provisions are specific to private equity transactions?

Private equity buyers typically seek comprehensive warranties, indemni-ties and post-completion price adjustments. They also commonly seek conditions precedent for regulatory approvals such as FIRB approval and ACCC clearance, and in private transactions will often have a condition precedent for financing.

Competitive auction processes have been employed by sellers to cre-ate competitive tension, encouraging a ‘take it or leave it’ approach where agreements are unconditional or contain very limited conditionality.

Private equity sellers typically seek a ‘clean exit’ (to facilitate repatria-tion of returns to investors on exit, rather than at the expiry of the claim periods or the satisfaction of escrow conditions) and provide only limited

warranty protection, with typically short claim periods and no guarantees or post-completion covenants. On exit, third-party purchasers are typi-cally required to obtain comfort from management warranties and their own due diligence (although there is a common practice of providing ven-dor due diligence that is capable of reliance). It is becoming increasingly common in private transactions for either the buyer or the seller to obtain warranty and indemnity insurance (buy-side policies are more common). The insurance operates to effectively protect both parties from loss from a claim under a warranty or indemnity (to the extent it is not a known risk at the time).

In public-to-privates, a merger or scheme implementation agreement will normally be entered into between the bidder and target. The agree-ment will govern conduct of the bid. It is common to extract a break fee from the target of up to 1 per cent of its market capitalisation or equity value, together with ‘no-shop’ and ‘no-talk’ undertakings, the latter being subject to the directors’ fiduciary duties to facilitate a superior offer. Reverse break fees are also becoming increasingly common.

8 Participation of target company management

How can management of the target company participate in a going-private transaction? What are the principal executive compensation issues? Are there timing considerations of when a private equity sponsor should discuss management participation following the completion of a going-private transaction?

Management typically participate in private equity transactions by acquir-ing ordinary non-voting shares (or their equivalent) in the bidding vehicle, which may have special rights to returns (known as ratchet rights) and that are subject to extensive transfer restrictions and drag-along rights in favour of the private equity investor to assist it in achieving an orderly exit.

If management already hold equity in the target, they are commonly given shares in the bidding vehicle in exchange for its shares in the target, structured typically to obtain capital gains tax (CGT) rollover relief (to defer taxes otherwise imposed on exchange).

Shares (and rights to acquire shares) issued to management as part of an employee share scheme are generally subject to tax in the hands of the recipients. It may be possible to defer tax liability by carefully struc-turing the terms of these securities. A key consideration for management is whether any gains are taxed as income or more concessionally taxed as capital gains.

Participation by management in bidding vehicles gives rise to conflicts of interest for management. These are typically addressed through adher-ence to strict management protocols (which require directors with conflicts to excuse themselves from deliberations concerning the proposal and in making any recommendation to shareholders) (see question 3).

In takeovers and schemes of arrangement, management deals can create ‘association’ issues for bidders. Full disclosure of the arrangements may be required in the bidder’s statement or scheme booklet. In the case of a takeover, if benefits are given during the takeover offer period (and are therefore likely to induce the manager to accept the offer) they risk being collateral benefits that are prohibited under the Corporations Act. Finally, any arrangements made to acquire or agree to acquire any target shares (including management’s target shares) during the four-month period prior to the bid will set a minimum floor price for the offer.

9 Tax issues

What are the basic tax issues involved in private equity transactions? Give details regarding the tax status of a target, deductibility of interest based on the form of financing and tax issues related to executive compensation. Can share acquisitions be classified as asset acquisitions for tax purposes?

The main tax issues relate to financing the acquisition (where the bidder is an Australian company) and exit strategy. The deductibility of interest expenses requires borrowings (generally including subordinated debt) to be used for income producing purposes. Preference shares issued by a bidder may also qualify as ‘debt’ for tax purposes (depending on the terms), in which case dividends paid on such shares may be deductible. Interest expenses incurred by the bidder cannot be set off against the tar-get’s net income for tax purposes unless the bidder and the target are part of the same tax consolidated group. This requires the bidder to acquire all the shares in the target. If a new consolidated group is to be formed



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post-acquisition, the bidder must be a company that is solely an Australian resident for income tax purposes.

In many instances, such as where the bidder is controlled by non-res-idents, the level of ‘debt’ financing must satisfy ‘thin capitalisation’ rules (which limit deductions for excessive ‘debt’ funding). A debt-to-equity ratio of 1.5 to 1 is necessary. More generous thin capitalisation limits apply for banks and other financiers. An arm’s-length debt test may also allow a greater level of debt, however there have been suggestions by some com-mentators that this alternative test may not be retained. Transfer pricing rules are also relevant in determining allowable levels of debt.

Generally, interest and dividends (subject to certain exceptions) paid to non-residents are subject to withholding taxes. There are some limited exceptions to the payment of withholding taxes on interest where certain qualifying debt instruments were offered broadly or under certain tax trea-ties where the loans are made by certain qualifying banks.

Except in relation to gains on taxable Australian property (for example, interests in land and certain indirect interests in land – see below), CGT is generally not payable by a non-resident unless the non-resident carries on business through a permanent establishment in Australia. Non-resident investors may however be taxed on the direct or indirect sale of shares in an Australian company where the gain is on an income account, where that income gain is sourced in Australia and where a tax treaty does not operate to protect the gain from Australian tax.

In 2009 the Australian Tax Office (ATO) attempted to tax TPG on its exit, by way of IPO, from its investment in Myer. Subsequently, the ATO issued four tax determinations relating to taxing gains by private equity. These determinations are complex and should be considered closely given the circumstances of each transaction; however, some of the key points addressed in those rulings include:• that gains made by foreign private equity entities can in particular

circumstances (which are likely to apply to most private equity struc-tures) be treated as ordinary income (and are not eligible for the non-resident CGT exemption) and are therefore taxable in Australia where those profits have an Australian source;

• anti-avoidance provisions can apply to common foreign investment structures where interposed entities are used to access the benefits of Australia’s treaty network (namely, treaty shopping);

• a ‘safe harbour’ is provided for foreign investors investing into Australia through foreign limited liability partnerships in particular circumstances where those foreign investors are able to access rel-evant tax treaty benefits; and

• the source of gains made by a private equity fund will not depend solely on where the purchase and sale contracts are executed.

Furthermore, a non-resident investor will be subject to Australian CGT on a sale of shares in a company (whether resident or non-resident) where the shares represent taxable Australian property (for example, where the investor has a non-portfolio interest in a land-rich entity). It has been proposed that from 1 July 2016 a non-final withholding tax regime will be introduced to support the operation of the foreign resident CGT regime. In broad terms, if a non-resident disposes of certain interests (including shares in a company or units in a trust) predominantly reflecting Australian land, the purchaser will be obliged to withhold and remit to the ATO 10 per cent of the proceeds from the sale. It should be noted that not only will this withholding apply to the taxation of capital gains, it will also apply where the disposal of the relevant asset is likely to generate gains on revenue account, and therefore be taxable as ordinary income rather than as a capi-tal gain. This measure was announced by the former Australian Federal Government, and it is unclear whether the new Federal Government will enact this measure.

Opportunities exist to achieve a ‘step-up’ in the cost base of various assets for income tax purposes if all the equity in a target is acquired by a bidder (which is part of a consolidated group or which subsequently makes an election to consolidate). However, ‘step downs’ in tax bases can also occur (eg, if acquired asset values have declined since the last acquisition occurred).

Under the tax consolidation rules, where the deemed purchase cost is allocated to depreciable assets (for example, equipment), this would have the effect of increasing deductions for depreciation charges. Amortisation of goodwill is not deductible for Australian income tax purposes.

It should also be noted that Australia has very far-reaching general anti-avoidance rules which are in the process of being reformed (making

them even more stringent). Accordingly, all transactions need to be con-sidered in the context of the risk posed by those rules.

10 Debt financing structures

What types of debt are used to finance going-private or private equity transactions? What issues are raised by existing indebtedness at a potential target of a private equity transaction? Are there any financial assistance, margin loan or other restrictions in your jurisdiction on the use of debt financing or granting of security interests?

Senior secured debt and mezzanine (or subordinated) debt are the most common forms of debt funding for private equity transactions. Initial debt financing was traditionally limited to a small number of lenders who underwrote the bank debt, with syndication occurring post-funding. Following the credit crisis, it became more expensive for private equity sponsors to obtain underwriting for large parcels of debt and banks have insisted on the inclusion of market flex clauses. As a result, some private equity sponsors have brokered their own debt syndicates and signed up the full syndicate of banks for initial funding. In almost all of Australia’s recent private equity public-to-private transactions, this is how the financial spon-sors have arranged their debt finance. Private equity transactions occasion-ally utilise bridge loans to fund the acquisition, which are then replaced by US-based high yield debt securities or retail debt securities such as notes that are exchangeable into shares on IPO at a discount to the offer price.

It is common for financing arrangements to contain a provision that requires the repayment of outstanding liabilities on a change of control. In general, existing indebtedness of a target company or group is often repaid as part of the change of control with the bidder having new debt facilities form part of the acquisition funding.

Australia has financial assistance prohibitions that restrict a target company from financially assisting someone to acquire its shares (or the shares of its holding company), unless shareholders approve the assis-tance. Financial assistance includes the target or its subsidiaries giving guarantees or granting security in favour of a financier who is providing acquisition funding to a bidder. Further information regarding financial assistance is set out in question 12.

11 Debt and equity financing provisions

What provisions relating to debt and equity financing are typically found in a going-private transaction? What other documents set out the expected financing?

Bidders must have a reasonable basis for concluding that sufficient funding (debt and equity) will be available for the bid.

Equity funding commitments of private equity investors are typi-cally set out in equity commitment letters addressed to the target, which represent that the fund has sufficient equity to meet the bidder’s obliga-tions under the transaction documents and commit to drawing down the funds from investors subject to satisfaction of any conditions precedent in the transaction documents. Disclosure of equity funding commitments is required in the bidder’s statement (or scheme booklet).

Although not specifically required by law, intense competition for quality targets and the increasing sophistication of lenders has led to debt funding structures containing ‘certain funds’ provisions (consistent with practice in, for example, the United Kingdom). This involves financing packages containing conditions that are limited to fundamental defaults, such as insolvency. This is a higher threshold than the ‘reasonable basis’ requirement referred to above.

The debt financing package is usually set out in a debt commitment letter and term sheet(s), which are then replaced with definitive financing documents if the bid is successful.

In recent leveraged transactions the terms of the debt facilities have included provisions that specifically provide for equity cures and clean-up periods to allow sponsors to support investments that may otherwise be in default.



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12 Fraudulent conveyance and other bankruptcy issues

Do private equity transactions involving leverage raise ‘fraudulent conveyance’ or other bankruptcy issues? How are these issues typically handled in a going-private transaction?

The nearest equivalents under the Corporations Act are:• ‘uncommercial transactions’ – broadly, any transaction a reasonable

person would not have entered into having regard to the benefits and detriments to the company and the respective benefits to other par-ties of entering into the transaction. If such a transaction causes insolvency, it the transaction may be voidable at the instigation of the liquidator appointed. Similar provisions exist in relation to ‘unfair loans’ and ‘unreasonable director-related transactions’. These are only a potential issue should the company formally enter into liquida-tion (as opposed to receivership, administration or a creditors’ scheme of arrangement);

• ‘unfair preference’ – broadly, if security is granted to a party who was previously an unsecured creditor and is not providing new money, that transaction may, in the event of liquidation, be set aside at the instiga-tion of the liquidator (ie, be voidable as the transaction would result in the creditor receiving a preferred distribution vis-à-vis other unse-cured creditors in a winding up). The look-back period is generally six months, although if the transaction was between related parties the look-back period is four years. Similarly to ‘uncommercial transac-tions’ this is only an potential issue should the company formally enter into liquidation (as opposed to receivership, administration or entry into a scheme or arrangement); and

• ‘financial assistance’ – whereby a company financially assists another to acquire shares in itself or a holding company. Issues associated with financial assistance typically arise in connection with the grant of security by a target company over its assets to the bidding company for no direct consideration. Notably, a contravention of the financial assistance provisions does not automatically affect the validity of the transaction, but any person involved in the contravention would be guilty of an offence. The court, however, has the power to make orders that would have the commercial effect of unwinding the transaction.

13 Shareholders’ agreements and shareholder rights

What are the key provisions in shareholders’ agreements entered into in connection with minority investments or investments made by two or more private equity firms? Are there any statutory or other legal protections for minority shareholders?

Where a private equity investor takes a minority interest or where there are two or more private equity investors, protections sought by private equity investors typically focus on retaining control over key operational and corporate decisions during the term of the investment, regulation of share transfers and exit procedures. Negative control (or veto rights) over the operation of the business is a fundamental requirement to give minor-ity shareholders a say in determining the direction of the business. Consent rights in relation to certain corporate actions (for example, blocking a potentially dilutive issue of shares) and key operational matters (for exam-ple, approving budgets and business plans, dividends, acquisitions and dis-posals) are also typically included. Director appointment rights, quorum requirements and periodic receipt of information (particularly financial information) are also important.

Pre-emption rights on transfer, tag-along rights and drag-along rights are standard, as are exit mechanics (IPO, trade sale or secondary buyout). Good leaver and bad leaver provisions for management are also usual (with bad leavers forced to sell at the lower of fair market value and cost, and good leavers at fair market value).

Covenants not to compete with the business or poach staff for a period (generally one to two years) are also common. However, the term and geo-graphic scope of the restraints must be reasonable or such covenants risk being unenforceable.

Generally the protections for minority shareholders will be contained in the shareholders agreement and will be negotiated at the outset of the investment. These can include approvals required for further issues of securities or fundamental changes to the business or sale of the business.

There are statutory approval requirements (usually a 75 per cent vot-ing threshold) for a number of corporate actions, but for a private company these are subject to the company’s constitution and the requirements can

in some cases be amended or removed. Often minority stakes are not of a sufficient size to impact the outcome of votes such that most of the powers will rest with the majority shareholder or private equity investor.

Where a member holds a different class of shares from the majority (for example, non-voting preference shares) then corporate actions affecting the rights attaching to that class are subject to a separate vote. Accordingly, the majority holder of ordinary voting shares cannot strip rights from pref-erence shares without a separate vote of the holders of preference shares.

The statutory protection for minority shareholders is otherwise very limited. There is a prohibition under the Corporations Act of ‘oppressive conduct’, which includes unfairly prejudicial or discriminatory conduct against one or more minority members. Minority members (or ex-mem-bers, where the impugned conduct has led to their removal from the mem-bers’ register) have standing to seek relief under the statute and there are a wide range of remedies available. In practice, however, statutory oppres-sive conduct actions are rare and unlikely to succeed.

14 Acquisitions of controlling stakes

Are there any requirements that may impact the ability of a private equity firm to acquire control of a public or private company?

Question 2 sets out the key requirements. In particular, a person or entity cannot acquire 20 per cent or more of a public or listed company without making a formal takeover offer for the relevant company unless a spe-cific exception is available such as where the target conducts a members’ approved scheme of arrangement. There are a number of prescribed requirements for a takeover offer or scheme that are set out in question 2 and other questions above. This is the major restriction on the ability to acquire control of a public company.

There is no equivalent requirement or restriction in respect of private companies in Australia.

There are minimum capitalisation requirements in Australia, which are outlined in question 9.

15 Exit strategies

What are the key limitations on the ability of a private equity firm to sell its stake in a portfolio company or conduct an IPO of a portfolio company? In connection with a sale of a portfolio company, how do private equity firms typically address any post-closing recourse for the benefit of a buyer? Does the answer change if a private equity firm sells a portfolio company to another private equity firm?

There are no specific legal restrictions on how a private equity firm con-ducts a sale process on exit of a portfolio company. Consent requirements relating to minority shareholders (if any) are typically addressed in a share-holders agreement via tag-along and drag-along rights that have often seen private equity firms conduct a ‘dual track’ process, which involves simulta-neously running a private treaty sale process and undertaking preparations for an IPO. The value of these processes is dependent on market condi-tions. Given the recent resurgence in equity markets in Australia, the use of the dual track process has started to increase.

As with all IPOs in the Australian context, there is a high level of dis-closure required in order to offer shares in connection with a listing, par-ticularly when offering to retail shareholders. Misleading statements or omissions of required information attract statutory liability with substan-tial penalties. The statutory liability extends to various individuals and entities involved in the listing or the preparation of the prospectus (includ-ing deemed personal liability for current or proposed directors) and this liability cannot be contracted out of.

In a private treaty sale of a portfolio company, private equity firms will usually seek to limit their ongoing or post completion liability in the man-ner described in question 7. Where a private equity firm sells a portfolio company to another private equity firm, this will directly conflict with the incoming buyer’s desire for extensive warranties and indemnities outlined in question 7.

As referred to in question 7, it is now common for a private equity pur-chaser or vendor to use warranty insurance to address post-closing liability.



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16 Portfolio company IPOs

What governance rights and other rights and restrictions typically included in a shareholders’ agreement are permitted to survive an IPO? What types of lock-up restrictions typically apply in connection with an IPO? What are common methods for private equity sponsors to dispose of their stock in a portfolio company following its IPO?

Where a private equity firm wishes to conduct an IPO in respect of a port-folio company, the existing shareholders agreement will be terminated. Once listed, the operations of the company will be governed by the ASX Listing Rules. Both as a matter of market practice and under Australian law and the ASX Listing Rules, most terms in shareholders agreements such as vetoes over board decisions, pre-emption rights, drag-along and tag-along rights cannot be carried forward post listing as they are generally not per-mitted. Where a private equity investor retains a significant stake post list-ing it is possible to have a relationship agreement that covers rights such as information sharing and board nominations.

An IPO can only be conducted in Australia through an offering docu-ment or prospectus which is lodged with the Australian corporate regula-tor (the Australian Securities and Investments Commission). The offering document must contain prescribed information including all material information relevant to the business and prospects of the company. Often IPOs in Australia are conducted in conjunction with a non-registered 144A or Reg S offering in the US or jurisdictions in other parts of the world.

In the past, private equity firms exiting a portfolio company through an IPO have been able to divest their entire shareholding however it is becom-ing more common to see private equity firms retaining a substantial stake in the portfolio company post-IPO and be subject to a ‘lock up’ or escrow of 12 to 24 months for its retained shareholding.

The private equity sponsors may dispose of their stock following the release of any escrow through on-market sales or more commonly in an off-market sale known as a ‘block trade’. Usually, the stock is offered, after market close and prior to market open to institutional investors at a dis-count to the current trading price. This is designed to minimise the uncer-tainty and delay and therefore the potential price impact that may result from selling, or attempting to sell, large holdings of shares on market. Where the selling shareholder is a ‘controller’ of the company, the block trade must be conducted with disclosure in the form of a ‘cleansing state-ment’ lodged by both the controller and the listed company (being disclo-sure of any material information known to the controller or the company) otherwise restrictions will apply to restrict the on-sale of shares for a period of 12 months.

17 Target companies and industries

What types of companies or industries have typically been the targets of going-private transactions? Has there been any change in focus in recent years? Do industry-specific regulatory schemes limit the potential targets of private equity firms?

Historically, investments favoured included those in the retail, manu-facturing, building products, mining services, consumer products and industrial sectors that have strong cash flows. In recent years, healthcare, education, aged care and retail have also become targets of private equity transactions.

Further layers of regulation in addition to the Corporations Act, FIRB approval and Australia’s antitrust legislation may apply to specific

companies or industries. Such legislation may be enacted by state or com-monwealth legislatures and may be specific to the target or regulate the industry in which the target operates. Restrictions generally only arise for companies that are in sensitive sectors such as the media (Broadcasting Services Act 1992 (Cth)), banking (Banking Act 1959 (Cth)), finance (Financial Sector Shareholdings Act 1998 (Cth)), aviation (Airports Act 1996 (Cth)) and health (various health legislation enacted by states and territories), or are subject to close regulation concerning privacy (such as casinos). Companies such as Qantas are regulated by their own acts of par-liament (for example, Qantas Sale Act 1992 (Cth)). Some of these indus-tries impose absolute limits on the level of foreign ownership of companies in those industries, such as the Airports Act, which limits foreign owner-ship of airports to an aggregate of 40 per cent. Under Australia’s foreign investment policy, an acquisition of 5 per cent or more in the media sector requires prior FIRB approval.

18 Cross-border transactions

What are the issues unique to structuring and financing a cross-border going-private or private equity transaction?

Tax structuring is critical in private equity transactions. Some of the areas that need to be addressed are:• the jurisdictional location of the bid vehicle to facilitate an efficient

exit;• the level of debt that can be used under the Australian thin capitalisa-

tion provisions (see question 9);• whether the debt can be structured so as to satisfy the ‘section 128F’

public offer exemption, to enable interest on facilities to be paid to non-residents free of withholding taxes;

• whether the acquisition gives rise to stamp duty that is payable on cer-tain share transfers, mortgages and charges (among other things), as the scope and rates of Australian stamp duties differ between jurisdic-tions; and

• whether any limitations exist on the ability to stream earnings within or out of the target group, as well as the ability to incur debt at various levels of the target group.

Foreign investment restrictions also apply to cross-border transactions and are set out in question 5.

19 Club and group deals

What are the special considerations when more than one private equity firm (or one or more private equity firms and a strategic partner) is participating in a club or group deal?

Where more than one private equity firm invests in a target, an investment agreement or shareholders’ agreement is entered into to set out the rights and relationship between investors. The arrangements principally relate to:• board appointment and removal rights;• the allocation of voting rights among sponsors and the mechanics for

exercising voting control;• matters reserved for board or shareholder decisions (and whether veto

rights exist) as well as delegated authority levels;• access to information by shareholders and disclosure by board nomi-

nees of confidential information received through their role as director to those appointing them;

• future funding commitments, if any, and anti-dilution protections;• exit mechanisms, including forced IPO or security sales, drag-alongs,

tag-alongs, rights of first offer or refusal;• competitive restraints or preferred vehicle rights for corporate

opportunities;• restrictions on related-party dealings and approval mechanisms;• dispute resolution or ‘deadlock’ mechanics; and• consequences of default.

One issue that has sparked some controversy is the manner and basis on which funding commitments are sought and specifically circumstances where financiers are tied exclusively to one bidder or bidding consortium. Target boards have in some instances sought, as a condition to grant-ing access to due diligence information, to limit exclusive arrangements between a bidder and potential financiers.

Update and trends

2014 was the year of the IPO. It was the busiest year for IPOs since the global financial crisis with favourable equity market conditions enabling major private equity-backed floats to come to market including Spotless and Healthscope. A majority of the IPOs held their ground or traded up after listing, supported by a greater willingness of sponsors to retain a significant shareholding often escrowed for the forecast period to giving new investors greater confidence in the future prospects of the company.

Shareholder activism continued to build and attract headlines in Australia in 2014, and we saw more dissident and disruptive shareholders in mergers and acquisitions transactions with more activist-focused funds emerging.



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20 Issues related to certainty of closing

What are the key issues that arise between a seller and a private equity buyer related to certainty of closing? How are these issues typically resolved?

Certainty of closing is becoming more and more important to securing tar-get board support, particularly in a public company transaction. A target

board is generally unwilling to support a transaction unless it has good prospects of completing. As such, buyers are forced to assume greater deal risk (by having fewer conditions) and banks are often required to commit funding on a certain funds basis. Private equity sponsors have in some cases agreed to pay reverse break fees where they breach their obligations under the transaction documentation to demonstrate their commitment to the deal, particularly where the transaction is subject to conditions.

Rachael Bassil [email protected] Peter Cook [email protected] Peter Feros [email protected]

Level 37, 2 Park StreetSydney NSW 2000Australia

Tel: +61 2 9263 4000Fax: +61 2 9263 4111www.gtlaw.com.au

AUSTRIA Schindler Rechtsanwälte GmbH


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AustriaFlorian P Cvak and Clemens Philipp SchindlerSchindler Rechtsanwälte GmbH



Austria has seen the full spectrum of private equity transactions, from seed and growth capital to buyout transactions. A more recent trend is the private equity fund-backed investment in non-performing loan port-folios. Many buyout transactions had a distressed background driven by the banks’ efforts to clean up balance sheets and to require borrowers to sell certain assets or the borrowing entity as such. For such reason, pro-viding debt to a potential target is becoming quite a popular in-route for private equity funds, with the eventual plan of a debt-equity swap. In the non-distressed space, secondary transactions and bolt-on acquisitions (that is, acquisitions of private equity-backed portfolio companies aimed at consolidating the market or enhancing the portfolio company’s value (for example, by acquiring neighbouring lines of business)) represented the largest number. We have not seen any notable management buyouts.

In a typical private equity transaction, the private equity fund will acquire the shares through a special purpose vehicle (SPV), which is funded by a combination of equity (provided by the private equity fund and some-times management) and debt (provided by the financing banks). In recent years, the SPV was typically a domestic limited liability company (LLC) to benefit from the goodwill amortisation, which was also available for a share deal. Given that this tax benefit was repealed, we expect to see more foreign-based SPVs in the future.



The level of regulation for a joint stock company (JSC) is greater than for a LLC or a partnership (eg, a JSC is subject to stricter rules on corporate gov-ernance and accounting) and again increases if the JSC is listed (eg, a JSC that is listed on the Prime Market of the Vienna Stock Exchange is subject to disclosure and reporting requirements under the Austrian Corporate Governance Code, some of which are mandatory, others follow the comply or explain concept and others the recommendations only). For that reason, private equity firms will typically seek to take a listed target private to ben-efit from reduced regulation and reduced costs. Further, it should be noted that changes to the management board and supervisory board of a (listed) JSC are more difficult and time-consuming to implement than in an LLC.



The management board of a JSC is required under the Stock Corporation Act to promote the interests of the company, considering the interests of its shareholders, employees and the public. Where a public JSC is involved, the management board is called upon to take measures preventing market manipulation and insider trading and not to make any inaccurate public statements. In addition, whenever a takeover bid is involved, the manage-ment board and supervisory board are subject to additional obligations, namely they are prohibited from taking any measure which could prevent the shareholders from taking a free and informed decision with respect to the takeover bid, and they have to seek the approval of the shareholders’ assembly for any measure which could frustrate the bid. The solicitation for a competing bid, however, is specifically allowed.

Where members of the management board or the supervisory board are participating in a transaction (see question 8) or otherwise have an interest in the transaction, they have to notify the company accordingly and will generally not be permitted to vote with respect to the transaction or to participate in associated meetings. In addition, where the transaction involves a takeover bid, the relevant member of the management board or supervisory board must not participate in the preparation of the opinion on the takeover bid required to be issued by the management board and supervisory board under the Takeover Act.

Special committees are rather uncommon in Austria, but if the man-agement or the supervisory board are involved in a takeover bid, they have to carefully consider and publish any conflict of interest they may have or advantage offered to them.

4 Disclosure issues


A typical going-private transaction involves a voluntary takeover bid aimed at control conditional upon the acceptance of 90 per cent of the outstand-ing share capital followed by a squeeze-out pursuant to the Act on the Exclusion of Shareholders or a disproportionate spin-off pursuant to the Spin-Off Act, which ultimately results in delisting. The takeover offer as such is subject to the same disclosure issues and requirements as any other takeover offer for the shares of a public company. The enhanced disclosure requirements with respect to the squeeze-out differ in detail but are gener-ally aimed at protecting the interests of the minority shareholders, employ-ees and creditors. Also other types of reorganisations may be used for a delisting, the legal consequences thereof are still unsettled and accord-ingly subject to uncertainties.

Schindler Rechtsanwälte GmbH AUSTRIA


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In addition, a person directly or indirectly acquiring or disposing of shares of a public company admitted to trading on a regulated market is required to notify the target, the stock exchange and the Austrian Financial Market Authority if as a result of such transaction they reach, exceed or fall below a certain voting rights threshold (4, 5, 10, 15, 20, 25, 30, 35, 40, 45, 50, 75 and 90 per cent of the votes) under the Austrian Stock Exchange Act.



As mentioned in question 4, going-private transactions usually involve a takeover bid followed by squeeze-out. The takeover procedure typically takes around six months from the beginning of the internal preparatory steps and usually three to four months from the first contact with the Takeover Commission. The time required to complete the squeeze-out depends on the structure and may take up to three months.

Other timing considerations that apply equally to public and private transactions include the time required for due diligence, the time required to obtain antitrust and regulatory clearance or required third-party approv-als or to implement any agreed pre-closing restructuring. In addition, where an organised auction process is involved, timing will largely depend on the process. The usual time frame for transactions in Austria is three to six months.



Minority shareholders may choose whether to tender their shares in the takeover bid. Once the private equity fund has acquired the required majority to implement the squeeze-out (see question 4), the minority shareholders do not have any possibility of blocking it. Their rights are lim-ited to receiving adequate cash consideration in exchange for their shares and requesting a review of the cash consideration offered before court as to its adequacy (ie, a fairness review). If the squeeze-out is implemented pursuant to the Act on the Exclusion of Shareholders and the shareholders’ resolution on the squeeze-out is passed within three months of the lapse of the offer period, there is a rebuttable presumption that the consideration offered is adequate if it amounts to the highest consideration paid during the offer period.



Provisions specific to private equity transactions relate to the financing of the transaction (see questions 10 and 11), the scope of warranties (if on the sell side the private equity firm will typically not be willing to provide busi-ness warranties but try to limit warranties to title and capacity – in such circumstances the purchaser will have to rely on its own due diligence and warranties of management) and limited recourse for breach of war-ranty or indemnification to amounts put in escrow at signing or recover-able from warranty and indemnity insurance (see question 15). We see an increasing interest in obtaining insurance coverage as either a substitute for some warranties or to substantially limit their scope, for instance, as to their duration.



In buyout transactions the private equity firm often involves future management in the due diligence process and the financial modelling. Typically, management is offered the opportunity (and is sometimes even required) to acquire an interest in the target to ensure management’s com-mitment. Senior management is sometimes also given the opportunity to

invest in the very same instrument (‘institutional strip’) acquired by the private equity firm, which ensures that the interests of senior management and the interests of the private equity firm are fully aligned.

In some cases, the incentive provides for a ratchet mechanism enti-tling management to an enhanced return once the return of the private equity firm exceeds a certain threshold. The detailed structuring of the incentive packages is dependent on the tax treatment of the benefits in the relevant jurisdictions. For example, management will have a strong inter-est in ensuring that any gains in relation to the interests acquired are taxed as capital gain and not as income.

Management members who hold real shares (as opposed to phantom stock) are usually required to restrict their shares (restricted stock) by way of a restricted stock agreement or by acceding to the shareholders’ agree-ment with the private equity firm. Such restrictions will typically include a right to drag of the private equity firm upon an exit and compulsory trans-fer provisions if the employment with the target group terminates. The consideration due in the case of such transfer will typically depend on the reason for termination (‘good’ or ‘bad’ leaver provisions).

9 Tax issues


Tax group and goodwill amortisationUntil recently, provided the target was Austrian and had an active trade or business, it was common to set up a tax group between the purchaser and the target following a share purchase. Such tax group enabled the pur-chaser to deduct interest expenses for the acquisition of the target from the operational profit of the target and to amortise the goodwill (up to 50 per cent of the purchase price) over a period of 15 years. Whereas the deduction of interest expenses (in a narrow sense, other financing expenses are not deductible, for instance, arrangement fees and capital loss deriving from foreign exchange loans) from the operational profit of the target is still possible, goodwill amortisation is not available any more for acquisitions made after 28 February 2014. For that reason, private equity firms (as well as other purchasers) now sometimes consider using asset deals or foreign-based acquisition vehicles which may also be beneficial with regard to any future exit, as most Austrian double tax treaties attribute the sole right of taxation in relation to capital gains in the shares of the target to the state of residence of the acquisition vehicle; assuming that such jurisdiction offers a participation exemption, a sale will be tax free.

FinancingInterest expenses on loans obtained from unrelated parties are generally fully deductible (ie, there is no interest barrier rule that limits the amount of interest expenses). Also, interest on loans from related parties is deduct-ible, provided that:• the terms are at arm’s length and properly documented;• the debt is not requalified as equity; and• no limitations apply.

Transfer pricing rules have to be considered in relation to related-party debt. While the Austrian tax authorities suggest that the comparable uncontrolled price method shall be applied, a comparison of inter-com-pany financing transactions to those with commercial banks is generally not accepted because of the differing objectives and goals of an unrelated lender. As a result, the interest rate of banks can only be considered as the upper limit of the arm’s-length interest rate. In general, in determining the interest rate, factors such as currency, term, creditworthiness of the bor-rower and refinancing costs need to be taken into account. If the related-party lender has sufficient own liquidity, the tax authorities see the deposit interest rate as the appropriate interest rate for the related-party loan.

There are no statutory rules on thin capitalisation in Austria, but the Austrian tax authorities generally accept debt to equity ratios of around 3:1 to 4:1. Beyond that, interest deduction may be denied and the shareholder loans may be qualified as deemed equity. Besides the non-deductibility, this would also result in the interest payments being treated as deemed dividends, which – unlike interest on shareholder loans – would be subject to withholding tax in Austria.



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There is an important new statutory limitation on related-party debt. Based thereon, interest expenses are not deductible from the Austrian tax base if the lender is a corporation and a related party, and the interest pay-ments in the state of residence of the lender are not effectively taxed at 10 per cent or more. From the Austrian tax authorities’ point of view, it is not relevant whether the tax at a rate lower than 10 per cent is based on the domestic law of the state of residence of the lender or the applicable double taxation treaty. The new rule is effective to all payments after 28 February 2014, irrespective of when the corresponding contract is concluded.

Equity contributionsThe contribution of equity by a shareholder (or its direct or indirect sub-sidiaries) to an Austrian company is subject to 1 per cent capital duty. The current position of the Austrian tax authorities is that ‘shareholder’ only means the direct shareholder of the receiving company (or its direct or indirect subsidiaries). Accordingly, contributions by an indirect share-holder (grandparent contributions) should not trigger capital duty if they are properly structured. The capital duty on contributions of a direct share-holder was abolished, effective as of 1 January 2016. Based on EU law, the capital duty cannot be reintroduced.

Management packagesManagement incentive packages are usually structured through share options or equity participation rights. Another possible incentive is profit participation rights.

Share options (a preferential regime applies to options granted before 1 April 2009) are taxed as follows. Non-transferable share options are not taxed at the time of the grant, but upon exercise of the option because they are not considered an asset for tax purposes. Upon exercise, the difference between the (discounted) cost of acquisition and the fair market value of the shares received based on the option is taxed at the progressive income tax rate. In contrast, transferable share options are taxed at the time of the grant as they are considered an asset for tax purposes.

After a broad reform of the taxation of investment income, income from shares typically triggers a 25 per cent tax for individuals resident in Austria, both for capital gains and dividends. Former models that granted shares to the management relied on an exemption for capital gains if the percentage of the investor’s (weighted) shareholding in the Austrian com-pany was below 1 per cent and held for more than one year, but this exemp-tion is no longer available following said reform. In the case of non-resident individuals, capital gains are taxable at a rate of 25 per cent if the percent-age of the investor’s (weighted) shareholding in the Austrian company amounts to at least 1 per cent during the last five years. Double taxation treaties, however, usually restrict Austria’s right to tax such capital gains (article 13, paragraph 5 of the OECD Model Tax Convention on Income and on Capital), whereas dividends are subject to withholding tax at a rate of 25 per cent (which is usually reduced by double tax treaty).

Profit-participation rights typically grant a right to receive a share of the profit of the company, and sometimes also to liquidation proceeds. Depending on the rights and obligations attached to such profit partici-pations rights (which unlike shares never carry voting rights), the funds given to the company by the subscriber either qualify as equity or as debt. Ongoing income will accordingly be taxed like income from dividends or interest, as the case may be. Regarding the exit, profit-participation rights generally give more room for a tax-optimised structuring than share options. The issue of profit participation rights will usually trigger capital duty at the rate of 1 per cent.



Going-private and private equity transactions generally involve senior debt and, particularly for larger transactions, subordinated mezzanine debt. Senior bank debt is typically provided by one or more commercial banks, and syndicated to other financial institutions and investors, in the form of a term loan (to finance the acquisition and the costs of the acquisition) and a working capital facility (to fund the working capital requirements of the target). The term loan is sometimes divided into ‘alphabet loans’: a term

loan ‘A’ repayable in annual instalments and a term loan ‘B’ repayable by a single bullet repayment (that is, a lump sum payment for the entire loan amount at maturity). We have seen high-yield bonds to supplement, or to be used instead of, senior bank debt on pan-European deals but not on Austrian deals. Subordinated debt is typically made up of either a mezza-nine facility (which may also contain warrants to purchase equity). Vendor financing is also sometimes used. To meet certain funds requirements in public-to-private transactions involving a takeover bid (see question 11), bridge financing is sometimes used, under which one or more commer-cial banks agree to provide bridge or interim loans if the long-term debt financing cannot be put in place in time. Where several layers of debt are involved, the private equity firm and financing banks will typically enter into an inter-creditor agreement which regulates the rights of each debt provider to receive payment and enforce security.

A private equity firm may wish to either retain or prepay any existing indebtedness in the potential target. The terms of the existing indebted-ness often require prepayment upon a change of control and typically con-tain limits on additional leverage or dividend stoppers which will require a refinancing or renegotiation of the existing indebtedness. More often, existing indebtedness is prepaid, in which case prepayment notice require-ments, prepayment fees, breakage costs and security releases will have to be considered in the timing of the transaction.

Leveraged going-private and private equity transactions typically involve upstream and side-stream security interests, guarantees and indemnities by the target group which are a concern under Austrian capital maintenance and, where a joint stock company is involved, Austrian finan-cial assistance rules. Transactions in violation of Austrian capital mainte-nance rules are null and void as between the parties as well as any involved third party if it knew or should have known of the violation. In addition, any members of the management or supervisory board who approved such transaction may be subject to liability for damages. Transactions violating Austrian financial assistance rules are not void but may result in liability of any members of the management or supervisory board who approved such transaction. It is widely accepted to include limitation language in the financing documents to prevent liability and to ensure that security inter-ests and guarantees will at least remain valid in part to preserve priority.



As mentioned under question 4, a going-private transaction typically involves a takeover offer. Under the Takeover Act, the private equity firm may only announce a takeover bid if it is certain of the necessary funds available to pay the consideration in full; this must be confirmed in the opinion on the takeover bid made by the private equity firm’s expert. Unless a financing condition has been permitted (which could be the case in a voluntary takeover bid not aimed at control), the expert will usually require a copy of the executed equity commitment letter from the private equity fund and copies of the definitive finance agreements (documenting the facilities described in question 10) together with documents evidenc-ing that all conditions precedent (other than those within the private equity firm’s control) have been satisfied.

Where a purchase agreement with one or more block shareholders is involved in a going-private transaction, the purchase agreement will typically include a condition that the acquisition vehicle will acquire an aggregate 90 per cent of the shares (and thus be able to implement the squeeze-out (see question 4)) for the benefit of the acquisition vehicle. It will also normally include warranties by the vehicle regarding the equity-financing commitment of the private equity firm and, where leverage is used, the third-party debt-financing commitments obtained from the financing banks. In addition, the seller will usually require a copy of the equity commitment letter from the private equity firm and copies of the definitive agreements with the financing banks at signing for assurance that the acquisition vehicle will be able to complete the transaction.



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Under Austrian insolvency law, when an Austrian company has entered into insolvency proceedings, the administrator may challenge certain transactions (eg, transactions that aim to discriminate against other credi-tors, transactions at an undervalue or preferences) entered into by the company prior to the opening of the insolvency proceedings. In leveraged transactions, there is a concern that security interests and guarantees can be set aside on such grounds. For that reason, purchase and debt-financing agreements typically include warranties that no insolvency proceedings are pending and that the target is not insolvent. Where, in a particular transaction, there is a concern regarding insolvency, the private equity firm will typically require additional evidence, such as an officer’s certificate from the chief financial officer or a special audit opinion, or both, for assur-ance that there are no fraudulent conveyance or other bankruptcy issues. In addition, actions taken with the intention to deprive other creditors may constitute a criminal offence.

Another concern related to leveraged transactions is personal civil or even criminal liability of members of the management board or supervi-sory board, or both, who approved the granting of upstream or side-stream security interests, guarantees or indemnities as these may constitute a vio-lation of Austrian capital maintenance or financial assistance (see question 10).



Shareholders’ agreements for a minority investment or a club deal involv-ing investments made by two or more private equity firms will typically include provisions dealing with the following matters:• composition of management board and supervisory board (if any);• rights to nominate members or observers, or both, to boards (if any);• veto rights requiring the prior consent of the investor or the investor

director (or the shareholders’ meeting or the supervisory board with qualified majority);

• anti-dilution provisions (allowing the private equity fund to subscribe for nominal value in case any future round of investment is completed at a lower valuation);

• liquidation preference (preferential treatment of the private equity fund upon certain exits);

• exit rights (right of the private equity fund to request initiation of a trade sale or an IPO process);

• a prohibition on selling for a certain minimum period of time (which may apply to all or only some of the shareholders, for example, the founders only, and may differ in length from shareholder to share-holder (lock-in)) and rights of first refusal, drag-along, tag-along and similar rights;

• requirements for management and annual accounts, business plan and budget;

• rights of access to information and management upon request; and• covenants not to compete and not to solicit customers, suppliers and

employees.

Statutory protection for minority shareholders differs. For corporations, minority shareholder protection includes information rights, rights to call a shareholders’ assembly, minimum voting requirements for major meas-ures (eg, corporate restructurings, changes of purpose, changes to govern-ing documents, dealings involving substantially all of the business or assets and squeeze-out transactions). Some of these protections are mandatory, others may only be adjusted to the benefit of the minority shareholders and others can be amended without restriction.



The acquisition of a controlling interest in a private company is not subject to any specific requirements other than as stated in question 18. In contrast, the acquisition of a controlling interest in a public company is subject to the Takeover Act which requires notification of the acquisition to the Takeover Commission without delay and triggers a mandatory takeover bid for the remaining shares that must be launched within 20 trading days and is sub-ject to, among other things, minimum pricing requirements. The consid-eration must:• not be lower than the highest price agreed or paid in the 12-month

period before the announcement of the takeover bid; and• be at least equal the average quoted share price (weighted according

to the trading volumes) in the six-month period before the day on which the intention to launch the takeover bid was announced by the purchaser).

The Takeover Act captures direct controlling interests (ie, where the bid-der directly holds more than 30 per cent in a public company) and indirect controlling interests (ie, where the bidder holds a controlling interest in another public company that holds a controlling interest in the target or in a private company (or other entity) controlled by it, whether through shareholding or based on contract, that in turn holds a controlling interest in the target).

In addition, an acquisition of a direct or indirect interest conferring more than 26 per cent but not more than 30 per cent of the voting rights of a public company must be notified to the Austrian Takeover Commission without delay within 20 trading days; the voting rights exceeding 26 per cent are suspended but there is no obligation to launch a mandatory bid for the remaining shares.

15 Exit strategies


A private equity firm will generally seek to retain flexibility in its ability to sell its stake in a portfolio company, which may include having the right to require an initial public offering or a trade sale after a minimum hold-ing period (usually not exceeding five years) and the right to drag along other shareholders in the event of a sale by the private equity firm of all or a significant portion of his shares. Both exit rights and drag-along rights are usually subject to certain restrictions (eg, a pre-emption right or minimum return requirement), which may affect the private equity firm’s ability to sell its stake in the portfolio company.

When private equity sellers sell their stake in a portfolio company, they are usually not prepared to accept substantial continuing liability to purchasers. As a consequence, they do not give business warranties and indemnities and instead just provide warranties on title and capacity. As mentioned in question 6, a purchaser must therefore often rely on its own due diligence and warranties from management, and accept limited recourse, for example, for a purchase price holdback, an escrow amount or the amount insured under warranty and indemnity insurance. The cost of warranty and indemnity insurance is usually part of the purchase price negotiations.

On an IPO, the portfolio company will have to satisfy the listing requirements of the relevant stock exchange. In addition, registration rights agreed in the shareholders’ agreement may limit the percentage the private equity firm can sell into the IPO and lock-up restrictions agreed in the course of the IPO may limit the private equity firm’s ability to sell any shares retained.

Dual track processes are rather uncommon. Last year, a private equity investor considered an IPO in Germany as a response to the rather unat-tractive capital market in Austria. Ultimately, this IPO was cancelled and the portfolio company was sold in an auction process.



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An IPO does not invalidate rights or restrictions contained in a sharehold-ers’ agreement. However, the underwriters will often push the private equity firm to give up any preferred rights prior to an IPO. Also, as a purely practical matter, the parties to the shareholders’ agreement will often not have the required majority to enforce such rights and restrictions following an IPO.

In an IPO, the underwriter will usually expect part of the shares retained by the private equity firm (and other shareholders) to be locked up for a certain period (to avoid downward pressure on the share price). Such lock-up provision may already be included in the shareholders’ agree-ment but this is rather the exception. It is more common to discuss the lock-up (in particular, in which proportion it applies to each shareholder that retains shares and the duration of the lock-up period) at the time of the IPO accounting for the circumstances at the time.



There have only been a handful of completed going-private transactions in recent years, which makes it difficult to determine typical target industries. Generally, hot sectors for private equity firms in 2014 included health care, financial institutions, packaging, retail, education and fintech (financial technology).

Transactions involving a change of control of targets in regulated industries (see question 18) may be subject to advance notice or consent requirements, or both, which may impact timing.



Regulated industriesIn regulated industries (eg, banking, insurance, utilities, gambling, tel-ecoms or aviation) the acquisition of a qualified or a controlling interest is typically subject to advance notification or approval. Sanctions for failure to notify or obtain approval in advance differ and range from monetary penal-ties to ordering a suspension of voting rights, or a partial or total shutdown.

Real estateThe acquisition of ownership and certain other interests in real estate by non-EEA nationals or the acquisition of control over companies owning such interests is subject to notification or approval by the local Real Estate Transfer Commission. What interests are covered and whether notifica-tion or approval is required varies across Austria from state to state. Where the real estate is used for commercial rather than residential purposes approvals are usually granted.

Foreign Trade ActThe acquisition of an interest of 25 per cent or more or a controlling inter-est in an Austrian business involved in defence and security services or public order and public services (for instance, hospitals, emergency and rescue services, energy and water supply, telecoms, traffic and universi-ties) by a foreign investor (ie, an investor domiciled outside of the EEA and Switzerland) is subject to advance approval by the Minister of Economic Affairs under the Foreign Trade Act. Within one month of application, the Minister of Economic Affairs must either approve the transaction or initi-ate Phase II investigations. If Phase II investigations are initiated, the deci-sion is due within two months of the application. If no decision is adopted within those time limits, the transaction is ex lege deemed approved. The application for approval must be filed prior to signing. Transactions sub-ject to approval may not be completed pending approval. Failure to obtain approval is subject to imprisonment and criminal penalties. If the foreign investor relies on the exception for EEA and Swiss residents, the Minister of Economic Affairs may initiate ex officio investigations as to whether reli-ance on such exception was made in an abusive manner.



Austrian law does not restrict multiple private equity firms, or a private equity firm and a strategic partner, from participating in a club or group deal. However, a club or group deal may raise additional antitrust concerns, which need to be analysed. In addition, where the transaction involves a public company, the partners in such deal will usually be considered to ‘act in concert’ and as such any shares held or acquired by them will be aggre-gated for determining various thresholds under the Takeover Act and the Austrian Stock Exchange Act.

Update and trends

Generally, the fact the deal volumes have decreased in recent years has shifted the spotlight of funds also to smaller jurisdictions such as Austria. Accordingly, Austria has seen increasing deal activity in recent years, with 2014 being quite an active year and the fourth quarter of 2013 being very busy. Most of that deal activity resulted from distressed situations (eg, Triton acquiring Alpine Energie), restructurings of corporate sellers (often forced by financing banks to sell non-core or non-performing assets), secondary transactions and non-performing loan transactions. With the macroeconomic environment remaining substantially unchanged, we do not expect to see any substantial shift in terms of deal flow source, but we see increased interest of private equity investors in Austrian targets.

Florian P Cvak [email protected] Clemens Philipp Schindler [email protected]

Tuchlauben 131010 ViennaAustria

Tel: +43 1 512 26 13 0Fax: +43 1 512 26 13 999www.schindlerandpartners.com



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As a practical matter, each partner in a club or group deal may have different objectives (eg, a private equity firm usually has a different invest-ments horizon from the strategic partner and may have a different horizon from another private equity fund) or target rates of return and structuring requirements which must be accounted for in the structuring of the trans-action and the shareholders’ agreement and ancillary documentation (eg, by introducing a special exit right or a liquidation preference for the private equity firm or a buyout option or special governance rights for the strate-gic partner where the strategic partner shall have control over the business and the private equity firm holds a purely financial interest in the portfolio company).



Generally, Austrian sellers were usually successful in resisting closing conditions other than in relation to antitrust clearance or other regula-tory approvals, material third-party consents and completion of agreed pre-closing restructurings. Sometimes material adverse change conditions have been accepted where required by a private equity purchaser to mirror a material adverse change provision in the financing documents in a lever-aged transaction or where limited to adverse changes to the business (and not the economy or financial markets as a whole). Bring-down conditions for warranties or pre-completion covenants were the exception.

BRAZIL Campos, Fialho, Canabrava, Borja, Andrade, Salles Advogados


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BrazilAlice Cotta Dourado and Clara Gazzinelli CruzCampos, Fialho, Canabrava, Borja, Andrade, Salles Advogados



Private equity transactions in Brazil range from seed funding to invest-ments in public companies, performed through equity or debt financing, whether leveraged or not.

Currently, the main private equity transactions in the Brazilian mar-ket involve the acquisition by private equity funds of common or preferred shares in closely held companies, made either as cash-out or cash-in trans-actions, or a combination of both. Investments in growing stage companies are more common than early stage financing, and private equity sponsors usually aim to acquire minority shareholdings.

Despite the predominance of investments in private companies, pri-vate investments in public equity (PIPE) are becoming more common, although going-private transactions remain incipient.

Transactions involving leverage, such as leveraged buyouts (LBO) and bridge loans, are not typical. This appears to be by virtue, on one hand, of the absence of a leverage and indebtedness culture and, on the other, of the high interest rates charged by commercial banks. Nevertheless, LBO transactions are becoming more frequent, especially for private equity funds with access to international credit.

Brazilian private equity transactions are often performed by private equity investment funds (FIPs), emerging companies investment funds (FMIEEs) and limited partnerships. FIPs and FMIEEs are investment vehi-cles regulated by the Brazilian Stock and Exchange Commission (CVM) with advantageous taxation regimes. Limited partnerships are usually incorporated abroad, mainly in the United States, and perform their invest-ments directly or indirectly in the target company.



The Brazilian Corporate Law provides for a series of mandatory corporate governance rules, which must be adhered to by all corporations, as follows:• the officers of corporations must be resident in Brazil;• financial statements must be published annually;• amendments to by-laws must be approved by a qualified quorum of

shareholders;• publicly held companies must have a board of directors, comprised of

at least three directors; and• publicly held companies shall grant tag-along rights to all voting

shareholders.

CVM regulations, in turn, require that the private companies receiving FIP investments shall comply with the following corporate governance rules:• a prohibition on the issue and trading of ‘profit participation shares’;• a one-year mandate for all members of the board of directors;

• disclosure of all contracts executed with related parties, shareholders’ agreements and share and securities option programmes;

• resolution of corporate conflicts through arbitration;• adherence to the stock exchange’s special levels of corporate govern-

ance in the event of an IPO; and• an annual audit of its financial statements.

Apart from those mandatory corporate governance rules, private equity investors often seek to enhance the corporate governance of the invested company, especially in closely held companies. Governance rules are usu-ally introduced through amendments to the by-laws or by the execution of shareholders’ agreements. Such voluntary improvement of corporate gov-ernance may protect investors, increase funding capacity and prepare the company for a future IPO.

In regard to the differences between closely held and publicly held companies, it is noteworthy that the latter is subject to a number of dif-ferent corporate law provisions and also to the CVM regulations, which impose more rigorous corporate governance rules. Furthermore, the São Paulo Stock Exchange (BM&FBovespa) establishes four special listing segments, each of them with a level of corporate governance that shall be adopted by the public company. Adherence to those listing segments is vol-untary, but is seen very favourably by investors.

In conclusion, as discussed above, if a company remains or becomes public following a private equity transaction, it must comply with the applicable Corporate Law, CVM and BM&FBovespa corporate govern-ance rules. In going-private transactions, on the other hand, the company becomes exempted from complying with the above-mentioned rules, except for the Corporate Law.



Boards of directors do not have a major influence in the decision-making process of going-private or private equity transactions. This relative lack of power is due mainly to the shortage of shareholding dispersion in the Brazilian market, which essentially leaves to the shareholders themselves the power to approve most of the material transactions. Nevertheless, directors must act in the best interest of the company and provide appropri-ate information to enable the shareholders to make a conscious decision.

A going-private transaction generally requires a tender offer for delist-ing, which can be made by the controlling shareholder or by the company. If made by the company, the board of directors shall submit the tender offer for the approval of the shareholders.

In those cases in which the board of directors plays a significant role, such as in transactions involving corporate reorganisation, special commit-tees of independent directors may be used in order to negotiate the trans-action and submit its recommendations to the board of directors. Although

Campos, Fialho, Canabrava, Borja, Andrade, Salles Advogados BRAZIL


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this is not a mandatory rule, it stands as good corporate governance prac-tice as it helps to preserve the fiduciary duties of the board. CVM Guidance No. 35 works as a high-level guide on the main characteristics that a special committee may have, although it is not related to private equity transac-tions. Further, BM&FBovespa and other market players had recently cre-ated the Committee on Mergers and Acquisitions (CAF), an independent committee that oversees public offers and corporate reorganisations in order to ensure that they treat shareholders equally. The adherence of pub-lic companies to the CAF is voluntary and it may complement the role of an internal committee.

In private equity transactions, the board of directors shall carry out activities while taking the company’s interests into account, which includes assuring due diligence for the purposes of disclosure of confi-dential information to prospective private equity investors. In the event of a hostile tender offer, CVM rule No. 361/02 establishes that the board of directors may express their agreement or dissent with the offer, addressing all aspects that are relevant to the decision of the investors (especially in relation to the price offered) and informing on any relevant changes in the financial situation of the company.

The members of the board of directors shall not participate in any transaction negotiations in which they have an interest that could poten-tially lead to a conflict with their duties as directors of the company. If this requirement is not fulfilled, the transaction may be nullified.

4 Disclosure issues


Going-private transactions necessarily involve a tender offer or the con-sent of all shareholders to the delisting. A tender offer triggers disclosure requirements, which include, inter alia, the publication of information about the offeror (for example, information about its purpose and activi-ties), detailed information on contracts or any other legal acts related to the acquisition of securities to which the offeror is a party, and information about the valuation of the securities.

Other private equity transactions have heightened disclosure issues only when involving a public company. In this case, the management shall disclose any material events that may have a relevant impact to the market and shareholders. A private equity transaction by itself is generally consid-ered to be a material event. The disclosure process encompasses the publi-cation of information about the transaction on newspapers and notification to the CVM and the stock exchange. Before the disclosure, the company, managers, controlling shareholders and related persons who have knowl-edge of the transaction information are prohibited from negotiating the company’s securities.



A variety of factors may influence timing considerations. In any event, from the execution of the memorandum of understandings to the closing, the average term of an ordinary private equity transaction ranges from 45–90 days. The transaction may take longer depending on its complex-ity, which increases if it involves fundraising, more than one private equity sponsor, or both. Furthermore, it should be noted that some activities in Brazil are subject to specific regulatory schemes that require completion of several mandatory steps before governmental bodies (see question 17). Such steps may sometimes cause delays in transactions.

In any event, due diligence is often the main factor in determining the length of the transaction, usually taking 15–60 days to complete. The amount of time for the completion of a due diligence process is also sub-stantially influenced by a number of factors, notably the size of the target company, its industry, the availability of information on said company and the level of detail required for the due diligence report.

As a general rule, in going-private transactions the company or the controlling shareholder shall place a tender offer. Tenders offers are extensively regulated by the CVM and they must comply with several pro-cedures, such as publication of the tender offer notice and opening of an auction after a certain term. Those requirements may extend the length of the going-private transaction for up to 180 days.



Pursuant to CVM Rule No. 361, a going-private transaction triggers a man-datory offer to be made by the company or its controlling shareholder for all the target’s outstanding shares. This offer shall be registered with the CVM and shall include the price the company is willing to pay for the acquisition of its shares based on an official valuation, which shall be made available to the CVM and the shareholders. The shares will be traded on an auction to be conducted on the stock exchange or over-the-counter market.

Once the offer is registered with the CVM, the shareholders need to register with the company in order to participate in the auction. However, the auction will only go through if the going-private transaction is approved by two-thirds of the shareholders who had previously registered with the company to take part in the auction. Therefore, only registered share-holders can challenge the going-private transaction. If the transaction is approved, the shareholders can decide whether or not to sell their shares in the auction, but in any case the company will become a privately held company. If the remaining tradable shares represent less than 5 per cent of the outstanding shares of the company after the auction, CVM Rule No. 361 authorises the compulsory redemption of such shares. Finally, it is important to highlight that, after the auction, shareholders representing 10 per cent of the outstanding shares can initiate the process to challenge the price per share paid by the company or the controlling shareholder.



Usually, a private equity purchase agreement has all the typical representa-tions, warranties and indemnification provisions of an ordinary purchase agreement, which, of course, must be adapted to the target company par-ticularities and its business activities. Nevertheless, investment horizons are usually subject to a fixed term. Thus, special attention is typically given to exit clauses and those relating to the management and corporate gov-ernance, which are often inserted in ancillary agreements, such as invest-ment commitments and shareholders’ agreements.

Those ancillary agreements’ provisions include, among others, liqui-dation preference rights, tag-along, drag-along, anti-dilution provisions, veto powers and the right to appoint management members.

Debt-financed transactions remain uncommon and there is no estab-lished trend in relation to purchase agreements’ provisions related to financing. Finally, private equity purchase agreements commonly include an arbitration clause in order to settle more efficiently all disputes and con-troversies that may arise from the transaction.



As discussed in our comments on previous questions, going-private transactions related to private equity investments are not common in the Brazilian market. That notwithstanding, going-private transactions gener-ally involve the execution of a tender offer for delisting, which can be made by the controlling shareholder or by the company. If made by the company, management assumes a critical role, given that they have the power to formulate the terms of the tender offer and submit it for the approval of shareholders.

In relation to executive compensations, the incipiency of going-pri-vate transactions makes it difficult to determine specific trends and issues. However, in order to retain and motivate management and key employees, detailed employment or other agreements may be signed as a condition to closing. These agreements may contain provisions regarding, among other matters, confidentiality of information, non-compete obligations



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and intellectual property assignment as well as compensation provisions, such as bonuses, participation in profits and stock options.

Discussions regarding management participation following the com-pletion of a going-private transaction are usually held during the negotia-tions of the investment documents.

9 Tax issues


Private equity transactions may be designed to achieve an optimal taxa-tion, which will depend, inter alia, on the structure used for the private equity investments and on the form of financing. Regarding the structure, it is important to note that private equity funds are flow-through entities and, therefore, do not suffer direct taxation on income or capital gains derived from their portfolio investments, but they must withhold the income tax payable by their respective investors at a 15 per cent rate in the event of amortisation or liquidation of the fund’s interests. The 15 per cent rate is only applicable if the fund maintains at least 90 per cent of its port-folio comprised of shares or other securities or titles convertible into shares issued by corporations.

If such criteria are not met, the income tax to be withheld will range from 15–22.5 per cent, varying according to the terms of the investment and of the securities in the portfolio.

With respect to the fund’s foreign investors, tax withholding at a zero per cent rate should apply as long as:• the foreign investor does not hold 40 per cent or more of the fund’s

interests and does not have the right to receive 40 per cent or more of the fund’s income;

• debt instruments do not represent more than 5 per cent of the fund’s portfolio, except for debentures convertible into shares, warranties or public debt securities; and

• the foreign investor is not resident in a country that does not tax income, or that taxes it at rates lower than 20 per cent.

Nevertheless, it should be noted that foreign investors may be subjected to taxation over the amount converted into reais by the time of the remittance of funds to Brazil (IOF). The rate of such taxation is currently set at zero per cent, but the government may raise it at any time, by decree, up to the rate of 25 per cent.

In relation to the form of financing, subject to some restrictions, debt financing allows the portfolio company to deduct from its taxable income the interest paid to the sponsor. By its turn, equity financing also allows the portfolio company to deduct from the company´s taxable income the ‘interest on net equity’ paid to the shareholders, which shall be deemed as part of the dividends.

Concerning executive compensation, the redemption of stock options by the company may generate capital gains that are subject to taxation. In these situations, the holders of such stock options shall pay an income tax on the capital gain at the rate of 15 per cent.

Finally, there is no substantial difference between the tax treatment of acquisitions of shares or assets, nor are there relevant differences concern-ing succession issues.



Going-private transactions are not very common in Brazil. Furthermore, as mentioned in question 1, leveraged transactions are not typical, due mainly to the high interest rates charged by commercial banks. Therefore, it is not currently possible to determine what types of debt are used to finance going-private transactions.

Existing indebtedness may raise thin capitalisation rules’ issues. According to such rules, the interest paid by the target company to a related foreign party shall only be deductible if the loan amount does not exceed

two times the net equity of the target company proportionally owned by such party. Thus, existing indebtedness reduces the target company’s net equity and, therefore, may prevent the target company to deduct inter-est paid to the sponsors. Debt-financed private equity transactions are incipient and a typical transaction involves mezzanine debt, with credi-tors usually having the right to convert their credit into shares of the target company.



Even though going-private transactions are unusual in Brazil, they gener-ally require a tender offer for delisting, which can be made either by the controlling shareholder or by the company. If the tender offer is proposed by the company, the Brazilian Corporate Law limits the acquisition of shares to the amount of profits and free reserves. In this situation, the debt and equity financing is limited to those amounts.

When the tender offer is executed by the controlling shareholder, there are no specific restrictions to debt or equity financing and there is no established trend in relation to the financing provisions.



Highly leveraged transactions are not common in Brazil. Thus, ‘fraudulent conveyance’ or other bankruptcy issues involving leverage raise are not typical. Nevertheless, if the target company is insolvent and this situation is previously known, the transaction (including going-private transactions) may be considered a creditors’ fraud and may be nullified. Moreover, if there is any outstanding lawsuit that may lead the company to insolvency, the transaction may also be considered fraudulent.

To prevent this situation, legal and accounting due diligence on the target company are strongly recommended, as well as a verification of the controlling shareholders’ solvency.



Article 118 of the Brazilian Corporate Law provides for specific rules on shareholders’ agreements, determining that the shareholders’ agreement shall be filed at the company headquarters and registered on the share reg-istry book and on the shares’ certificates in order to become both binding on the shareholders and enforceable with regard to third parties.

In minority investments, the main provisions set forth in the portfolio company’s shareholders’ agreement are:• tag-along rights;• transfer restrictions, such as ‘lock-up provisions’ for purposes of pro-

hibiting certain shareholders to sell their shares in the company during a determined period, ‘right of first refusal’ provisions, or both;

• drag-along rights to force the sale of shares of certain shareholders;• anti-dilution provisions;• pre-emptive rights to participate in future financing rounds;• the right to appoint executive officers, members of the board of direc-

tors and members of the audit committee;• special quorum or veto powers over strategic decisions made in share-

holders’ meetings, such as amendments to the by-laws, profit distribu-tion and certain equity or debt issuances;

• exit rights, such as a put option against the company;• registration rights;• the right to have access to company and management information;

and• dispute resolution mechanisms.



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In cases where more than one private equity firm invests in a company, the aforementioned provisions need to be carefully arranged in order to avoid potential conflicts between sponsors.

Apart from those shareholder’s agreement provisions, Corporate Law also establishes a series of legal protections for minority shareholders, such as:• the right to request copies of corporate records and books – subject to

certain conditions;• the right to call a shareholders’ meeting under the following situations:

• if the company fails to call a meeting for more than 60 days when required by its by-laws or by the law;

• if the company fails to call a meeting for more than eight days after being requested to do so by the shareholders – a right granted to those shareholders holding at least 5 per cent of the share capital; and

• if the company fails to call a meeting for more than eight days after being requested to do so in order to vote for the installation of the audit committee – a right granted to those shareholders holding at least 5 per cent of the voting shares or 5 per cent of the non-voting shares;

• the right to solicit shareholder addresses – a right granted to those shareholders holding at least 0.5 per cent of the share capital and sub-ject to certain conditions;

• special quorum of more than 50 per cent of all voting shares for the approval of:• modification of the rights granted to the preferred shares;• merger of the company;• modification of the company’s purpose; and• liquidation of the company;

• special quorums in order to enable the election of members of the board of directors and the audit committee by minority shareholders, under the following:• shareholders holding at least 10 per cent of the voting shares may

require a ‘multiple vote’ for the election of the board of directors, through which each share will entitle the shareholder to a number of votes equal to the number of the members of the board of direc-tors; and

• holders of preferred shares with restricted or no voting rights are entitled to elect one member of the audit committee and the minority shareholders together accounting to 10 per cent of the voting shares shall have the right to elect another member;

• the right to participate in dividends and other distributions;• tag along: the direct or indirect transfer of control of a public corpo-

ration can only be performed under the condition that the purchaser agrees to make a public offer to acquire all remaining voting shares. The price for such shares shall be at least 80 per cent of the price paid for the voting shares of the controlling block;

• pre-emptive rights; and• the right to withdraw from the company in certain situations.



As mentioned in question 13, the Corporate Law provides that the transfer of control of a public corporation can only be performed if the purchaser agrees to make a public offer for all the voting shares owned by the non-controlling shareholders, for a price equivalent to at least 80 per cent of the price paid for each share acquired from the controlling shareholders.

Further, BM&FBovespa also establishes specific tag-along rights for those public companies that have adhered to its special listing segments, as follows:• Bovespa Mais grants 100 per cent of the price paid for each share

acquired from the controlling shareholders to all shareholders;• Level 1 of Corporate Governance grants 80 per cent of the price paid

for each share acquired from the controlling shareholders to holders of common shares;

• Level 2 of Corporate Governance grants 100 per cent of the price paid for each share acquired from the controlling shareholders to holders of common or preferred shares; and

• New Market grants 100 per cent of the price paid for each share acquired from the controlling shareholders to all shareholders.

Concerning private companies, the acquisition of the control is not subject to any legal restrictions. Nevertheless, it is important to check the exist-ence of any shareholders’ agreements granting tag-along rights or the right of first refusal on the assignment of shares, or both. Any assignment of shares not complying with the shareholders’ agreement duly filed with the company shall be considered revocable.

Furthermore, transactions that might result in market concentration or impair competitive practices are to be analysed and approved by the Brazilian Administrative Council on Economic Defence (CADE). CADE’s analysis may encompasses not only the circumstances involving the direct parties of the deal, but also the role played by the fund, by the funds’ man-ager and by controlling investors.

15 Exit strategies


As a general rule, there are no legal limitations on the ability of a private equity firm to sell its stake in a portfolio company. However, some limita-tions might be applicable in specific situations. For instance, the by-laws of the private equity fund may require the approval of the fund’s interest hold-ers to proceed with the sale as an agreement executed with the sharehold-ers of the portfolio company may establish tag along rights or right of first refusal. Further, to conduct an IPO the approval of the other shareholders of the portfolio company is often necessary.

Usually, private equity firms execute shareholders’ agreements to pro-tect their interests and are not subject to any other shareholder’s will on the sale of its stake in a portfolio company or in an IPO, especially if the private equity firm is a minority shareholder.

Another relevant issue refers to market limitations that may affect the ability to sell a stake in the portfolio company or perform an IPO. As the Brazilian market is still under development, more sophisticated options, such as the sale to other private equity firms or an IPO of small size compa-nies, are not common.

In connection with post-closing recourses, the most used are indemni-fication and the escrow. Indemnification can be paid in cash or by assign-ment of shares of a portfolio company, or both. The latter is typically used when the private equity firm retains some interest in the company. Although not so popular, insurance is also an option. Sales of portfolio companies between private equity firms are not so frequent as to create a trend on post-closing recourses. Nonetheless, we must highlight that the use of indemnifications in this case may be compromised due to difficul-ties in requiring additional contributions from the fund’s interest holders for such purpose.



All legally established provisions set out in a shareholders’ agreement can survive an IPO and bind the parties that signed such an agreement. Nevertheless, it should be noted that the Corporate Law regulates the shareholders’ agreement and determines that they can only prescribe the purchase and sale of shares, pre-emptive rights and exercise of voting rights or the controlling power. See question 13 for the rights and restric-tions typically included in a shareholders’ agreement.



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Commonly, private equity sponsors dispose of their stock in a portfolio company following its IPO through public follow-ons or through a private sale of their stocks, or both, mostly to the controlling shareholders. In rela-tion to the sales of stock after an IPO, public follow-on offers must comply with the same rules and proceedings of an IPO, including the registration before the CVM and the preparation of a prospectus. An exception is made for ‘well-known seasoned issuers’, which are the companies:• whose shares have been traded on the stock exchange for at least three

years;• that have fulfilled all obligations with the CVM in the past 12 months;

and• the market value of which is equal or superior to 5 billion reais.

Those companies are subject to a simplified registration proceeding. Private sales are not subjected to previous registration before the CVM.

Concerning lock up restrictions, the controlling shareholders of com-panies listed in all BM&FBovespa’s special listing segments shall not trade their interests in the company for six months after the IPO and in the next six months they cannot offer or sell more than 40 per cent of their inter-est in the company. This last restriction is not applicable at Bovespa Mais level. That notwithstanding, other lock-up provisions can be contractually agreed by the shareholders and are usually required by underwriters.



In the period between 2011 and 2014, according to a survey carried out by PwC and INSEAD, private equity and venture capital deals in Brazil were distributed as follows:• 20 per cent in the consumer and retail market;• 17 per cent in business services;• 15 per cent in industrials;• 13 per cent in technology, media and communications;• 9.0 per cent in food and agriculture;• 7.0 per cent in education;• 5.0 per cent in energy and utilities;• 4.0 per cent in health care;• 4.0 per cent in clean technology;• 3.0 per cent in materials;• 3.0 per cent in real estate.

Even though the extremely positive outlook expected for the Brazilian Private Equity industry in the past years did not fully materialise, many of the long term growth trends that helped Brazil to be acknowledged as one of the most attractive emerging markets for Private Equity investors are still in place. A special need to update and improve the country’s infrastruc-ture followed by governmental incentives may result in more interest for

Private Equity investors in more capital-intensive industries in the future. Although the general sense is that the Brazilian Private Equity market has evolved and consolidated, it still shares many features with other emerging markets – growth capital is still predominant and most deals are still made with minimum leverage. The outlook for the future is still positive, since the recent market cool-down may reflect in good buying opportunities, given that the pipeline for deals is improving, currency is favourable and prices are achieving attractive levels.

In relation to the limits for private equity investments, it should be noted that there are some restrictions on foreign investments, includ-ing those performed by foreign private equity firms, such as restrictions related to domestic airline companies, broadcasting and telecommunica-tion sectors, public transportation services and health and care services. Additionally, there are some highly regulated sectors, such as the financial and educational ones, in which investments must comply with several obli-gations and in some cases depend on governmental authorisations.



Tax issues are usually the most relevant matter regarding cross-border transactions. As mentioned in question 9, the definition of the transaction structure is determinant for the avoidance of excessive taxation or ‘dry’ tax charges. To achieve tax-efficiency, it is highly recommended that the spon-sor perform a careful analysis of the most suitable market practices and the applicable regulations at the federal, state and municipal levels.

Remittance of funds to Brazil and return of profits issues shall also be carefully analysed, given that the related regulation is commonly modi-fied. It should also be noted that several industry sectors are subject to spe-cific regulatory schemes that restrict foreign investments (see question 17).

Furthermore, depending on certain conditions of the target company business, it is possible to obtain funding for the transaction at very compet-itive rates from The Brazilian Development Bank (BNDES). Such funding is easier to obtain in relation to venture capital investments. It is notewor-thy that almost half of the capital committed to private equity investments in Brazil comes from foreign investors, and that Brazil is one of the coun-tries with the larger amount of foreign direct investments. In this sense, the BNDES has already informed that it will facilitate the financing for foreign investors, especially for those focused on infrastructure projects.



The core considerations regarding situations in which more than one spon-sor is part of a private equity transaction are related to the alignment of interests, rights, obligations and protection mechanisms between the par-ties. To align such elements, it is important to design appropriate and suit-able association structures for the transaction (for example, incorporation of an investment vehicle) to enable cooperation between the sponsoring entities. In this context, from an organisational and effectiveness perspec-tive, it is also convenient that the sponsors elect a leading firm to represent them before the company.

Despite the foregoing, it is advisable and usual to include several con-tractual provisions in the shareholders’ agreement in order to preserve a healthy and friendly environment for the investments. The most common contractual provisions are related to timing considerations regarding the exit of the sponsors, veto powers or a special quorum to approve certain strategic matters, tag-along rights, lock-up provisions, drag-along rights and right to appoint management members. All these provisions aim at avoiding conflicts of interest between the sponsors that could result in harmful consequences for the transaction.

Update and trends

The Brazilian Antitrust Authority recently issued Resolution 8/2014 which changes the rules defining an economic group involving a PE investment fund. According to the new rules, the fund’s manager is not considered as part of the fund’s economic group and only investors who hold, directly or indirectly, more than 50 per cent of the fund’s interests are included in its group.

These are important developments for private equity transactions in Brazil, since the economic group turnover is one of the thresholds for the submission of a transaction to the Brazilian Antitrust review and the new regulation will most likely restrict the number of transactions which are submitted to such review, saving time and money for the parties involved in the deals.



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The main issues that influence the certainty of closing are related to the extent of price adjustments after due diligence, requirement of govern-mental or creditors’ consent to conclude the transaction, changes in the way the business is conducted and proceedings or investigations that may

prevent the consummation of the transaction. Unlike in other countries, financing issues in Brazil do not usually affect the closing.

Typically, price adjustment issues are resolved through the prior establishment of an adjustment method. As to the other above-mentioned matters, the solution usually lies in negotiating closing conditions. If such conditions are not fulfilled, the costs and expenses incurred by the parties, such as due diligence costs, are usually supported by the party in default. Notwithstanding that, specific termination fees are not common.

Alice Cotta Dourado [email protected] Clara Gazzinelli de Almeida Cruz [email protected]

Rua Iguatemi, No. 192, 13th floorConjuntos 131-133, Itaim BibiSão Paulo 01451 010Brazil

Tel: +55 11 4064 7001Fax: +55 11 4064 [email protected]

CANADA Gowling Lafleur Henderson LLP


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CanadaHarold Chataway, Kathleen Ritchie, Daniel Lacelle and Ian MacdonaldGowling Lafleur Henderson LLP



The most common types of private equity transactions include leveraged buyouts, often in conjunction with the participation of management. These transactions could be structured as a takeover bid, court-approved plan of arrangement, amalgamation or asset sale. Depending on the cir-cumstances, private equity firms will also occasionally take minority posi-tions in companies or invest in the debt of a company with a view to taking a larger equity stake under conditions that are favourable to the private equity firm.

Once invested, private equity firms will often engage in a follow-on investment to facilitate further growth of the business or an acquisition, or to improve a weakening balance sheet. Private equity firms will also often recapitalise the business after a period of time by releveraging the com-pany and taking out invested funds. These payments, once made to the private equity firm, can be paid out to the private equity firm’s investors, deployed by the private equity firm in other transactions or redirected to other portfolio companies.

A private equity investment can take the form of various structures depending on the stage and sector of the company, the size and scope of the transaction and general market conditions at the time an invest-ment is made. In particular, earlier-stage investments may be structured as straight equity investments or as convertible preferred shares, or both, or as debt investments, whereas later stage investments are more likely to take the form of a straight common share investment. Acquisitions by private equity firms are often structured as cash transactions where a por-tion of the purchase price can be paid on closing with the balance of the purchase price to be held in escrow or in the form of a vendor take-back note whereby payment is made to the seller on the satisfaction of certain financial performance milestones (following a negotiated indemnification period) or pursuant to a deferred payment schedule.

Non-resident private equity investors may structure their Canadian investments and acquisitions through a Canadian limited partnership organised under a Canadian provincial or territorial statute or through a corporation incorporated under the Canadian federal statute or under a Canadian provincial or territorial statute depending on the corporate and taxation needs of the investor.



Acquisitions involving public companies are subject to securities laws. In Canada, securities regulation falls within provincial rather than federal jurisdiction, though many of the rules are harmonised across the jurisdic-tions. The applicable laws will depend upon the jurisdictions of the target company and its shareholders.

A private equity firm will generally prefer to be the majority share-holder so that it retains decision-making power with respect to the target

company. As a result, corporate governance of the target company will often change considerably upon completion of a private equity transaction. Change will be particularly significant in the case of a going-private trans-action because public securities laws will generally no longer be applica-ble, although the applicable corporate laws will continue to be operative. If there are minority shareholders (such as management) following the trans-action, a shareholders’ agreement will often dictate the manner in which the target company is governed and any veto rights given to minority inves-tors will be a matter of negotiation.

The advantages of a going-private transaction involving a private equity firm often include reduced administration costs, greater speed of decision-making and the potential for decisions to be made with longer-term objectives in mind rather than shorter term quarter-by-quarter financial objectives (which are often of considerable concern to a public company). If the company in which the private equity firm has invested is a public company, its governance will be regulated to a large extent by appli-cable corporate and securities laws.



The board of directors of a private or public company has a fiduciary duty to act in the best interests of the company, taking into account the com-peting interests of the various stakeholders. This duty is often misunder-stood by directors, and the public in general, who sometimes believe that the board’s duty is to act in the best interests of the shareholders only (and to focus exclusively on maximising shareholder value), for example, in the context of a change of control transaction. This misunderstanding can lead to problems, particularly when there are separate classes of shares and the shareholders have competing interests. In addition, there are other stake-holders (such as preferred shareholders and bondholders) whose interests must be considered by a board of directors in the context of a change of control transaction. As such, a board is at risk if it acts under the premise that it must act in the best interests of the shareholders rather than the com-pany as a whole. Since private equity investors usually occupy board seats of their portfolio companies, they run the risk of breaching their duties as directors if they act in a manner that is obviously designed to benefit their own shareholdings at the expense of the company as a whole.

In general, a Canadian court is unlikely to challenge a business deci-sion of a board of directors, made free of conflict on an informed basis, where there is some reasonable justification for the decision (known as the business judgment rule). Accordingly, in the event that insiders such as members of the board, senior management or significant shareholders have an interest in an acquisition, a public company will often form a spe-cial committee of independent directors which is advised by independent counsel and other third party experts, such as financial advisers. Under Canadian securities laws, a special committee of independent directors is required to be established in the case of an insider bid (for instance, where the private equity firm making a takeover bid is already an insider of the

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target company or makes the bid acting jointly with insiders, for instance, with senior management of the target company).

4 Disclosure issues


If a private equity firm, together with any person acting jointly or in concert with it, acquires beneficial ownership of, or control or direction over, voting or equity securities of any class of securities of the target company which, when added to the private equity firm’s existing securities of that class (including certain convertible securities), would constitute 10 per cent or more of the securities of that class, the private equity firm must issue a press release and file an early warning report. This threshold is reduced to 5 per cent for such acquisitions while a formal takeover bid is outstanding. The same reporting requirement applies for each additional acquisition of beneficial ownership of, or control or direction over, 2 per cent or more of the securities of that class. In each case, further acquisitions of the securi-ties of that class by the private equity firm are prohibited from the time of making the reportable acquisition until the expiry of one business day after the required disclosure is made.

A private equity firm that becomes an insider by virtue of having ben-eficial ownership of, or control or direction over, more than 10 per cent of the voting shares of a reporting issuer is subject to insider reporting requirements.

Private equity firms looking to make a takeover bid as regards a report-ing issuer, unless exempt, are required to prepare, file and send to share-holders a takeover bid circular that must be in the form prescribed by applicable Canadian securities law. The takeover bid also requires that the target’s directors prepare a directors circular recommending the accept-ance or rejection of the takeover bid or advising as to why it is unable to make a recommendation. In a friendly deal, the takeover bid circular and directors circular are typically coordinated to be mailed together to share-holders. Transactions structured as plans of arrangement and amalgama-tions, which typically require shareholder approval, generally require that a management information circular be prepared in the form prescribed by applicable Canadian corporate and securities law and sent to the share-holders of the respective parties.



Canadian securities laws establish the procedural requirements for a takeover bid. A takeover bid is required to remain open for a minimum of 35 days. Unless the private equity firm is seeking to acquire a controlling position of the target only, the minimum tender condition is usually 66.6 per cent. Once this threshold is achieved, the bidder will be able to com-plete a second-stage squeeze-out transaction. Once the minimum tender condition is met, the bidder typically issues a press release advising that the condition has been satisfied and that it will proceed with a squeeze-out transaction. As a result, often shares not yet deposited are tendered giving the bidder 90 per cent or more of the subject shares.

Under corporate law, if the bidder acquires not less than 90 per cent of the subject shares (excluding shares of the class owned by the bidder or its associates or affiliates at the date of the bid) within 120 days of the date of the bid, a procedure is available for the compulsory acquisition of the remaining untendered shares.

In the case of an acquisition by plan of arrangement, amalgamation or sale of assets requiring shareholder approval, the minimum threshold for shareholder approval is typically 66.6 per cent (and depending on the transaction, a ‘majority of the minority’). Shareholder-approved transac-tions are one-step acquisition transactions not requiring a second-stage squeeze-out transaction. As shareholder approval is required, a manage-ment information circular, in prescribed form, must be prepared and mailed to shareholders of the target. Corporate law determines the mini-mum period for notice to shareholders of a meeting, which is generally 21 days. Also, for a plan of arrangement, court approval is required.

A takeover bid with a compulsory acquisition of the remaining shares (rather than a second-stage squeeze-out transaction), and a plan of arrangement, can each take approximately 50 to 65 days to complete, from commencement of the takeover bid and calling the shareholders’ meeting,

respectively. A plan of arrangement can be faster to complete than a takeo-ver bid if a second-stage squeeze-out transaction is required in connection with the takeover bid, since this requires a shareholder meeting to be called and held. No securities regulatory review of either transaction is required.

Court-approved plans of arrangement are commonly used for acquisi-tions of public companies because, among other reasons, they require 66.6 per cent approval by shareholders voting at the meeting rather than tender to the takeover bid of 66.6 per cent of all outstanding shares. In addition, a plan of arrangement is a one-step transaction which is more attractive to lenders in a leveraged transaction and more complex tax restructuring may be accomplished.

If a private equity transaction is notifiable under the Competition Act (see question 14), it cannot close until 30 days following submission to the Canadian Competition Bureau of the prescribed information form by each of the parties (unless the Competition Bureau permits closing to occur earlier). The Competition Bureau has the power to issue a supplementary information request within that 30-day period. A supplementary informa-tion request has the effect of extending the period in which the transac-tion cannot close for an additional 30 days following compliance with such request (as determined by the Competition Bureau).

If the transaction is reviewable under the Investment Canada Act (see question 14), the review period is 45 days from the date of submission to Industry Canada of an application for review. The minister of industry has a unilateral right to a 30-day extension. Further extensions can be agreed to by the minister of industry and the acquirer. As a practical matter, the acquirer must agree to further extensions if it wishes to complete the trans-action, as the right to close requires the positive approval of the minister of industry, not just passive expiration of the review period. In addition to any private equity transaction that exceeds the Investment Canada Act review thresholds, the government has the power to review any foreign acquisi-tion that could be injurious to national security, regardless of the size of the transaction. Completion of a national security review could take more than 130 days.

Tax issues can also influence the timing of a private equity transaction. A change of control of a corporation will trigger a year-end for Canadian income tax purposes, which may impact some of the tax accounts of the target company. The target company may lose up to a year of available tax loss carry-forwards as a result of the shortened year-end. Also, complex going-private transactions may, in certain circumstances, take more time to complete if they require the issuance of an advance tax ruling from the Canada Revenue Agency.

Finally, accessibility to financing by the private equity firm can often affect timing. In Canada, a takeover bid made for a public company cannot be conditioned upon financing, and securing sources of financing can often be a time-consuming process. For this and other reasons, a private equity firm will occasionally finance the whole transaction using its own resources with a view to recapitalising the company once it has been acquired. This approach, however, exposes the private equity firm to subsequent refinanc-ing risk that will potentially impact its forecasted internal rate of return and tie up firm capital that the private equity firm wishes or needs to deploy elsewhere. There are no legal restrictions on financing for transactions structured as a plan of arrangement, amalgamation or asset sale, although, practically, a target board is unlikely to accept any such transaction in cases where financing is not well addressed.



Under corporate law, depending on how a going-private transaction is structured and the applicable corporate law statute, the shareholders may have a statutory right to dissent to such transaction such that, when the transaction becomes effective, they can be entitled to be paid by the corpo-ration the fair value of the shares in respect of which they dissented. Even if there is no statutory right to dissent, an acquirer may voluntarily offer a dissent right as part of the terms of the transaction – for example, in certain plan of arrangement contexts, to bolster arguments before the court as to fairness of the deal. As a result, dissent rights are typically available in a going-private transaction.



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The mechanics for exercising a dissent right are technical and com-plex and are typically available only to registered shareholders. Failure to comply strictly with the provisions of the applicable corporate law statute and the governing transaction documents may prejudice the availability of the right to dissent. In the past, it was rare for shareholders to pursue their dissent rights, given the technical and complex process which can involve application to a court to fix the fair value for the shares. However, with increasing shareholder activism in Canada, both the threat by share-holders of exercising, and actual exercises by shareholders of, their dissent rights is on the rise.

Acquirers typically address the risks associated with shareholder dis-sent rights by requiring as a condition to the transaction that holders of not greater than a specified percentage of the outstanding shares (for example, 5 per cent) shall have exercised their rights to dissent (and not withdrawn them) by the effective date of the transaction. If shareholders holding shares representing more than the threshold dissent, the acquirer then has the opportunity to consider the matter and either terminate the transaction or waive that condition.



Private equity firms will typically spend more time and energy than a strategic buyer on a purchase transaction. A strategic buyer is already very familiar with the industry and often with the target company itself. In contrast, a private equity firm often will not have the same historical understanding of the business and industry and, for that reason, will focus more energy on due diligence and on the representations, warranties and required disclosure being provided in the purchase agreement. The private equity firm will also typically look to greater management commitment as part of the continuing operation of the business, whereas the strategic buyer will often have its own management team ready to fill the required roles. As a result, the purchase agreement negotiated by the private equity firm will often contain more provisions that tie management more closely into the continuing operations of the business. Otherwise, purchase agree-ments contain similar provisions whether part of a private equity transac-tion or otherwise.



As previously mentioned, management is often a critical component of a private equity firm’s acquisition of a company as the industry may be new to the private equity firm. Further, the private equity firm’s interest in the target company often arises, in part, because of the company’s high qual-ity management team. In addition, the principal shareholder of the target company is often also its principal executive and the private equity firm may be reluctant to fully compensate this executive on closing of the trans-action. For these reasons, private equity firms will often negotiate employ-ment contracts with key management in addition to vendor take-back debt or special equity (or both) or earn-out arrangements. Under these arrange-ments, management will be required to meet or exceed the target financial performance before it is entitled to receive a full payout on its sharehold-ings. In addition, management can often negotiate higher salary, bonus and other compensation with a private equity firm provided management performs in the manner as represented to the private equity firm during the due diligence process.

If the target company is a public company, then additional securi-ties law considerations arise. If management is regarded as a joint actor in making the acquisition or receiving an equity interest in the successor company, then the acquisition may be an insider bid (if a takeover bid) or business combination (if a plan of arrangement or other shareholder-approved transaction) and may be subject to additional requirements, such as a formal valuation, minority approval and enhanced disclosure (unless an exemption is available).

Additionally, compensation packages must be considered in light of securities law restrictions applicable to collateral agreements with share-holders of the target company, in the context of takeover bids, or the pro-vision of collateral benefits, in the context of plans of arrangements and other shareholder-approved transactions.

There are exemptions from these restrictions for certain employment compensation, benefit and severance arrangements depending upon vari-ous factors, such as whether the benefits are offered pursuant to a group plan and will be made available to employees with similar positions in the successor company, whether the benefits relate solely to services as an employee rather than as consideration for the target shares, the value of the benefit and the value of the shareholder’s interest in the target com-pany. For takeover bids, if the proposed arrangement does not fit within the exemption, it is also possible to obtain exemptive relief from the relevant securities regulators if a valid business or financial purpose can be dem-onstrated. In the context of a plan of arrangement or other shareholder-approved transaction, additional requirements regarding enhanced disclosure of the benefits and approval by an independent committee of directors of the target may apply and, if the transaction is regarded as a business combination as a result, minority approval may be required.

9 Tax issues


Various tax implications will impact how a private equity transaction will be structured given the fact that tax efficiency is often of meaningful importance. Should the acquirer be a non-resident of Canada, it will be important to address the tax issues from the standpoint of both tax juris-dictions involved. Canadian tax issues involving non-residents are dis-cussed in question 18.

Generally speaking, interest paid or payable on indebtedness incurred in order to proceed with a private equity transaction will be deductible. In most instances, the acquirer will form a specific corporate entity to acquire the shares of the target company and both companies will then amalgam-ate. This procedure allows for the interest expense incurred in the course of the acquisition to be deductible for income tax purposes by the target company against its income.

Of note is the fact that, in Canada, a share acquisition cannot be re-characterised as an asset transaction. Accordingly, there is no step-up in the tax cost of the assets of a target company acquired by way of a share purchase. Under specific circumstances, it may be possible to increase the tax cost of certain non-depreciable property to its fair market value at the time of acquisition.

As previously discussed, management involvement is often of criti-cal importance in private equity transactions. It is therefore important to design, where possible, a tax-effective compensation plan. Depending on the type of company involved, stock option plans, performance-based plans or deferred share unit plans can be structured to provide a long-term deferral under Canada’s tax regime. Under these types of compensation arrangements, growth must be limited to future gains usually over a pre-defined performance period.



The classic debt-financing structure includes a tranche of senior debt, a tranche of junior mezzanine debt and a tranche of subordinated share-holder debt followed by the various equity components. This debt and equity financing is generally used to repay in full all existing debt within the target company and to pay the shareholders for equity interests held by them in the target company.



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At times, certain existing debt will not be repaid in full and will remain within the target company. Examples would include certain existing unse-cured debt (namely, unsecured shareholder debt that will not be repaid in accordance with the terms of the purchase agreement or unsecured debt that is not contractually required to be repaid upon a change of control) or secured debt used to finance real property, equipment or inventory of the target company in those circumstances when repayment is not required or the security supporting such debt is limited to a specific asset of the target company.

The new senior debt usually consists of a cash flow-based loan in an amount reflected as a multiple of EBITDA, although the senior debt can also be an asset-based loan reflected as a percentage of the company’s inventory and receivables. A portion of the senior debt will usually be revolving in nature to permit the target company to finance periods of high working capital requirements and to repay its loans as working capital is reduced. A portion of the senior debt will also typically be fixed in amount and term with an established schedule of repayments over the life of the loan.

The new junior mezzanine debt can be secured or unsecured. The terms of this debt are often similar to those for the senior debt although the junior mezzanine debt is higher-priced, reflecting the subordinated nature of the debt. Junior mezzanine debt is usually restricted from being repaid prior to the senior debt although it can often be refinanced from the pro-ceeds of a post-acquisition refinancing. Intercreditor arrangements with the holders of the senior debt are typically negotiated to include, among other things, enforcement standstill and restricted payment provisions.

Subordinated shareholder debt is usually unsecured, deeply subordi-nated to the senior and mezzanine debt and typically not permitted to be repaid ahead of the other debt unless certain performance targets are met by the company.

Margin loans are rarely advanced for a variety of reasons. Even if security is taken over the shares that are being financed, lenders have plenty of experience with sudden and sharp deterioration in equity values. Furthermore, the shares may be governed by shareholder agreements and restrictive covenants contained in those agreements and in other docu-mentation. It is often impossible to obtain the concessions necessary from the other shareholders that would make a lender comfortable with this form of primary security.

Unlike other jurisdictions in the world, Canada and its provinces no longer have financial assistance laws that restrict the circumstances under which guarantees and security can be granted to a creditor by a subsidiary or other related person of a borrower. Although there must be considera-tion provided in exchange for the provision of a guarantee or security, that consideration is no longer determined by way of a statutory financial assis-tance formula or calculation.

Structuring the acquisition of a public company as a plan of arrange-ment rather than a takeover bid is attractive when acquisition financing is involved. Since a plan of arrangement is a one-step acquisition transaction, the lenders can acquire security on all of the assets of the target company and its subsidiaries at the time of initial drawdown. In contrast, with a take-over bid, funds must be drawn at the time of initial take-up and payment, with security granted on those purchased shares, but with full security to be taken only on completion of the squeeze-out.



Under Canadian securities laws, a takeover bid must not be subject to a financing condition. In the case of a takeover bid involving cash, the bid-der must make adequate arrangements before the bid is made to ensure that the necessary funds will be available to it to take up and pay for the securities.

Though the financing commitment obtained by the private equity firm to finance the purchase may be subject to conditions, the bidder must reasonably believe the possibility to be remote, that if the conditions of the bid are satisfied or waived, the bidder will be unable to pay for the securities deposited under the bid due to a financing condition not being satisfied. Though a similar requirement does not apply to a plan of arrange-ment or other shareholder-approved transaction, practically speaking,

a target company’s board of directors will likely expect equivalent assur-ances before agreeing to support the transaction.

The bidder should have a binding commitment letter from its bank or other lender prior to commencing the takeover bid. The conditions to financing in that letter should track the financing conditions in the takeo-ver bid circular sent to the target company’s shareholders.



Fraudulent conveyance issues are not typically a significant feature of a pri-vate equity transaction in Canada. However, if a private equity transaction involves the transfer of assets by a company that is insolvent or becomes insolvent, a fraudulent conveyance concern may arise. For example, a transfer of assets by a company at undervalue (meaning consideration conspicuously less than fair market value) may be attacked by a trustee in bankruptcy within certain time frames depending on whether the parties dealt with each other at arm’s length and the intention and insolvency of the transferor.



As mentioned previously, a shareholders’ agreement is often the key agree-ment that determines the governance of a private company. As such, the composition of the board of directors and the procedures for board meet-ings and shareholder meetings are often described in detail. In addition, minority shareholders will often be concerned that the principal share-holder can make decisions that are contrary to their interests or the inter-ests of the company. As a result, consent or veto rights are often negotiated so that some or all of the minority shareholders have the right to consent to, or vote down, a decision by the principal shareholder on certain key mat-ters. Examples of those matters could include the issuance of new shares or the incurrence of additional debt, the amount of capital expenditures that the company is entitled to make and payments made by the company to its shareholders.

Another key provision in a shareholders’ agreement is a general restriction on the shareholders to transfer or encumber their shares in the company, except under certain circumstances such as when a right of first refusal has been given to the existing shareholders. Many other provisions are often contained in a shareholders’ agreement relating to the transfer of shares. For example, a shareholders’ agreement may provide liquidity rights to minority shareholders such as piggy-back and tag-along rights in the event of a proposed sale to a third party. Drag-along rights also assist with liquidity as they can be beneficial to a shareholder looking to sell a control block of shares to a third party who wishes to acquire all of the com-pany’s shares. Shotgun or other forms of buy-sell rights and registration rights are also common features of a shareholders’ agreement designed to address liquidity concerns. Liquidity provisions can also be negotiated to address specific events such as death or disability of a shareholder or ter-mination of an employee shareholder. Although unusual, it is possible for shareholders’ agreements to be negotiated in respect of a public company.

Apart from any specific approval threshold contained in a sharehold-ers’ agreement, most Canadian corporate statutes provide minimum approval thresholds that must be complied with prior to completing cer-tain transactions. For example, amalgamations, plans of arrangements and sales of all or substantially all of a corporation’s assets must be approved by two-thirds of the affected shareholders of the corporation. Shareholders may also have the ability to dissent from the foregoing transactions and to be paid fair value for their shares provided they follow the applicable dissent procedures pursuant to the relevant Canadian corporate statute. Shareholders may also bring a legal action under the applicable Canadian corporate statute for transactions that are oppressive or unfairly prejudicial to, or that unfairly disregard, shareholder interests. Courts have broad dis-cretion to intervene in these transactions.



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An acquisition by a private equity firm will be subject to Canadian securi-ties laws, the Competition Act and the Investment Canada Act.

Canadian securities laws provide, generally speaking, that an offer to acquire outstanding voting or equity securities of a public company which, when combined with existing securities beneficially owned by the offeror and persons acting jointly or in concert with the offeror (including certain convertible securities and rights), amounts to 20 per cent or more of the securities of that class, is a takeover bid and requires that the offer be made to all outstanding security holders of that class. Anti-avoidance rules cap-ture indirect offers. Additional rules address purchases of shares by a bid-der before, during and after the bid and the meaning of acting jointly or in concert.

Outside of an offer made to all of the holders of a class of securities, accumulations of more than 20 per cent of a class of securities in the secondary market can only be made under certain limited exceptions. For example, it is possible for a control block (20 per cent or more) to be purchased by a private equity firm pursuant to a separate agreement with-out making an offer to all shareholders, thus enabling a large stake to be acquired at one time rather than through a gradual build up in the mar-ket. These rules require that there not be more than five sellers, and that the value of consideration paid not exceed 115 per cent of the market price (determined as prescribed).

In circumstances where 100 per cent ownership of a corporation is the objective, a private equity firm will often negotiate a ‘friendly’ trans-action with the directors and officers of that corporation together with a lock-up agreement with one or more major shareholders. Under a lock-up agreement, those major shareholders agree to tender their securities to the acquirer’s offer or vote them in favour of the shareholder-approved trans-action as applicable.

Additional rules apply to protect minority shareholders in the case of insider bids, issuer bids, business combinations and related party transac-tions. Where applicable, these rules may require preparation of a formal valuation, majority of the minority shareholder approval or enhanced dis-closure. For instance, an insider bid requires enhanced disclosure and a formal valuation supervised by an independent committee of directors of the target company and paid for by the acquirer.

A transaction will generally be notifiable under the Competition Act if the parties, together with their affiliates, have assets in Canada, or annual gross revenues from sales in, from or into Canada, exceeding C$400 million and the assets in Canada of the acquired business, or the annual gross revenues from sales in or from Canada generated by such assets, exceed C$82 million. The C$82 million figure applies in 2014. It is gener-ally adjusted annually based on the change in Canada’s GDP. Additional thresholds may apply depending on the type of transaction.

For example:• the proposed acquisition of voting shares of a publicly traded corpora-

tion will not be notifiable unless, following completion of the transac-tion, the purchaser will own more than 20 per cent of the voting shares (or more than 50 per cent if the purchaser already owns more than 20 per cent); and

• the proposed acquisition of voting shares of a private corporation will not be notifiable unless, following completion of the transaction, the purchaser will own more than 35 per cent of the voting shares (or more than 50 per cent if the purchaser already owns more than 35 per cent).

The substantive test applied to determine whether a proposed transaction will be prohibited is whether it prevents or lessens, or is likely to prevent or lessen, competition substantially. Of note is the fact that the Competition Bureau may challenge a transaction that does not exceed the notification thresholds.

A transaction involving the direct acquisition of control of a Canadian business will be reviewable under the Investment Canada Act if the acquirer is a resident of a World Trade Organization (WTO) country and if the book value of the Canadian business exceeds C$354 million. The C$354 million figure applies in 2014. It is adjusted annually based on the change in Canada’s GDP. In addition, the government has announced that: the basis of the threshold will be changed from book value to enterprise

value; and the threshold will initially be set at C$600 million and increased to C$1 billion over a four-year period and indexed annually in relation to Canada’s GDP thereafter (although the book value of assets threshold, currently at C$354 million, will continue to apply if the foreign investor is a state owned enterprise). The announced change has not yet taken effect. A much lower C$5 million threshold applies if the target carries on a cultural business. Indirect acquisitions (for example, of a US parent company that has a Canadian subsidiary) by WTO resident investors are not reviewable unless they involve the acquisition of a Canadian cultural business, in which case the C$5 million threshold applies. With respect to a direct acquisition by an acquirer that is a resident of a non-WTO member, a transaction will be reviewable under the Investment Canada Act if the book value of the Canadian business exceeds C$5 million. The proposed indirect acquisition of a Canadian business by an investor that is not a resi-dent of a WTO member is reviewable if the book value of the assets of the Canadian business exceeds C$50 million or the book value of the assets of the Canadian business exceeds C$5 million and the value of the assets of the Canadian business represents more than 50 per cent of the value of the assets of the target’s entire international business. As with indirect acquisitions by residents of a WTO member, the C$5 million threshold also applies if the Canadian business is engaged in cultural business activities.

The Investment Canada Act’s rules relating to what constitutes an acquisition of control are detailed and complex. By way of a general summary:• the acquisition of a majority of a corporation’s voting shares is deemed

to be an acquisition of control;• the acquisition of less than a majority but more than one-third of a cor-

poration’s voting shares is considered an acquisition of control, unless it can be established that the acquiring party will not have control in fact of the corporation (for example, a 40 per cent acquisition would not result in control if another shareholder owned the other 60 per cent and there is no shareholders’ agreement that limits the larger shareholder’s rights); and

• the acquisition of less than one-third of a corporation’s voting shares is deemed not to be an acquisition of control.

If the transaction is reviewable under the Investment Canada Act, the test to be met for approval is whether the transaction is likely to be of net benefit to Canada. The net benefit test is typically satisfied on the basis of undertakings provided by the acquirer with respect to the acquired busi-ness (for example, employment levels, capital investment, participation by Canadians in senior management). Almost all reviewable transactions have ultimately been approved.

As mentioned under question 5, the acquisition of a controlling stake in a target company will trigger a year-end for Canadian tax purposes that may impact some of the tax accounts of the target company, more particu-larly, a potential reduction of available loss carry-forwards.

15 Exit strategies


If the private equity firm is an insider of a public company or has nomi-nees on the board of directors of the target company, the private equity firm must be careful to ensure that it is not in possession of material undis-closed information when it sells its interest. A private equity firm may be restricted from selling its stake in a public portfolio company depending on whether it:• intends to sell its stake in the open market or in a private transaction;• holds a controlling interest in the public company;• is subject to regulatory or stock exchange hold periods or escrow peri-

ods; or• is subject to contractual escrow or lock-up agreements.

For example, unless the holder of a controlling stake in a public company relies on a private placement exemption, such holder will not be able to sell its stake in the open market unless:



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• the company in question has been a reporting issuer in a jurisdiction of Canada for the four months preceding the trade;

• the controlling shareholder has held the securities for at least four months;

• there has been no unusual effort to prepare the market or to create a demand for the security that is the subject of the trade;

• no extraordinary commission or consideration is paid in respect of the trade;

• the controlling shareholder has no reasonable grounds to believe that the company is in default of securities legislation; and

• the controlling shareholder files a notice of intention to distribute (in the prescribed form) at least seven days before the trade.

Private equity firms may be limited from selling their stake in a private portfolio company by rights of first refusal, rights of first offer, tag-along provisions and other restrictions on transfer that may be contained in a corporation’s articles or any shareholders’ agreement. Subject to any other regulatory, exchange or contractual hold periods, private equity firms that wish to sell their securities in a private transaction must also ensure that such transaction complies with applicable securities laws (namely, a private equity firm may sell to an accredited investor in Canada which may include another private equity firm). In connection with the sale of a privately-held portfolio company, as previously mentioned, buyers may impose certain escrow and indemnification provisions on the seller, or require some other form of deferred payment arrangement. Private equity firms who are sell-ing shareholders would be directly involved in these negotiations.

See questions 5 and 14 with respect to the Competition Act and foreign investment review (Investment Canada Act) considerations.



Although a shareholders’ agreement pertaining to a Canadian corporation may remain in place as among the parties thereto following an IPO of such corporation, generally speaking, all shareholders’ agreements will termi-nate upon completion of that corporation’s IPO. As such, a private equity firm would generally be subject to the same governance as is accorded to all shareholders and would not have any special governance rights follow-ing an IPO. That said, depending upon the significance of its investment or other factors, a private equity firm may insist that it have certain board rep-resentation on a go-forward basis as part of the IPO process. Registration rights are not required for post-IPO sales of stock in Canada because, gen-erally speaking, selling shareholders may sell their stock in the open mar-ket four months after the IPO, subject to any regulatory or contractual hold period, escrow period or lock-up restrictions.

Underwriters typically impose a lock-up restriction of six months or longer on shares held by significant holders post-IPO. Without any regula-tory or contractual hold period, an issuer may enter into an agreement with a private equity firm that is a significant shareholder of the issuer to allow for a secondary offering of some or all of the shares held by the private equity firm through the preparation and filing of a prospectus of the issuer with the applicable Canadian securities regulators to qualify the distribu-tion of such shares to the public. This secondary sale may be performed through an underwriter by way of a bought deal, underwritten or best efforts transaction. Alternatively, a private equity investor may dispose of its shareholdings through a partial sale (or a sale en bloc) to one or more other investors subject to securities laws as described in question 5.



Private equity firms using a leveraged buyout model have traditionally been reticent to invest in industries that have large variations in cash flow and earnings, such as mining and oil and gas. Given the volatile profit-ability, it is more difficult for a private equity firm to obtain the necessary

debt financing for companies in these types of industries. With more lim-ited debt-financing capability, it is more difficult for a private equity firm to achieve an adequate return on its equity investment while, at the same time, being price-competitive with strategic purchasers.

Private equity firms more readily gravitate towards companies in industries that have steady cash-flow characteristics and are more frag-mented. These types of industries are easier to debt finance and offer consolidation opportunities for the private equity firm. Capital-intensive businesses can also be of interest to a private equity firm that has easy access to capital (and thus a competitive advantage) relative to other com-panies that may be interested in those businesses. General manufacturing and service-oriented industries have traditionally been the main source of transactions for private equity firms. More recently, in Canada, energy and energy related businesses have become an area of focus for private equity firms as the universe of the more traditional businesses shrinks and as energy becomes a more dominant part of the Canadian economy.

To the extent that ownership of companies within specific industries is limited by regulation, private equity firms are subject to those regulations. Although most industries in Canada have become deregulated, many industries continue to be subject to ownership restrictions in terms of per-centage ownership of any individual entity or affiliated group and who can qualify as an owner. For example, the large Canadian banks are generally subject to a 10 per cent ownership limit by any single shareholder or group of affiliated shareholders and are still subject to ownership restrictions with respect to shareholders from non-WTO countries. Certain industries, such as telecommunications, broadcasting and print media, are subject to for-eign ownership restrictions, and other specific restrictions apply in certain other sectors such as aviation. In addition, certain Canadian pension plans have percentage ownership restrictions.



Cross-border acquisition transactions typically involve a number of tax issues, although some tax impediments have been resolved further to recent federal budgets. Canada eliminated withholding tax on payments of interest by a Canadian borrower to a non-resident arm’s-length lender (as long as the interest is not interest on participating debt). Except as indi-cated below for Canadian-US indebtedness, interest earned by a non-arm’s length non-resident person is still subject to a 25 per cent withholding tax unless such rate is reduced by an applicable tax treaty. Under most tax trea-ties, the rate of withholding tax has been reduced from the 25 per cent level. Under Canada’s tax treaty with the US, the interest paid to a non-arm’s length US lender no longer attracts any withholding tax. The Canada-US Tax Convention, however, has a limitation of benefits provision as noted below that will need to be respected.

Dividends paid by a Canadian corporation to its non-resident share-holder will be subject to a 25 per cent withholding tax unless such rate is reduced by an applicable tax treaty. For example, under the Canada-US Tax Convention treaty, if a US resident is a beneficial owner of the divi-dends paid and owns at least 10 per cent of the voting stock of the Canadian company paying the dividend, the withholding tax is only 5 per cent of the amount of the dividend. Otherwise, the withholding tax by a Canadian company to a US resident is 15 per cent of the dividend paid. Private equity firms looking to repatriate profits need to consider withholding tax implica-tions (as well as the limitation on benefits provisions under the Canada-US Tax Convention as noted below).

Under most tax treaties involving Canada, capital gains arising from the disposition of shares of a Canadian corporation by a non-resident holder of such shares are not taxable in Canada, unless the value of such shares is primarily derived from real estate. In most cases, there is no need to obtain a clearance certificate from the Canada Revenue Agency in rela-tion to the sale of shares of Canadian companies (that do not derive their value principally from real estate) by non-resident persons, including non-resident private equity investors.

The Canadian tax legislation contains rules about thin capitalisation. Pursuant to these rules, a borrower that is a corporation or a trust, resident in Canada or carrying on business in Canada, is unable to deduct interest expense on the amount of its debt that exceeds 1.5 times such borrower’s equity, to the extent that such debt is owing to a related non-resident per-son in the case of a corporation, or, in the case of a trust, to a non-resident beneficiary of the trust who owns 25 per cent or more of the value of all



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interests in the trust. The amount of interest that is not deductible due to the application of these rules would be deemed to have been paid as a dividend to the relevant non-resident person and therefore subject to withholding tax on dividends. The thin capitalisation rules also apply to a corporation’s or a trust’s share of the debt of a partnership in which it is a member. Recently, the federal government has introduced a new specific anti-avoidance rule to limit the use of ‘back-to-back loan’ arrangements for the purpose of avoiding the application of the thin capitalisation rules. It is important for private equity firms to remember these rules when different financing options for Canadian acquisitions are being considered.

Section 956 of the Internal Revenue Code has proven to be a complica-tion for private equity firms looking to finance the acquisition of a Canadian business to the extent that it may be the subsidiary of a US parent owned by the private equity firm. Essentially, if more than 66.6 per cent of the voting stock of a Canadian subsidiary held by a US parent is pledged to support a loan to the US parent, this pledge will result in a deemed dividend to the US parent if it is coupled with negative covenants limiting the Canadian subsidiary’s right to sell assets or incur liabilities (which will usually be the case in most acquisition loan arrangements). A deemed dividend may also result if the Canadian subsidiary guarantees the obligations of, or grants a security interest in its assets in favour of, the lender to the US parent.

Under the Canada–US Tax Convention, entitlement by a US person to the benefits of Canada’s tax treaty with the US is subject to the limitation on benefits (LOB) provisions. These LOB provisions are complex and may have implications for private equity acquisitions in Canada by US entities. The Canada–US Tax Convention also contains specific rules for purposes of denying treaty benefits to hybrid entities. Such rules should be care-fully reviewed and analysed where a Canada–US cross-border transaction involves, as an example, a specific entity that is considered fiscally trans-parent for tax purposes in one jurisdiction but not in the other jurisdiction.

The transfer of partnership interests to a non-resident person may trigger the application of an anti-avoidance rule aimed at transactions that effectively result in the avoidance of recapture of depreciation by a taxable person.



Private equity firms that form a syndicate for the purpose of making an acquisition will typically appoint, either formally or informally, a lead investor to fill the role of primary negotiator on behalf of the group. This appointment will often go to the private equity investor that initiated the transaction, has the best relationships with the target company or sources of funding, or that will make the largest investment in the transaction. If the transaction is favourable to the investors and they are brought into the deal at a relatively late stage, the lead private equity firm may negotiate better economics for itself. A shareholders’ agreement (and possibly other agreements such as a co-management agreement or co-investment agree-ment) will be negotiated that governs, among other things, the relationship among the syndicate of investors, the decision-making process and the exit procedure. More than one private equity firm will often be represented on the board of directors.

The tax implications for private equity firms forming an acquisition syndicate depend, among other things, on the type of structure involved and the tax status of each member of the syndicate. For example, should the syndicate be formed as a flow-through entity, such as a partnership, the tax consequences resulting from the investment will apply at the level of each member of the syndicate. This structure will have the advantage of reducing overall taxes where some of the investors are not taxable enti-ties (like pension funds). In addition, the participation of separate classes of investors (for example, Canadian resident investors and non-resident investors) may require the creation of parallel entities in order to maintain tax efficiencies.

On 5 February 2014, Canada and the US entered into the Canada United States Enhanced Tax Information Exchange Agreement (the IGA). The IGA relieves Canadian financial institutions of the application of Foreign Account Tax Compliance Act (FATCA) withholding tax and from certain reporting obligations to the US tax authorities under FATCA. Implementation of the IGA has resulted in new reporting obligations for certain Canadian financial institutions under the Canadian federal income tax legislation. Those new obligations may potentially apply to certain Canadian private equity funds, whether or not such funds have invest-ments in the US. For example, certain Canadian private equity funds may be considered reporting Canadian financial institutions and have obliga-tions under the Canadian legislation and under FATCA.



Tension can exist between a buyer and a seller during the negotiation pro-cess relating to circumstances when a party may want the definitive acqui-sition agreement to end prior to closing. These circumstances can vary depending on the nature of the transaction, the objectives of the parties and the industries in which the business operates.

It is typical for a definitive acquisition agreement to contain closing conditions in favour of each party. If a party fails to satisfy a closing condi-tion that is not waived by the other party, the agreement typically comes to an end. Generally speaking, a buyer will require a broader set of closing conditions than a seller. These conditions can include board and share-holder approval, regulatory or court approval (if required) as well as (in the case of the acquisition of a private company) the completion of satisfactory due diligence by the buyer. Conversely, a seller usually aims to have clos-ing conditions limited and narrowly defined. A seller often will not accept a buyer’s desire to have a termination right on the basis of unsatisfactory due diligence. As such, a seller may insist that the buyer complete its due diligence prior to entering into the definitive agreement by signing a non-disclosure agreement and visiting a due diligence data room set up by the seller. Standstill provisions (for acquisitions of public or private compa-nies) and non-solicitation (of employees and customers) obligations can be agreed to by the parties at this early stage.

To reconcile differences that may only be discovered after closing, holdback or earn-out provisions can be negotiated whereby a portion of the purchase price is calculated based on post-closing company performance. Earn-outs usually contain very detailed language and can address various objectives including performance standards, add-on acquisitions, over-head allocations and other matters.

Private equity buyers and sellers often include various forms of termi-nation rights and fees in their agreement. Typically, termination rights are constrained to material adverse change (MAC) clauses. MAC clauses pro-vide a buyer with the contractual right to terminate the agreement before completion if there is a material adverse change as defined in the agree-ment. In many cases, a MAC clause can also provide a basis for renegotiat-ing the transaction if the event proves to be seriously detrimental to the target company or its assets. Whether a MAC clause is defined broadly or narrowly depends greatly on the perceived risk in the transaction and the negotiating ability of the parties. A MAC clause may be constructed as part of a condition, warranty, representation or condition precedent and varies depending on the nature of the transaction.

Termination rights in an acquisition of a public company are typically more limited, though the target company will insist on a fiduciary out so that its board of directors can terminate the agreement in the event that a superior acquisition proposal is received.

Update and trends

During 2014, the primary trends in private equity reflect the general continuing increase in asset valuations during the year. It has become a ‘seller’s market’. As a result, private equity firms have increasingly become sellers into this market with proceeds being returned to the investors. Market trends have also resulted in more active fundraising by private equity firms during 2014 (with the anticipation that active fundraising will continue well into the new year). Transaction sizes have become larger, and, both in Canada as well as globally, private equity has taken a greater interest in energy and energy services. Finally, there is a trend towards the consolidation of smaller pools of private equity in order to achieve the scale and efficiencies that are increasingly important from an expertise and technology standpoint as well as the ability of a larger private equity fund to play a more consequential role in investments, perform more of a direct investment function (rather than just a fund of funds type role) and invest in more substantive companies.



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Termination fees, also known as break fees, are typically negotiated in an acquisition of a public company payable by the target company where the fiduciary out is exercised by the board of directors or for failure of cer-tain other conditions to be satisfied. Termination fees are usually calcu-lated as a percentage of the total transaction price or as a flat fee. In some circumstances a ‘reverse break fee’ may apply to termination due to the fault of the buyer. Termination fees provide an incentive for the parties to abide by the agreement. The use of a non-refundable deposit can also be negotiated in the definitive acquisition agreement to provide a disincentive for the buyer to terminate the agreement, without the failure of the seller to satisfy a condition precedent or in the event of a MAC.

Harold Chataway [email protected] Kathleen Ritchie [email protected] Daniel Lacelle [email protected] Ian Macdonald [email protected]

Suite 1600, 1 First Canadian Place100 King Street WestToronto, Ontario M5X 1G5Canada

Tel: +1 416 862 7525Fax: +1 416 862 7661www.gowlings.com

CAYMAN ISLANDS Stuarts Walker Hersant Humphries


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Cayman IslandsAndrew Hersant, Chris Humphries and Simon YardStuarts Walker Hersant Humphries



Leveraged acquisitions, management buyouts, development capital investments, fund organisations, divestitures and recapitalisations are all types of private equity transactions which occur in the Cayman Islands.

The most commonly used vehicle for private equity funds in the Cayman Islands is the exempted limited partnership established under the Cayman Islands Exempted Limited Partnership Law (2014 Revision), which affords limited liability status to investors who are limited partners in the limited partnership provided that they do not take part in the con-duct of the business of the limited partnership. The fund’s sponsor, or an affiliate, typically acts as the general partner and has unlimited liability for the limited partnership’s obligations.



The reporting requirements of overseas fund managers managing private equity funds (for example, reporting requirements of US fund manag-ers who are SEC registered) has implications for Cayman Islands private equity funds, as those fund managers are aligning their management of the funds and corporate governance generally with best practices expected by the regulators.

The effect of corporate governance rules on companies that, following a private equity transaction, remain or become public, will be subject to the corporate governance obligations imposed by the regulator of the relevant exchange.



In making their decisions at board level, the directors have fiduciary duties to, among other things:• act in good faith in the best interests of the company;• act for a proper purpose in accordance with the constitution of the

company; and• avoid circumstances which create a conflict of interests between the

interests of the director and the interests of the company.

As a general principle, these duties are owed to the company and not to individual shareholders.

A conflict of interest will arise if the directors’ interests do not align with those of the company. In the context of a ‘take-private’ transaction, directors are under a duty to act in good faith when advising sharehold-ers on the merits of a transaction but are under no obligation to give such advice.

In cases where the controlling shareholder has control of the board or senior management, or members of the board are participating in the transaction, it is the norm for Cayman Islands companies to establish special committees consisting entirely of independent and disinterested directors to negotiate the transaction to ensure arm’s-length third party negotiations and to avoid conflicts of interests.

4 Disclosure issues


There are no specific disclosure obligations on the directors of the target company under Cayman Islands law in a ‘take-private’ transaction, other than the directors’ fiduciary duties and their common law duty to act with due care and skill in exercising their functions for and on behalf of the company.



The timing considerations for a ‘take-private’ transaction are subject to the takeover mechanism used to effect the acquisition of the target com-pany in the Cayman Islands. The mechanism most often used is to have a merger (under the merger regime in Part XVI of the Companies Law (2013 Revision) (the Companies Law) between the target and an acquiring newco (which has been financed for the transaction). Other legal mechanisms used are schemes of arrangement under sections 86–87 of the Companies Law and takeover offers utilising the ‘squeeze-out’ provisions contained in section 88 of the Companies Law.

In the case of a merger, the timing from commencing the ‘take-private’ to applying to register the merger (in order for a Certificate of Merger to be issued by the Cayman Islands Registrar of Companies) will depend on the complexity of the transaction and the timing for obtaining tax and regula-tory clearances but can be between two to three months which is usually shorter than the time periods for a scheme of arrangement or tender offer.

In the case of a scheme of arrangement, a precise timetable will need to be agreed with the Grand Court of the Cayman Islands. In practice, this process is likely to take up to three months from the date of settling the scheme document and commencing the court-based scheme proceed-ings, to sanction of the ‘take-private’ pursuant to the scheme by the Grand Court. However, the overall time period for a scheme of arrangement from beginning to end often takes significantly longer than three months. The merger regime has a number of advantages over the scheme in terms of timing. For example, the lack of court supervision under the merger regime provides the target company with more manoeuvrability in the event of a competing, unsolicited (or hostile) bid being made because there would be no need for the target company to deal with obtaining court approval for

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its actions or otherwise to keep the court informed of what it is undertak-ing and how that might bear on the scheme of arrangement at hand. The approval threshold for a merger is lower than the approval threshold for a scheme of arrangement.

While there is no maximum time period in completing a takeover, if the ‘squeeze-out’ provisions are being utilised and the bidder meets the 90 per cent minimum acceptance condition within four months of the date of the offer being made, the bidder will (unless the minority or dissenting shareholders make an application to the court) be able to compulsorily acquire the outstanding shares held by the minority or dissenting share-holders one month from the bidder’s notice to acquire such shares.



In respect of the mechanism most often used for a ‘take-private’ transac-tion, the merger and consolidation under Part XVI of the Companies Law, in order to implement such a merger, a plan of merger, approved by the directors, must be put to the shareholders of each constituent company for approval. The threshold for such approval is a special resolution of the shareholders, all voting as one class, unless a higher threshold is required under the company’s memorandum and articles of association. A special resolution is at least two-thirds majority (or such higher number as may be specified in the constituent company’s articles of association). However, under the Company Law, a member of a constituent company shall be entitled to payment of the fair value of his shares upon dissenting from a merger. Such fair value shall be agreed between the company and each dissenting shareholder or, in the absence of such agreement, by the court. This ensures that a dissenting shareholder cannot delay the ‘take-private’ transaction and also enables the directors to take some comfort when con-sidering their fiduciary obligations to ensure the interests of all sharehold-ers are protected.

If a scheme of arrangement is used, under sections 86–87 of the Companies Law, a higher threshold of approval is required being majority in number of affected (ie, independent) shareholders on a show of hands, whose collective shareholding must be at least 75 per cent of the shares being voted at the meeting. As schemes of arrangement require the con-sent of a majority in number (as opposed to a vote based on shareholdings in a merger) this can lead to some difficulty where listed companies who might have small numbers of registered shareholders (for example where shares are predominantly held by nominee shareholders) which would mean a registered shareholder with a comparatively low shareholding may potentially block the scheme of arrangement. The same issue would not arise with the merger route described above. However, if a scheme of arrangement is approved, any dissenting shareholders are bound by the decision of the majority.



Private equity buyers will, in addition to the standard terms contained in these types of purchase agreements, seek comprehensive representations and warranties, indemnities, seller or management earn-out provisions, seller roll-over requirements or restrictive covenants. On the investment aspects of the transaction, the private equity buyer will seek to have provi-sions dealing with a number of investor consent matters including borrow-ing, capital expenditure, financing, control on management remuneration, exit strategy provisions, employee incentivisation plans or schemes.

In contrast, on exit, private equity sellers typically only provide limited warranty protection, with short claim periods and no guarantees or post-completion covenants.



In performing his fiduciary duties as a director, a director is under an obli-gation not to put himself in a position where there is an actual or poten-tial conflict between his duty to the company and his personal interests. Notwithstanding this obligation, a director may participate and become part of a compensation-based structure in a private equity transaction pro-vided that:• any conflict of interest is disclosed and such disclosure and participa-

tion by the director is permitted or can be waived under the company’s articles of association;

• there has been no breach of fiduciary duties by the participating direc-tor; and

• there are no circumstances giving rise to the participating director having used the company’s assets, opportunities or information for his own personal profit.

There are no statutory or regulatory restrictions or disclosure requirements in relation to principal executive compensation under Cayman law.

9 Tax issues


Under current Cayman Islands law, there are no Cayman Islands taxes on income or gains of the private equity entity or the portfolio company and on gains on dispositions of shares or partnership interests, and distribu-tions made by the private equity buyer or portfolio company will not be subject to withholding tax in the Cayman Islands.



There are currently no regulatory restrictions in the Cayman Islands on the use of debt financing for private equity transactions. Secured senior debt, high yield or mezzanine debt, secondary debt, loan notes and payment-in-kind notes are all types of finance mechanisms used in the Cayman Islands to finance ‘take-private’ or other private equity transactions. There are no financial assistance restrictions in the Cayman Islands.



The provisions relating to debt and equity financing will typically be the commonplace terms that are normally negotiated and settled between the parties to the private equity transaction. There are no special Cayman Islands law considerations that are required to be factored into these provisions.

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To the extent that a private equity transaction involving leverage impacts on the solvency of the target and its subsidiaries (all or some of which are typically required to provide security for the financing obligations of the acquirer), there will be ‘bankruptcy’ related issues, such as:• statutory provision for voidable preferences – which makes invalid

every conveyance or transfer of property, or charge thereon, or pay-ment obligation, etc, made, incurred, taken or suffered by the company in favour of a creditor with a view to giving such creditor a preference over other creditors at any time when the company is unable to pay its debts if the conveyance or transfer of property, or charge thereon, or payment obligation, etc, was made, incurred, taken or suffered by the company within six months preceding the commencement of its liquidation;

• statutory provision for avoidance of dispositions at an undervalue – every disposition of property made at an undervalue by or on behalf of the company with an intent to defraud its creditors is voidable at the instance of the company’s liquidator; and

• fraudulent dispositions – under the Fraudulent Dispositions Law (1996) every disposition of property made with an intent to defraud and at an undervalue shall be voidable at the instance of a creditor thereby prejudiced if the action is brought within six years of the dis-position happening.

These issues are typically handled by structuring the transaction in such a way so as to avoid fraudulent conveyance or other ‘bankruptcy’ issues from arising.



The key provisions that drive the structure of shareholder agreements in private equity transactions are focused on retaining control over key operational decisions during the term of the investment, regulation of share transfers, liquidity and exit procedures. Protections afforded to minority investors include: veto rights over certain operational decisions (ie, restricted matters which require the consent of all the shareholders), pre-emption rights on transfer, tag-along rights, board appointment rights and rights to receive information. As a breach of these protections under the shareholders’ agreement would only entitle the aggrieved shareholder to claim damages for breach of contract and not reverse the breach, it is important that these protections are also included in the company’s arti-cles of association.

Under the Companies Law, special resolutions (which require the approval of at least two-thirds of the shareholders unless the articles of association of the company stipulate a higher threshold) are required for specified actions including: the reduction of the share capital of the com-pany, any amendments to the memorandum and articles of association of the company, any application to wind-up the company; and with respect to the approval of a merger involving the company.



There is no mandatory takeover offer or minimum capitalisation require-ments under Cayman Islands law. However, in order to acquire a con-trolling stake by way of a takeover utilising the statutory ‘squeeze-out’ provisions or by way of a scheme of arrangement, the acquirer will need to meet the statutory thresholds set in order to trigger the compulsory acqui-sition of the remaining shares (which is currently 90 per cent to activate the statutory squeeze-out mechanism and 75 per cent under a scheme of arrangement).

15 Exit strategies


Provided that appropriate institutional drag-along rights have been included in the shareholders’ agreement or articles of association of the company, a private equity firm should be able to sell its shareholding in a portfolio company to a third party without restriction.

Another limitation on the ability of a private equity firm to sell a portfolio company or conduct an IPO of a portfolio company will also be where the fund is in its agreed life cycle. Where a fund reaches the end of its agreed life but still has a portfolio company, an extension of the fund may result in penalties for the fund manager. Accordingly, there may be an incentive to sell the asset for whatever value can be achieved prior to the end of the fund’s agreed life rather than attempting to maximise the return in the longer run. A fund seeking a quick exit will usually approach another PE fund as they tend to be the most liquid acquirers. In particular, funds that are underinvested and are approaching the end of the investment period have strong incentives to invest or lose access to the committed capital. Accordingly, a fund’s life cycle is a very important factor in relation to any exit, whether by sale or IPO.

Private equity firms will normally seek a ‘clean exit’ on the sale of a portfolio company rather than at the expiry of claim periods or on the sat-isfaction of escrow conditions and this would typically be factored into the buyer’s offer.



Once listed, the operations of the portfolio company will be governed by the listing rules and regulations of the exchange and jurisdiction in which the portfolio company is listed. Governance rights and other rights and restrictions typically included in a shareholders’ agreement such as board appointment rights, veto rights over restricted matters and special infor-mation rights are generally not permitted post-IPO.

There are no restrictions on registration rights for post-IPO sales of shares in the Cayman Islands. Lock-up restrictions for private equity firms vary depending on the circumstances and contractual obligations of the parties, but IPO underwriters typically require in the underwriting agree-ment or lock-up agreement that private equity firms should not sell any shares in the portfolio company for up to 180 days following the IPO.

Whether a PE sponsor can divest itself of stock following an IPO will largely be driven by both market conditions and listing rules and regula-tions of the exchange and jurisdiction in which the portfolio was listed. Typically, a sponsor will look to sell down a portion of its shares on the IPO but where a sponsor has been blocked from selling any or all or its stock, the sponsor will need to rely on strong public markets to complete an exit through follow-on public offerings in relation to which it will seek to include its stock in such offering.



As the Cayman Islands is a popular jurisdiction for a holding company structure, there is a very wide range of companies and industries which have been the target of ‘take-private’ transactions in recent years. There are no industry-specific regulatory schemes or anti-trust laws in the Cayman Islands that limit the potential targets of private equity firms.

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There are no foreign investment restrictions, minimum capitalisation requirements or financial assistance restrictions in the Cayman Islands which would lead to specific structuring issues in a cross-border ‘take- private’ or private equity transaction. The tax-neutral status of the Cayman Islands (see question 9) also means that there are no adverse tax conse-quences from a Cayman Islands perspective.



There are no specific Cayman Islands legal considerations which would apply to a private equity transaction involving syndicated parties other than the typical general considerations which would include: the valua-tion of the investment price, pre-emption rights, investor consent require-ments, the make-up of investor majority, timing, terms of disposal pre-exit, restrictive covenants and exit provisions.



The key issue relating to certainty of closing arises from the delay between exchange of contracts and closing (with closing happening upon the satis-faction or waiver of a number of conditions precedent in the transaction documents). The principal concern for the seller will be to ensure that the conditions precedent (applicable to the seller) are clear, specific and achievable within the time-frame set for closing. The principal concern for the private equity buyer will be to ensure the synchronisation of the condi-tions precedent (applicable to the buyer) in the finance, equity investment and acquisition documents. For example, the private equity buyer will want to ensure that it is not legally obliged to buy the target until the conditions precedent relating to debt finance and equity finance have been satisfied or waived. These issues are typically resolved through negotiation. There are no Cayman Islands-specific considerations that are required to be factored into such negotiations.

Andrew Hersant [email protected] Chris Humphries [email protected] Simon Yard [email protected]

PO Box 25104th Floor Cayman Financial Centre36A Dr Roy’s DriveGeorge TownGrand Cayman KY1-1104Cayman Islands


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ChileFelipe Dalgalarrando HDalgalarrando, Romero y Cía Abogados



Private equity transactions taking place in Chile include the following:• acquisition of the entire capital stock or a controlling stake of a com-

pany by private equity or venture capital funds or by other private equity sponsors;

• acquisition of minority investments, whereby the private equity spon-sor invests by injecting new capital into the company to boost growth or by replacing certain shareholders of the company;

• acquisition of selected assets (to be absorbed in the existing structure of the purchaser or to be contributed to a new special purpose vehicle);

• management buyout or management buy-in transactions; and• going-private transactions, where a listed company is taken private by

one or more private equity sponsors.

It is customary to have the transactions structured as leveraged buyouts (LBO) where a substantial part of the purchase price is backed by the issu-ance of new debt by the acquiring party. The debt is typically secured by the assets acquired, and any other assets belonging to the special purpose vehicle that acquires the equity interest in the target. Note, however, that some debt might not need to be secured debt if granted by governmental agencies through special programmes for private equity funds investing in innovative ventures.

For tax purposes, foreign investors commonly structure their private equity investments through a local special purpose vehicle (typically a lim-ited liability company, a corporation or a sociedad por acciones) that serves as the acquiring entity. The foregoing allows the special purpose vehicle (SPV) to receive any dividend distributions from the operational company before sending them abroad, thereby deferring the 35 per cent withholding tax applicable to dividend distributions made abroad. On the other hand, locally organised funds tend to invest directly in the target companies since they have a highly advantaged tax treatment. Indeed, said funds are not subject to taxation in connection with the income or gains they receive, thereby not requiring the implementation of an SPV as in the case of for-eign investors.



Given the fact that corporate governance regulations applicable to listed corporations are much more stringent than those applicable to closely held corporations, there are certain advantages to going private. The corporate governance differences between both types of corporations include the following:• Related party transactions – with regard to privately owned corpo-

rations, the Chilean Corporations Law requires that transactions with related parties be on similar terms to those customarily prevail-ing in the market. Board approval is required only in cases where

a director has a direct or indirect interest in a transaction (the interested director being excluded from such voting proceeding). In listed companies the general principles remain the same, but approval of related party transactions are more cumbersome. Indeed, article 147 of the Corporations Law requires (with certain exemp-tions) that all related party transactions be approved by the board of directors. Also, the transaction must be approved by the majority of the directors of the board, excluding any interested directors (who nonetheless must make public their opinion regarding the transac-tion if requested by the board) or, if more than the absolute majority of the directors of the board are interested in the transaction, by all the non-interested directors, or otherwise, by two-thirds of the shares with the right to vote of the company. In cases where the transaction will be approved by the shareholders, the board must designate at least one independent appraisal to inform the shareholders about the terms of the transaction, its effects and its potential impact to the company. Unlike listed corporations, the by-laws of a privately held corpora-tion may authorise entering into transactions with directors on a no arm’s length basis.

• Directors’ committee – in addition to the above, listed corporations that have a market capitalisation of over 1.5 million Unidades de Fomento and at least 12.5 per cent of their shares in the hands of share-holders holding individually 10 per cent or less of such shares must have a directors’ committee comprised of at least three board mem-bers meeting certain independence tests (or, if there are not three independent directors, the committee is comprised of all the existing independent directors plus other directors needed in order to have a three-member body). Among other duties, the committee must look over the accounts and certain transactions of the company, as well as examine the compensation plans of executive officers and other employees of the company. In the event the company goes private, there is no obligation to maintain the directors’ committee.

• Board members – listed corporations need to have a board comprised of at least five members, while privately owned corporations only need a board of three members.

• Audit – listed companies also need to have their accounts audited by external auditing companies registered with the local securities regulator (SVS), while closely held corporations may only have their accounts reviewed by specially appointed inspectors or in such other manner they deem fit, or even not reviewed at all if their by-laws so state.

• Tender offer rules – in order to obtain control of a listed company the acquiring party is generally required to launch a tender offer, to be directed to all the shareholders of the target, at the same price per share, for a specific period of time. These rules, among other restric-tions, also impose certain corporate governance obligations on the members of the board (as indicated in question 3).

• Regulated vehicles – unlike closely held corporations, listed corpora-tions are subject to the overview of and regulation by the SVS.

Companies that go public following a private equity transaction must adapt their by-laws and corporate governance in order to comply with the afore-mentioned rules. In addition, existing shareholders’ agreements might need to be amended, and in some cases terminated.

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There is a general principle that requires directors to always act in the best interests of the company, its business and its shareholders. While perform-ing their duties, directors shall comply with a standard of care similar to the care ordinarily used by persons in their own businesses, and are jointly and severally liable for their fraudulent or negligent acts.

Among other prohibitions, directors cannot perform any act contrary to the by-laws or the social interest, or use their position in order to obtain undue advantages for themselves or for their related parties that might damage the social interest.

Consequently, when analysing going-private or private equity transac-tions, directors shall act according to the aforementioned rules.

In addition, rules governing tender offers (applicable in the case of a going-private transaction) require board members to provide the share-holders with their reasoned opinion as to the suitability of the offer made by the tendering party. In such opinion, each director must indicate its relationship with the controlling shareholder of the company, and with the acquiring party, and must also state what type of interest he or she has in the transaction, if any.

In the event that one or more board members are participating or have an interest in the transaction, such members may not vote in any of the board meetings dealing with such matter. For details on board approval, please see the section on related party transactions in question 2.

The committee of directors, if it exists, must also analyse the transac-tion and issue a report to be delivered to the board of directors, a copy of which shall be read at the board meeting dealing with the matter.

4 Disclosure issues


Going-private transactions are subject to heightened disclosure require-ments that typically do not apply to the acquisition of privately held companies.

In fact, if tender offer rules are applicable, the offeror must publish a notice in two nationally circulated newspapers communicating the offer to the public. Such notice must include information regarding the identity of the offeror, the purpose of the tender offer, the amount of shares to be purchased, payment terms and conditions, mechanics to accept the offer and revocation of the same, etc. In addition, the offeror must prepare a prospectus containing full details of the offer and make it available to the public at the offices of the target, the offeror, the listed subsidiaries of the target, the SVS and the relevant stock exchanges. Among the details to be provided, the offeror must include comprehensive information regarding the offeror itself, indicating the names of its directors, executive officers and managers, its shareholdings in other corporations and the names of its related parties. Additionally, the offeror must provide full details on the offer and a financial, business and legal description about itself or its final and effective controlling parties, if applicable. During a tender offer pro-cess, board members of the target also need to provide the shareholders with their reasoned opinion as to the suitability of the offer made by the tendering party, and to make the disclosure referred to in question 3.

Once the tender offer is completed, the offeror must publish the results of the tender offer in the same newspapers where it published the com-mencement notice, describing the total number of shares received, the number of shares it will acquire, the pro rata factor, if applicable, and the percentage of control it will achieve as a result of the tender offer.

If tender offer rules are not applicable, other disclosure requirements (somewhat less cumbersome) might be applicable to going-private trans-actions. Said rules require the offeror to publish a prominent notice in two nationally circulated newspapers and on the offeror’s website announcing its intention to take control of the target. In addition, a written commu-nication must be sent to the target company, to its controlling and con-trolled companies, to the SVS and to the stock exchange where the target’s

securities are traded. Once the target’s control has been obtained, the offeror, within two business days after closing the transaction, must pub-lish a notice in the same newspapers where it published the takeover notice and send a written communication to the same persons indicated above.



There are no specific timing requirements for private equity transactions not involving a listed or public target. From a practical standpoint a trans-action of this type generally takes between 45 to 120 days to be completed (from the execution of a memorandum of understanding until the final closing). The exact timing will depend on the length and complexity of the due diligence process, the size of the target company and the knowledge that the purchaser has about the industry in which the target is involved, among other factors. Also, if the target management is well prepared for this type of transaction, the length of the process can be significantly reduced. Transactions in which there is a group of investors might take more time than transactions having a single investor. In addition, the fund-ing structure plays an important role in timing (for example, a single lender is generally faster than a syndicate of lenders; the number and complexity of guarantees required also have an impact).

It is important to note, however, that regulated vehicles (banks, pen-sion funds, insurance companies, etc), even if not listed, might be faced with additional timing considerations, since in many cases the prior approval of the applicable regulator is required.

Going-private transactions typically take longer than standard trans-actions given that applicable tender offer rules impose certain time frames. Tender offers must not be open for less than 20 days or more than 30, except in cases where depositary entities are registered as shareholders of the target, in which case the term must be 30 days. The offeror has, in addi-tion, the option to extend the validity of the offer for a minimum of five days and a maximum of 15 days.



Generally, the shareholders of a listed corporation do not have the right to oppose to a tender offer launched with the aim of making a company private. However, dissenting shareholders may try to challenge such a transaction by claiming before the regulator, or even the courts, that the applicable tender offer regulations have not been complied with. To this end, acquirers and acquirers’ counsel need to be extremely careful and thorough in the compliance of such rules and regulations.

It is important to note that the Corporations Act provides that if a controlling shareholder reaches 95 per cent of the company’s shares, the minority shareholders shall have appraisal rights (which in this case will be in line with the interests of the acquirer), which require the company to purchase the minority shareholders’ shares in the price indicated in ques-tion 13. By the same token, if the by-laws of the company so provide it, the purchaser may squeeze-out the minority shareholders that have not sold their shares in the tender offer process in the event the acquirer reaches 95 per cent of the company’s shares, to the extent the acquirer offered to pur-chase 100 per cent of the company’s shares during the tender offer process and managed to acquire at least 15 per cent of the shares from non-related parties.



Purchase agreement provisions in private equity transactions do not sub-stantially differ from those in other M&A transactions. Indeed, purchase agreements in private equity transactions have customary representations and warranties, indemnification provisions, non-compete and arbitration clauses.

With regard to covenants relating to financing, in cash-out transac-tions it is becoming increasingly common to see sponsors guaranteeing the price payment obligation of the purchasing special purpose vehicle. In



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addition, parties might agree to reverse termination fees, even though pri-vate equity funds and other private equity sponsors are typically reluctant to accept them. Such termination fees are structured as a liquidated dam-age provision in order to avoid the non-breaching party having to prove it has incurred damages (and the amount of them) as a consequence of the breach. On the other side, the reverse termination fee is normally agreed to be the sole and exclusive remedy of the non-breaching party against the private equity sponsor. In the event the transaction does not close because the purchaser was not able to secure financing, and no termination fee was agreed upon, the sellers will need to sue for damages (and prove them) before the court appointed in the relevant documentation.

With regard to indemnification mechanisms, the structure is generally the same as in other M&A transactions. However, when representations and warranties are breached, or the finance or sales projections taken into account for the investment are not met, indemnification can be structured as a payment in kind by issuing and delivering more shares to the private equity investor (and, thereby, diluting the breaching party).



There have been very few going-private transactions in recent years, which makes it difficult to establish a trend on principal executive compensation in such transactions. It is important to note, however, that directors and executive officers of the target are bound by certain general duties and con-flict of interest rules as set out above. Therefore, any type of compensation scheme that is agreed upon with them must be structured not to affect any of the duties, conflict of interest rules and takeover regulations applicable under Chilean law. In any event, any such compensation plan needs to be carefully structured, since such compensation may be subject to tax rates of up to 40 per cent pursuant to Chilean income tax rules. There are no spe-cial timing considerations to be taken into account with regard to discus-sions on management participation after the completion of the transaction.

9 Tax issues


Deductibility of interestIn the past the Chilean IRS objected in some cases to the use of interest paid on acquisition debt as an expense if the LBO entity directly held the target’s shares. A comprehensive tax reform has been passed in 2014, which has changed the aforementioned criteria. Indeed, the Income Tax Act now specifically provides that all interest and other financial expenses, which might be considered as an expense according to the general rules, deriving from credits aimed at acquiring shares, equity rights, bonds and other securities, can be deducted as expenses.

Tax issues related to executive compensationSalaries, wages, bonuses and other direct compensation are subject to an income tax rate of up to 40 per cent to be paid by the employee. Therefore, structuring executive compensation through the grant of stock options or similar success-linked schemes is generally recommended, as it allows the reduction of the tax burden and at the same aligns the interests of the employee and the company.



Generally, all types of debt can be used to finance a going-private or pri-vate equity transaction, either at the purchaser or target level or at the acquisition vehicle level. It is usual to see asset backed loans granted at the acquiring entity level, where the shares of the target and any intermediate vehicles are pledged to the creditors. Also, bridge loans can be used by pur-chasers, which are later replaced by medium or long-term debt at the target level, with or without undergoing a prior corporate restructuring (in which the target merges with an intermediate vehicle that was the borrower of the bridge loan).

In addition, the private equity sponsor must determine whether the acquisition of the target might trigger change of control provisions in the existing indebtedness of the target that would require creditor consent.

By the same token, private equity sponsors need to determine whether the level of the target’s indebtedness allows the purchase structure to sup-port more debt. Given the fact that most private equity transactions are leveraged, a high level of debt at the target might impair the transaction since it would not allow the private equity sponsor to receive enough cash to serve its own debt. Also, restrictive financial covenants may hinder the private equity sponsor to receive dividends in the amount needed to serve the acquisition debt. Financial covenants of the target may also restrict its ability to secure shareholder or affiliate debt, and to create security inter-ests in its assets or the assets of its subsidiaries (which might be required by the lenders to the acquiring party). Consequently, private equity sponsors need to determine the cost of prepaying or refinancing the target’s debt in relation to the cost of their own debt.

To deal with these issues, private equity sponsors often require as a condition precedent of the closing that:• restrictive covenants be renegotiated so as to give more financial flex-

ibility to the target;• change of control provisions be eliminated from the existing docu-

mentation or waived in writing by the relevant creditors; or• the target’s debt is repaid in total or in part (generally to occur simulta-

neously on closing).

Regarding restrictions on debt, article 84 No. 4 of the Banking Act forbids banks to grant loans for the purpose of acquiring shares issued by the same bank.



There have been very few going-private transactions in the past; therefore, it is difficult to determine whether there is a general rule as to customary provisions in this regard. Normally, they will replicate the structure of a standard private equity financing (representation and warranties, affirma-tive and negative covenants, events of default, issuance of promissory notes and other general covenants).

From a regulation perspective there are no requirements as to specific provisions that must be included in debt or equity financing documenta-tion. Generally, debt and equity financing may include a facility letter, a bridge loan agreement, a term loan agreement (either bilateral or syndi-cated) and the applicable security interest documents (for example, share pledge agreements).



In the event the target becomes bankrupt after the acquisition is com-pleted, certain acts and contracts performed by the target within the ‘sus-picious period’ may be set aside. Such period can be fixed by the court up to two years prior to the bankruptcy declaration. Indeed, pursuant to section



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Sections 288 and 289 of the New Bankruptcy Act, any payments of debt or any contracts entered into during the suspicious period may be set aside if the relevant creditor or the counterparty to the bankrupt company had knowledge that the latter had ceased payments of its obligations. Security interests created in order to secure payment of debts that are set aside will also be affected in the same manner. In addition, security interests cre-ated during the suspicious period might also be set aside when the secured credit was granted before the suspicious period.

In order to avoid these issues (which might affect, inter alia, LBO financing), private equity firms and the parties giving financing to them conduct a thorough business, financial and legal due diligence over the tar-get in order to ensure that the latter is in sound condition.



In shareholders’ agreements private equity funds will typically seek, from the outset, to set forth clear exit strategies. To this end, funds will require the other shareholders to agree upon certain provisions allowing funds to sell their shares in the company with preference to any other share-holder. Among the several exit-oriented clauses a fund may request, the most typical are drag-along, first right to sell and tag-along. In addition, minority investors customarily request the other shareholders to accept transfer restrictions clauses, either as first-refusal or first-offer clauses. Private equity funds are generally prone to first-offer clauses (rather than first refusal) since they give much more freedom when finding a potential buyer (namely, the seller does not need to have a potential buyer before starting the selling process). Also, funds may request registrations rights that enable them to force the company to list its shares in a stock exchange after a certain period of time has elapsed since the original investment. Furthermore, funds may request put rights or mandatory redemption pro-visions to be exercised against the company or the other shareholders.

Venture capital funds will also look to obtain certain preference rights in case of early liquidation of the investment company thereby entitling such VC funds to be fully repaid of their investment (plus an agreed upon interest or gain thereof ) before any other shareholder.

On the other hand, minority investors will certainly look to have an influence over the management decisions of the company. To this end, they typically request to have at least one member on the board of direc-tors in order to grant this board member a veto power over certain corpo-rate decisions (such as incurrence of debt; related party transactions; sale of assets over a certain amount; approval of company budgets; appoint-ment of key executives; creation of subsidiaries; appointment of auditors of the target; grant of loans to third parties; loan policy to employees; stock options plans to employees; grant of security interests over assets of the company). In addition, higher quorums for holding board meetings are requested, with the intention to have at least one member appointed by the fund in the room.

Parties also tend to regulate deadlocks that might take place as a con-sequence of the exercise of the aforementioned veto powers. To this end they can choose that the arbitrator resolves the matter in a way it deems to be in the best interests of the company. In other cases, parties try to avoid going to arbitration by setting forth a mechanism that entails the sale of the equity interests belonging to one or all parties. If the joint sale of the company to a third party is agreed (namely, all the parties to the sharehold-ers’ agreement that are affected by the deadlock agree to sell their shares), typically, the process is put in the hands of an investment banker, which is requested to conduct a bidding process aimed at selling the company to the best bidder. On the other hand, if the parties agree to purchase the shares one from another, the mechanism to be agreed upon grants the higher bidder the right to purchase the shares of the lower bidder (who, in turn, undertakes to sell its shares to the higher bidder).

The Corporations Act grants protection to minority shareholders by requiring that certain matters be approved by two-thirds of the outstand-ing voting shares (such as the sale of 50 per cent or more of the company’s assets; the reduction of the company’s capital; its transformation, merger, divestiture; its early termination; the reduction of board members; the way in which dividends are distributed; the creation of guarantees or liens securing third parties’ obligations other than that of subsidiaries,

exceeding 50 per cent of the assets). A minority investor acquiring less than one-third of the shares will look to have higher approval quorums for said matters in order to avoid them being approved without its consent. In addition, the approval of certain of the aforementioned matters enti-tles dissenting shareholders to tender their shares to the corporation and be bought-out of the corporation. If such appraisal right is exercised by a dissenting shareholder, the price to be paid to it shall be the weighted average of the sales price for such a corporation’s shares as reported in the relevant stock exchanges for the 60 business days going from the 30th and the 90th business day preceding the approval of the matter giving rise to the appraisal right; or in case of privately held companies, and if the SVS determines that the shares of public companies are not actively traded on a stock exchange, the price shall be the company’s book value.



In the event a private equity sponsor intends to acquire control of a public corporation it must launch a tender offer process. For details of the process please see question 4 above. At such a tender offer the sponsor must pay the same price per share to all shareholders or to all shareholders holding shares of the targeted series, as the case may be.

In addition, if after any acquisition of shares a person or group of per-sons acting together reaches or exceeds two-thirds of the voting shares of a public corporation, the acquiring person must launch a tender offer for the remaining shares within 30 days, except in the case it reached such two-thirds through a tender offer for 100 per cent of the shares or through a legal exemption to the mandatory tender offer. If no such tender offer is launched the remainder shareholders will have withdrawal rights at a price at least equivalent to the price that would have been paid to a dissenting shareholder as indicated under question 13.

Furthermore, when a shareholder acquires more than 95 per cent of the issued shares of a public corporation, all other shareholders shall have the right to withdraw and to have their shares purchased by the corporation within 30 days of the publication in a nationally circulated newspaper of the notice by the controlling shareholder that the requisite shareholding has been reached.

15 Exit strategies


In general, private equity firms do not have legal limitations to sell their stake in portfolio companies. In any event, shareholders’ agreements pro-visions might impose certain levels of restriction to freely sell the shares in a portfolio company (such as first refusal, first offer, tag along clauses), thereby requiring careful drafting of such provisions by counsel to the pri-vate equity sponsor.

To conduct an IPO, board approval is required. Consequently, if the private equity firm does not have board majority it will not be able to force the portfolio company to go public. In order to address this situa-tion, private equity firms require that registration rights be granted in the shareholders’ agreement to be signed with the other shareholders of the portfolio company.

As to post-closing recourse for the benefit of a buyer, private equity firms tend to agree to limited recourse in the event of breach of the rep-resentations and warranties or the covenants stated in the purchase agreement. For these purposes it is not uncommon to agree upon escrow amounts securing payment of any damages suffered by the target. On the contrary, private equity firms generally do not provide buyers with insur-ance policies or bank bonds in order to secure their post-closing obliga-tions. Private equity funds, in their case, need to ensure that the funds’ duration exceeds any post-closing liabilities derived from representations and warranties or covenants so as to avoid any liability being transferred directly to their quota holders.



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From a legal standpoint, the answers provided above do not change in the event a private equity firm sells a portfolio company to another private equity firm. It might be the case, however, that if the selling fund only car-ries out a partial sale of its stake in the portfolio company, reduced post-closing recourse is given to the purchasing fund to the extent that the latter obtains the same rights the selling fund has under the current sharehold-ers’ agreement.



In general, governance rights (such as board appointment rights and veto rights) included in shareholders’ agreements are permitted to survive an IPO. Also, selling restrictions (such as first-offer or first-refusal rights, put and call options and tag along) are permitted to survive an IPO to the extent they do not collide with tender offer rules applicable to public corporations.

Once a corporation registers itself and its shares with the SVS, all such corporation’s shares can be freely offered to the public at large with-out a need to register them again before the SVS. Hence, no registration rights are required for post-IPO sales of stock. However, if the corporation increases its stock capital after the IPO, in order to place such shares with the public it needs to previously register the new issuance with the SVS.

By the same token, when an issuer has registered itself and its shares before the SVS, shareholders may freely sell their shareholdings to the pub-lic, without any restriction (unless, of course, the acquirer thereof intends to obtain control of the corporation, in which case it needs to launch a ten-der offer process). Thus, no legal lock-up restrictions are applicable with regard to an IPO.

On the other side, private equity sponsors willing to dispose of their stock in a portfolio company following its IPO generally sell their shares in auction processes at the stock exchange, for which they hire the services of a stockbroker who contacts potential buyers.



As previously stated, there have been very few going-private transactions in the past serving to establish a trend of the companies or industries that are commonly targeted.

On the other hand, it is worth noting that a foreign private sponsor may face certain restrictions in connection with the acquisition of some Chilean businesses. For instance, in the case of concessions over television broadcasting services, such concessions may only be granted to companies that are organised and domiciled in Chile and whose officials, including their chairperson and directors, are Chilean citizens.

Other laws prevent the nationals of bordering countries and their com-panies from owning real estate located near the country’s borders.

Furthermore, there are a number of laws that impose certain restric-tions, whether on the nationality of the owners of specific assets, on the members of the board of directors and the executives of certain Chilean companies, or both (for example, laws regulating fishing, maritime and air transportation activities).



Given that remittances of dividends abroad are subject to a 35 per cent with-holding tax (with a credit for the corporate tax paid by the operating entity generating the income), foreign investors typically set up an intermediate special purpose vehicle that receives the dividend distributions from the operational company before sending them abroad. This allows reinvesting of such funds or otherwise dealing with them without having to send them abroad directly, thereby deferring the payment of the aforementioned tax.

In the event that the amount of the investment to be made exceeds US$5 million it might be convenient to execute a foreign investment con-tract with the Republic of Chile under Decree Law 600 (DL 600). In gen-eral, DL 600 affords sound legal protection to foreign investors, as their rights are secured by an investment contract entered into with the Republic of Chile. Such foreign investment contracts are governed by Chilean law, are subject to the jurisdiction of Chilean courts and may not be unilater-ally modified by the Republic of Chile. Furthermore, DL 600 grants for-eign investors additional protection against discriminatory treatment as regards domestic investors by stating that foreign investors and local companies receiving foreign investments are subject to the general provi-sions of law applicable to domestic investors and that no discrimination, direct or indirect, may be made against them. Nevertheless, DL 600 pro-vides that regulations may be enacted to limit foreign investor access to local financing. In practice, however, no general regulations are in effect in this regard. Please note, however, that DL 600 will no longer be in force from 1 January 2016 (as it will be abrogated by the Act that approved the 2014Tax Reform). It is expected, nonetheless, that a similar legal body will be enacted to replace DL 600.

It is also important to bear in mind that certain restrictions apply to the acquisition of some Chilean businesses. For details please see question 17.



There are no special considerations to be taken into account aside from the general considerations that any co-investment requires (such as joint action in board or shareholders’ meetings, in the case of third-party takeo-ver bids or exit mechanics) when more than one private equity firm is act-ing in a club deal.

However, when business opportunities are devised by one firm that thereafter invites the others, it is common to enter into a private sharehold-ers’ agreement that gives certain prevailing rights to the inviting firm. For example, if a selling opportunity comes along it is usual to see that the first fund has the preference to sell part or all of its shareholdings before any other part. Also, casting votes in board or shareholding meetings can be granted to the first fund.



As in any other mergers and acquisition transaction, private equity transac-tions are commonly subject to the completion of a set of conditions prec-edent. Among the key issues that are captured in such conditions are:• transaction approval by governmental entities, if applicable;• the granting of creditor or provider consent, if change of control

restrictions apply;• the granting of corporate authorisations and approvals of both buyer

and seller;• the release of security interests affecting the assets acquired;

Update and trends

During 2014 the government of Michelle Bachelet approved an ambitious tax reform aimed at funding an educational reform currently under legislative discussion. The tax reform considers, among other things, the increase in general corporate tax from 20 per cent to 27 per cent (gradually from 2015 until 2018) as well as the elimination of the full tax credit system by which corporate taxes paid by corporations and other legal entities were used as credit for taxes applicable to individuals. This increase in taxes has favoured the development of a new selling trend in the Chilean market. Indeed, many Chilean investors and company owners see the gradual increase in taxes as an opportunity to cash out before taxes rates reach their peak in 2018. This trend not only applies to private equity transaction but to public company transactions as well. Also, the trend applies to all markets and industries, as we may see sales in the salmon, mining, vineyard, construction, shipping, and food industries (many of them already announced), among many others.



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• representations and warranties to be true and correct at closing; and• no uncured default of covenants under the purchase agreement at

closing.

Parties also set forth a time frame within which closing has to take place. If the deadline is met without closing, the transaction can automatically fail (unless the contract considers one or more extensions to be clearly defined by the parties) or can be terminated by notice sent by the non-breaching party.

In the event closing cannot take place because one party breached its obligations under the agreement or is not able through fault on its side to meet the conditions precedent, such party typically must pay damages to the other party to be determined by the arbitrator appointed in the agree-ment. Parties may agree on termination fees or reverse termination fees, which for Chilean law purposes may be regarded as penalties. Therefore, such penalties must be capped at double the price to be paid in the transac-tion; any amount over such limit risks being considered excessive by the courts.

Felipe Dalgalarrando H [email protected]

San Sebastián 2952, 7th floorLas CondesSantiago 7550050Chile


CHINA HJM Asia Law & Co LLC


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ChinaCaroline BerubeHJM Asia Law & Co LLC



In practice, there are various types of private equity transactions that occur in China (China or the PRC), such as leveraged buyouts, venture capital, mezzanine capital and growth capital transactions, angel investments and private investments in public equity (commonly referred to as PIPE).

In China, there are also two special types of funds that could fall within the definition of private equity funds – the industry investment fund (IIF) and the start-up investment fund (SIF). IIFs and SIFs are similar to most private equity funds in the sense that they can only purchase shares in non-listed companies. They are the form of private equity funds referred to in Chinese legislation. IIFs are usually funded by certain institutional inves-tors who are state-owned or state-controlled enterprises. For example, the Bohai Industry Investment Fund is jointly sponsored by the National Social Security Fund, China Development Bank, Postal Savings Bank of China and five other state-owned enterprises. Some IIFs are also funded by large Chinese commercial banks, private insurance companies and security companies.

The central government opened the door to foreign investors to set up SIFs through the Provisions Concerning the Administration of Foreign-funded Start-up Investment Enterprises, effective from 1 March 2003, and later published the Interim Measures of the Management of Start-up Investment Fund for the Start-up Investment Projects in the Emerging Industry on 17 August 2011 so as to facilitate the development of this emerging industry. However, while the central government has allowed foreign participation, some restrictions still exist. For instance, SIFs in emerging industries must be funded by the government.

While leveraged buyout firms may play an important role in the global private equity transactions market, they do not currently play a major role in China, as the majority shareholders of Chinese enterprises, whether state or privately owned, are generally reluctant to give up their position as majority shareholders.

Currently, the most commonly used structure is the Foreign-Invested Limited Partnership (FILP), which was introduced in 2010, and is particu-larly beneficial to foreign investment firms looking to establish RMB funds.

Chinese and foreign (enterprise and individual) investors may both participate in the FILP. The operation of a FILP is largely provided for in the partnership agreement, although it is subject to certain corporate governance structures provided for in the Partnership Enterprise Law (2006). A FILP may be registered directly with the State Administration for Industry and Commerce (SAIC) and is not required to be established with the approval of the Ministry of Commerce (MOFCOM). A FILP is still subject to the foreign investment restrictions provided in the Guidance Catalogue for Foreign Investment (2011 Amended version) (GCFI), which is explained in further detail in question 17.

In January 2011, Shanghai introduced the Qualified Foreign Limited Partner Programme (QFLP), which allows a qualifying foreign fund man-ager to establish a ‘foreign-invested equity enterprise’ (FIE PE Fund) which is subject to a less onerous local approval process. The FIE PE Fund may be treated as a ‘domestic’ fund subject to the following requirements:• it should be denominated in renminbi; and

• all cash investment should be raised from Chinese investors in ren-minbi (the qualifying funds manager may convert up to 5 per cent of the capital contribution from non-renminbi currency into renminbi to invest in the PIE PE Fund).



The China Securities Regulatory Commission (CSRC) has the right to check and supervise the corporate governance of securities investment companies. The shares of a public company may be transferred upon the satisfaction of certain conditions and submitting the report to the CSRC and the Stock Exchange. For instance, the initiator can not transfer his, her or its shares within one year from the incorporation date of the com-pany. The shares issued before the public stocks issue can not be trans-ferred within one year from the date of listing. The director, supervisor and senior managers can declare to the company the shares held by them and the changes thereof. During the term of office, the shares transferred by any of them each year can not exceed 25 per cent of the total shares of the company he or she holds. The shares of the company held by the afore-said persons can not be transferred within one year from the date of listing according to the Company Law.

The financing strength of the leveraged buyout in private equity trans-actions is realised through its innate ability to generate capital through small funds. Most of the acquisition funds are sourced from loans and bonds, thereby keeping the demand for large amounts of cash limited. As opposed to traditional acquisition transactions, the acquirer in a leveraged buyout will focus on the integration of resources which may maximise the efficiency of the management and the grass-roots staff in order to recover the debts. Moreover, the acquirer can start cross-sectoral operations within a relative short period of time through leveraged buyout in consideration of transaction fees and interests.

Private equity transactions are often conducted with the view of even-tually going private. This is because once a company is no longer public, it no longer has to deal with the onerous obligations imposed on it, including (but not limited to) the obligations in relation to disclosure (for example, a listed company must publish its financial information and major opera-tional information under article 165 of the Company Law).

Companies that become or remain a publicly listed company fol-lowing a private equity transaction are subject to the Rules of Corporate Governance of Listed Companies (the Rules), which apply to all listed com-panies in China. According to the Rules, the business of a public company must be independent from that of its controlling shareholder. A controlling shareholder of a public company and its subsidiaries may not engage in the same or similar business with such public company. Such shareholder shall refrain from competition with the public company, and the public company may not provide a guarantee for its shareholders or affiliated parties.

HJM Asia Law & Co LLC CHINA


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In China, as in most parts of the world, the board of directors of a public company is a key part of the company’s management.

Before the completion of the acquisition, the board of directors is not permitted to dispose of assets of the company, make an investment, provide any guarantee or make loans without approval at the sharehold-ers’ meeting, except for those required for the continuous operation of the business or by the shareholders’ approval. Furthermore, a director may not resign from his or her position during the period of acquisition. Where the controlling shareholders of a public company and its affiliated parties are in debt to the company, encumbered with the security provided by the com-pany or in any other way in a position capable of damaging the interests of the company, the board of directors shall provide disclosure of same and take action to protect the interests of the company.

The Rules of Corporate Governance for Listed Companies (the Rules) provide that the board of directors may, subject to the resolution at a share-holders’ meeting, set up special committees for strategy, audit, nomina-tion, remuneration and performance review and so on. However, there are no provisions in the Rules on the roles of a special committee for a trans-action where the directors participate or have interests in the transaction. The company may set up a special committee for such a kind of transac-tion and lay down the responsibilities of this committee based on its needs according to the approval by the shareholders’ meeting.

The Company Law places restrictions on a board of directors’ ratifica-tion of ‘vested-interest’ transactions. Directors (or the board of directors as a whole) who have personal interests in the transaction cannot ratify such transactions, nor can they represent other directors (in relation to the other directors’ voting rights) on such transactions, and the vested-interest transactions can be resolved only with the majority consent of the other directors without personal interests therein (article 124 of the Company Law). With regard to acquiring a public company in China, an independ-ent qualified auditor must be hired according to Chinese regulations on the acquisition of a public company (articles 49 to 51 of the Rules of Corporate Governance of Public Companies), as such transactions are closely related to the immediate interests of the shareholders of the target company and the board of directors of the target company might damage the interests of the shareholders for their own personal gains (a point elucidated further in question 9). The CSRC and the MOFCOM must give their initial approvals for the acquisition and are able to closely supervise the acquisition process (article 10 of the Measures for the Administration of the Takeover of Listed Companies).

Furthermore, the Notice On The Issuance Of The Rules For Listing Of Stocks On The Shanghai Stock Exchange stipulates that when a board of directors is considering a related party transaction, the related direc-tor shall withdraw from voting and shall not exercise any voting rights as a proxy of other directors (article 10.2.1). If a related party transaction is being considered by the shareholders’ general meeting, the related share-holders are required to withdraw from voting (article 10.2.2).

Going private, of course, brings fundamental changes to a company. In China, being public not only brings financial power from the public stock market, but it is also a symbol of a company’s reputation and credibility, especially when viewed in light of the lengthy and selective process that Chinese companies need to complete to go public in the first place. Thus, until now, most of the public companies in China have been reluctant to be privatised.

4 Disclosure issues


Measures for the Administration of the Takeover of Listed Companies (the Measures for Takeover of Listed Companies), issued by the CSRC and revised on 14 February 2012, established heightened disclosure require-ments regarding mergers and acquisitions of public companies. In China,

disclosure requirements differ, depending on the ratio of shares being pur-chased in the target company.

If the investor or other individuals or companies acting in concert obtain between 5 per cent and 20 per cent (inclusive) of the total shares issued by the target company through a stock exchange purchase or share transfer, the acquiring parties only need to submit a share exchange report to both the CSRC and the relevant Chinese stock exchange (there are two in China, the Shanghai Stock Exchange and the Shenzhen Stock Exchange) within three days upon transfer of the shares (article 16 of the Measures on Administration of Acquisitions of Listed Companies). The report must also be published in the relevant stock exchange’s bulletin. This report must include the name and domicile of each acquiring party (namely, the inves-tor), the purpose of the acquisition, the investor’s intention in relation to its newly purchased shares for the coming 12 months and the name, types, volume and ratio of the newly purchased shares of the target company (public company) as well as the date and description of the shares owner-ship (article 16 of the Measures on Administration of Acquisitions of Listed Companies).

If the acquired share ratio is between 20 per cent and 30 per cent (inclu-sive) of the total shares issued by the target company, a more detailed share exchange report must be submitted by the acquiring party. Besides the information mentioned above, the report must include details on the share structure of the acquiring company, the price of the purchased shares, the amount of the required capital of the acquiring party that was used in the transaction and a list of the transactions between the acquiring party and the target public company in the past 24 months (article 17 of the Measures on Administration of Acquisitions of Listed Companies). The report should also state whether this is a vested-interest transaction.

If the acquiring party obtains more than 30 per cent of the shares of the target company through a stock exchange purchase, and it still wishes to increase its shareholdings in the target public company, it is legally required to make a tender offer to the target company (article 24 of the Measures on Administration of Acquisitions of Listed Companies). Such tender offer and any changes thereafter must be submitted to the CSRC and Stock Exchange and disclosed to the public.

Except for the disclosure of the change in equity of the public com-pany, the board of directors, actual controller and the shareholder con-trolled by such actual controller, shall assume the obligations of disclosure during the going-private transaction or private equity transaction.

In the event that after such transactions the equity structure of the target company does not fulfil the relevant requirements on public compa-nies, the stock exchange will issue a notice to the public regarding the stock transactions of the target public company also called the ‘stock market exit caution notice’ (article 13.2.1 of the Rules Governing the Listing Stock on Shanghai Stock Exchange). This notice aims to remind the public that the listed company may go private due to either a private equity transaction or the failure to fulfil the relevant official requirements.



Actual time considerations vary from case to case. Under Chinese laws and regulations, the following rules apply where the acquiring party (a private or public company) acquires more than 30 per cent of the shares of a public company:

The Measures on Administration of Acquisitions of Listed Companies provides that, unless there are other competitive tender offers, the acquisi-tion period in the tender offer shall be 30 to 60 days (inclusive), and the acquirer shall not change the tender offer 15 days before the expiry of such offer. In the event of the occurrence of competitive tender offer, the initial acquirer may extend the period in its offer.

Where a foreign acquirer wishes to acquire the equity of a public company in China for medium to long term strategic investment, such equity transactions must be approved by the MOFCOM. In general, such kind of transaction shall be completed within 180 days after the issu-ance of approval by the MOFCOM (article 16 of the Measures for the Administration of Strategic Investments by Foreign Investors in Public Companies).

Where the target company has become private due to the private equity transaction, it shall delist from the stock exchange and register the change of legal form of the company with the relevant Administration for



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Industry and Commerce (the Chinese business registry) within 30 days upon its receipt of approval from the relevant bureau of commerce.



Regarding the right to vote to dissent or object to a going-private transac-tion, a resolution of going-private transaction must be passed by the board of shareholders (article 37/103 of Company Law). As a consequence, share-holders have the right to vote against such motion. (The shares which are held by the company do not have any voting right.)

As to the resolutions amending the articles of association or increas-ing or reducing the registered capital, or a resolution about the merger, split-up, dissolution or change of the company form, the resolutions shall be adopted by shareholders representing two-thirds or more of the voting rights of the shareholders who are present (article 103 of Company Law).

To address the risks associated with shareholder dissent, the acquir-ers shall stipulate a termination/penalty clause in the purchase agreement with the seller. In the event that the resolution of a going-private transac-tion is objected to by the shareholders, the acquirers have the right to ter-minate the purchase agreement unilaterally and claim for compensation based on the penalty clause.



Below is a list of the main clauses that are either specific to, or should be contained in, purchase agreements that deal with Chinese private equity transactions.

PrerequisitesThe first and most important prerequisite is the consent obtained at the shareholders’ meetings of both the acquirer (if a company) and the target company (articles 71 and 103 of the Company Law).

Representations and warrantiesRepresentations and warranties need to be included regarding the effec-tive completion of the complex administrative procedures that must be completed through various Chinese authorities for private equity transac-tions, especially if the target company is a public company or a state-owned public company. Obviously, these administrative approvals will sometimes affect the validity of the purchase agreement (for example, in China the equity purchase agreement, while signed, officially becomes effective only after the required administrative approval from the MOFCOM or its competent local counterparts is obtained). Further, warranties need to be included confirming the validity of the transaction in light of any agree-ments between the main parties and third parties.

Evaluation of equityThis is equivalent to the price term of a common purchase agreement. In common cases, the acquirer and the target company can negotiate with each other the purchase price of the equity. However, if the acquirer is a foreign company and the target is a Chinese company, the value of the equity under the purchase agreement shall be evaluated and approved by a qualified third-party evaluation agency. If the target is a state-owned enter-prise, the equity value shall be evaluated by one of the specific state-owned asset evaluation agencies accredited by the China State-owned Assets Supervision and Administration Commission of the State Council (article 13 of the Interim Measures for the Management of the Transfer of State-owned Property). The asset evaluation report will be utilised as the basis in determining the reasonable purchase consideration by the approval authority, to avoid the domestic or state-owned assets being undervalued.

Management and profit distributionAfter the transaction, if the acquirer is a foreign entity and acquires all of the shares in the target company, the target company will become a wholly foreign-owned enterprise (commonly referred to as a WOFE), which is still a separate Chinese legal entity under the Company Law. However, if the acquirer acquires only some of the shares of the target company, the target

company will become an equity joint-venture company. Such classification affects the distribution of profits and the corporate structure of the new entity and thus should be taken into account in the purchase agreement. The management rights and profit distribution shall be decided in accord-ance with the shareholding amount each party owns in the company after the transaction. The GCFI dictates the ownership levels allowed by a for-eign private equity purchaser and the industries where it can invest.

EmploymentA merger and an acquisition of a company will not influence the pre-existing employment relationship between the acquired company and its employees. If the new shareholder wishes to terminate the employment relationship with the employees, severance pay must be given in accord-ance with the related labour laws and regulations (articles 47 and 87 of the Employment Contract Law). Employment issues, especially the compen-sation of senior managers of the target company or the compensation to laid-off employees in a state-owned enterprise, are important issues that should be addressed in the purchase agreement and may sometimes influ-ence the costs of the entire transaction.

FinancingSuccessful financing plays an important role in deciding the success of the transaction. The acquirer is usually required to make a representation on the purchase agreement about its credit history and financial reputation.

Penalty clauseIn most cases, the acquirer may ask for a break-up fee from the target company if the transaction is terminated owing to the default of or aban-donment of the deal by the target company. The break-up fee acts as a guarantee in the event that the target company reneges on its acceptance after it has already accepted the offer. Reverse break-up fees require the acquirer to pay a fee to the target company (or seller) if the deal fails to con-clude because of any breach of contract by the acquirer.

Limitation on remedies for breachIn China, the general function of civil remedies is to compensate losses (including direct losses and indirect losses) rather than award puni-tive damages. According to articles 113 and 114 of the Contract Law, the amount of the compensation shall not exceed the amount that the breach-ing party can foresee or should foresee when signing the agreement (this foreseeable amount shall be decided by the people’s court if there is a dis-pute between two parties). Where the amount of compensation stipulated in the agreement is lower or higher than the actual losses suffered by the other party, an application can be filed with the relevant court or arbitra-tion tribunal to adjust the amount of compensation to reflect the actual losses. However, the court or tribunal will not entertain such application unless the difference is considerable.



Going private is an important decision for public companies. In practice, a resolution is submitted to the management and presented at the share-holder meeting. Under the current corporate governance stipulations, the management gets involved in the going private transaction from the very beginning.

The management of the target company can be given the rights to pur-chase the equity, options and restricted stocks of the target company, or can be offered a golden parachute (which refers to high compensation pay-outs given to the current management of the target company to get them to leave after the transaction). These dispositions aim at encouraging the management to get involved in the transaction and to ensure that senior managers will protect the interests of the target company as well as their own interests. However, management may also convince the shareholders to accept unfavourable transactions given potential conflicts of interests (see question 3).

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transaction, the Measures on Administration of Acquisitions of Listed Companies provides that the board of directors of the target company must complete a due diligence report on the qualifications, credit, repu-tation and intentions of the acquirer, and carry out an in-depth analysis and give suggestions to the shareholders as to the terms and conditions of the tender offer rendered by the acquirer. Moreover, the board of direc-tors of the target company must appoint an independent financial consult-ant to advise on the going-private transaction (article 32 of the Measures on Administration of Acquisitions of Listed Companies). An important consideration for the buyer is how the parties aim to deal with potential conflicts between the company founder’s interests and influence over the management. The target company typically requires certainty that if the founder decides, after signing the agreement, that he or she no longer wishes to proceed, he or she would not exert influence as head of the com-pany to impede the transaction.

The public company shall determine the remuneration and incentive payments of the executives based on the performance appraisal prepared by the board of directors or the remuneration and performance review commission on the executives. The remuneration and performance review commission might be staffed by the directors, where independent direc-tors must constitute a majority. The remuneration and incentive payments of the executives must be approved by the board of directors, presented to the shareholders’ meeting and disclosed to the public.

9 Tax issues


Stamp duty is charged on both contracting parties at a rate of 0.05 per cent of the consideration for the transfer of shares. The shareholders of the target company (both individual and corporate) are subject to income tax, whether individual (article 2 of the Individual Income Tax Law) or enterprise (article 3 of the Enterprise Income Law), based on the income obtained from the transaction. However none of the parties must pay busi-ness tax (article 1 and 2 of the Circular Caishui (2002) No. 191).

Under Chinese tax law, share acquisitions are more tax-efficient than assets acquisitions. For example, when purchasing tangible assets, value added tax (VAT) applies to the purchasing party according to the tax rate applicable to each type of assets (article 1 of the Interim Regulations on VAT). When transferring the ownership of real estate or intangible assets, the target company is subject to a 5 per cent business tax (article 1 and the Schedule of the Interim Regulations of the PRC on Business Tax) and the purchasing party is subject to a 3 to 5 per cent deed tax if the assets involve land-use rights or property titles (articles 1 and 3 of the Interim Regulations on Deed Tax).

The payment method further influences the tax payable in a private equity transaction. In the event that the acquirer pays by cash, the cash received by the shareholder of the target company is subject to income tax. If the acquirer pays with unconvertible bonds, the interest earned on the bonds received by the shareholder is also subject to income tax, but the interest paid by the acquirer is deducted prior to taxation. If the acquirer pays with convertible bonds, the acquirer can defer the process of convert-ing the bonds to shares. By doing so, the interest paid by the acquirer will be deducted from the taxable amount and the tax on capital gains from the conversion shall be deferred, too, which is beneficial to the acquirer.

Furthermore, if the private equity transaction was carried out through a share swap, it will be exempt from income tax, as no actual monetary income was earned as a result of the transaction.

Finally, some preferential tax policies apply regarding the level of employees retained after the transaction. For example, pursuant to arti-cle 5 of the Notice of the Ministry of Finance and the State Administration of Taxation on Deed Tax Policies Concerning Reorganization and Restructuring of Enterprises and Public Institutions, if the acquiring party retains more than 30 per cent of a public institution’s employees of the tar-get company and enter into labour contracts with a term of more than three years with these employees, the deed tax involved in any transfer of land-use rights and property title in relation to the transaction is reduced by half. If the acquiring party retains all the employees and enters into labour con-tracts with a term of more than three years with these employees, deed tax related to the transaction shall not apply.

According to article 1 of the Issues on the Payment of Individual Income Tax regarding Compensation promulgated by the Finance Ministry and Tax Bureau on 10 September 2001, where the amount of the compensation paid to the executives of the target company such as the gen-eral manager and other senior management staff (the executives) does not exceed three times the local average salary where the target company is located in the latest year (the average salary), the executives do not need to pay individual income tax. In the event that the amount of compensa-tion (on its own) exceeds the average salary for the related year, the execu-tives shall pay individual income tax on the basis of the exceeding part. This amount will not be added to the existing income of the executive but instead will be taxed separately as if it were a separate stream of income.



In China, the LBO process has not been commonly accepted in acquisi-tion practices, owing largely to the lack of regulations and a mature capital market as well as the control issues noted in question 1. In addition, the main source of capital in China comes from commercial banks. However, under the current banking laws and regulations, the Chinese commercial banks are reluctant to lend money to companies that are unable to offer any guarantee, even if there is a prospect of high returns on the investment. Moreover, according to the statistics from China People’s Bank, small to medium enterprises (SMEs) generally receive less than 5 per cent of the loans granted to companies by commercial banks. The social insurance and securities investment funds in China are under strict supervision and can only invest in certain IIFs and SIFs accredited by the National Development and Reform Council and are thus not available for LBO financing purposes.

In practice, some large companies and enterprises do lend to each other, but under the current financial laws, financing between two com-mercial companies is also restricted (article 61 of the General Rules on Loans) unless this is achieved in other ways, for example, through an entrustment loan arrangement involving qualified financial institutions, as only legally recognised financial institutions such as banks are able to lend money.

The existing indebtedness of the target company may bring about a significant impact on the evaluation of the equity in a private equity trans-action. The acquirer must determine the existing indebtedness of the tar-get company, including but not limited to all securities provided to any third party by the target company, all contractual obligations assumed by the target company under the contract with a third party, taxes and charges levied by the governmental authorities, and liabilities and responsibilities borne by the target company subject to the verdict or award made by the court or arbitration organisation. The acquirer must estimate the value of the equity based on the status of the indebtedness. Any assets encum-bered with a mortgage or other form of security may depreciate in value. The accounts receivable and accounts payable can present a clear financial status to the potential acquirer. The target company may be subject to tax payment, penalty or even criminal charges in the occurrence of tax fraud, tax arrears or tax evasion.

According to articles 18 and 19 of the Guidelines on Risk Management of Loans Extended by Commercial Banks for Mergers and Acquisitions issued by the China Banking Regulatory Commission (CBRC), qualified commercial banks can offer loans for acquisition projects, but the term of the loan must be five years or less, and the loan cannot cover more than 50 per cent of the total value of the acquiring transaction. As LBOs are relatively new to Chinese commercial banks, most of them are still very cautious and follow the detailed implementation rules prescribed by the Chinese authorities.

Article 9 of the Core Indicators for the Risk Management of Commercial Bank (Trail Implementation), provides that the credit line granted to a group by a commercial bank may not exceed 15 per cent of the net capital of such bank, and the total loan to a single company in a group may not exceed 10 per cent of the net capital of such bank.



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The Chinese government is also cautious about acquisition transac-tions in China. There are various reasons for this (including a perceived lack of experience, talent and legal support), but the most important relates to the wish to prevent state-owned assets from being privatised, as many target companies are state-owned enterprises that play an important role in China’s economy. For example, China Stegy Investment Co (Hong Kong) acquired 196 Chinese enterprises in 1992 and 1993, and most of the target companies were state-owned enterprises. This large-scale buyout activity attracted the attention of the Chinese government and made it reconsider the use of foreign investment in LBOs, especially given the lack of regulation.

In addition, structuring a private equity transaction is restricted due to the difficulty of leveraging equity with debt in China. There are stringent foreign exchange controls imposed by the Chinese government regarding foreign guarantees and loans provided by foreign enterprises. Debt finance in China lacks flexibility. This is attributable to the inadequate funds sup-plied from the Chinese domestic capital market and loans available from qualified financial institutions, in combination with a lack of coordination of the central government’s policies and conflicting local policies by local authorities.



The LBO market is closely related to the subordinated debt market, espe-cially the high yield bond market. As discussed in question 10, the Chinese capital market is not as mature as those in other markets, thus debt or equity-financing (especially in going-private transactions) is not popular. In addition, being public in China is, as mentioned in question 3, very highly regarded and therefore public companies are usually very reluctant to go private.



In accordance with the Measures for the Administration of Strategic Investments by Foreign Investors in Public Companies there are strict requirements for the acquiring party (capital levels, corporate governance, credit, etc), which aim to reduce the risk of a transaction. In addition to these requirements, a resolution must be ratified by the board of directors and shareholders of the target company (article 104 of the Company Law) according to the Company Law and the target company’s articles of asso-ciation. Further, elements of the transaction, including but not limited to the transaction plan, the share transfer agreement and the qualifications of the acquirer, must be firstly reviewed and approved by MOFCOM and the CSRC. This strict scrutiny prevents, to some extent, fraudulent convey-ance. Further, the acquirer often conducts due diligence investigations on the target company and requires the target company to provide consent let-ters issued by the creditors of the target company to indicate the creditors’ consent of the transactions to be carried out, which may mitigate the risk of fraudulent conveyance or other bankruptcy issues by the target company.

The Measures for the Administration of Strategic Investments by Foreign Investors in Public Companies also impose requirements as to the creditability and financial status of the acquiring party to assess the inves-tor’s financial health. . One of the criteria for a qualified acquiring party is that it must be validly established and a legally operated foreign entity with sound financial status, good creditworthiness and a mature manage-ment system. The balance sheet of an acquiring party for the preceding three years issued by a certified auditor must be submitted for approval as part of the acquisition application (articles 6 and 12 of the Measures for the Administration of Strategic Investments by Foreign Investors in Public Companies).

The investor is allowed to walk away from the transaction in case of bankruptcy, among other reasons, subject to approval from MOFCOM. Before the expiry of the term during which the investor has warranted to hold the shares of the listed company, the investor may transfer its shares, after approval by MOFCOM, in case of bankruptcy or liquidation.



One important exit mechanism for private equity sponsors (whether singu-lar or multiple) is the share transfer. In order to ensure that a public com-pany can operate smoothly at the beginning stage of privatisation and to prevent the shareholders from engaging in illegal speculation of the securi-ties, the Company Law provides that shares held by the initiators, direc-tors, supervisors and senior management shall not be transferred within one year of the date the shares go public (article 141 of the Company Law). Transfers of equity in an onshore joint venture are subject to a statutory consent right and right of first refusal by all other members.

Most of the minority shareholders do not have directors representing their benefits, owing to their small shareholdings. In practice, majority shareholders have had the final say on major decisions, even if some deci-sions may be disadvantageous to minority shareholders. In view of this, minority shareholders must pay special attention to the following issues while compiling the shareholders’ agreement: accessibility to the account-ing books; financial reports and operational documents; voting rules for the selection of directors and supervisors; voting rights of the sharehold-ers; exit strategy and resolution of a deadlock. Under the Company Law, the minority shareholders of a limited liability company are entitled to apply to a court to compel the company to repurchase their shares if they object to certain major resolutions (article 74 of the Company Law). This is because they cannot technically prevent a resolution from being ratified by the board of directors of the company. Such laws should, for the sake of clarity, be included in shareholders’ agreements.



Private funds often face difficulties in obtaining control of a target com-pany in China. One reason for this is that the CGFI considers many indus-tries ‘strategic’ and therefore foreign investment is restricted or prohibited. Across all sectors a typical Chinese private-equity investment in an operat-ing company is a non-controlling stake of approximately 15 to 40 per cent. This is usually intended to be used as growth capital.

Article 88 of the Securities Law and article 24 of the Decision on Amending Article 63 of the Measures for the Administration of the Takeover of Listed Companies provide that when an investor holds, or holds with any other person, 30 per cent of the stocks as issued by a listed company, and wishes to further increase this percentage, the investor is required to issue a tender offer to all shareholders of the target company to purchase all or part of the target company’s shares. The investor is not permitted to revoke the offer during the term of the offer. The Measures for the Administration of the Takeover of Listed Companies provides for several requirements for acquiring a listed company including, inter alia, that any takeover may not damage state security or social public interests (article 4); the purchaser is required to hire a professional institution that is registered in China and is qualified as a financial consultant (article 9); and once the acquisition of the target company is concluded, the purchaser may not transfer the stocks of the target company within 12 months after the acquisition is concluded (article 74). A further challenge for private funds looking to acquire a controlling stake of either a private or state-owned company is that the Chinese government and the entrepreneur are both usually very reluctant to give up control over their company.

There are currently no capitalisation requirements on the acquirer. However, according to article 6 of the Measures for the Administration of the Takeover of Listed Companies and article 146 of the Company Law, a natural person or a company owing a substantial amount of debt cannot take over a listed company.



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15 Exit strategies


A secondary sale is defined as a sale by a private equity firm of its stake in a portfolio company by way of an IPO. Whereas more mature markets have significant experience conducting IPOs, this is still relatively new in China and is not very common. The IPO is the most profitable exit strategy for PE firms, however, it presents many challenges due to the strict requirements. In November 2010, the Beijing Financial Assets Exchange published the Private Equity Trading Rules of Beijing Financial Assets Exchange (PETR) that officially opened the private equity secondary sale market in China. This secondary market aims to provide private fund firms with services including fundraising, financing, transfer of equity and fund-portfolio, and exit investment. The implementation of this secondary market has eased some of the challenges faced when conducting an IPO.

PE funds often face difficulties in conducting a public offer in the Main Board Market (MBM) due to the strict access requirements. As private funds tend to invest in high-technology and other innovative enterprises, the success ratio in order to access the MBM is usually too low and the cost too high. Therefore, most private funds choose the Growth Enterprise Market (GEM), which was created for growth companies, to conduct IPOs of a portfolio company.

The Interim Measures for The Administration of Initial Public Offering and Listing of Stocks on Growth Enterprise Market (2009) set out the fol-lowing conditions for the issuance on initial public offering stocks:• the company must possess adequate profit capability. In order to cater

for different financing demands of different enterprises, the GEM set forth two standards for the applicant to choose;

• the issuer must have made a profit in the latest two years and the net profit accumulatively amounts to no less than 10 million renminbi; or

• the issuer must have made a profit in the previous year, the net profit of the previous year is no less than 5 million renminbi, the turnover of the previous year is no less than 50 million renminbi and the growth rates of turnover in the last two years are no less than 30 per cent respectively;

• its business income in the previous year must be at least 50 million renminbi;

• its business income growth rate in the last two years must be at least 30 per cent;

• its net assets must be valued at least at 20 million renminbi, with no loss to cover in the most recent period;

• the total amount of capital stocks after offering must be at least 30 mil-lion renminbi;

• there must be no major change in the principal business, directors and senior managers of the issuer in the last two years, nor must there have been a change in the actual controller; and

• the core business must be highlighted by the issuer and the funds raised may only be used to develop the core business.

Private equity investors typically expect pro-buyer terms, with extensive representations and warranties with the aim of facilitating a potential indemnification claim. Also, a provision capping a potential claim on the amount of losses as high as the purchase price is often included.



The CSRC published the Rules of Corporate Governance of Listed Companies (the Rules), which is applicable to all listed companies within China, and will apply to a company post-IPO. The Rules set forth the basic principles of corporate governance, the means for protection of investors’

interests and rights and the basic behaviour rules and moral standards expected. During the restructuring and reorganisation of a company that plans to go public, the controlling shareholders are required to observe the principle of ‘first restructuring, then listing’, and must emphasise the establishment of a reasonably balanced shareholding structure.

Articles 86 and 87 of the Securities Law and articles 13 to 19 of the Measures for the Administration of the Takeover of Listed Companies pro-vide that, after the IPO, if the shares held by an investor reach or exceed 5 per cent, the acquirer is required to submit a report on the alteration of the share entitlements to the CSRC and the Stock Exchange, notify the listed company and make a public announcement.

When dealing with lock-up restrictions, one can generally refer to arti-cle 141 of the Company law, which provides that the shares of a company held by the promoters of this company cannot be transferred within one year after the date of the establishment of the company, and the shares issued before the company publicly issues shares cannot be transferred within one year from the day when the stocks of the company are listed and traded in a stock exchange.

The directors, supervisors and senior managers of the company must declare to the company the shares held by them and the changes thereof. During the term of office, the shares transferred by any of them each year may not exceed 25 per cent of the total shares he or she holds. The aforesaid persons may not transfer their shares within one year from the time the stocks are listed and traded in a stock exchange. The articles of association may include other restrictions on the transfer of shares held by the direc-tors, supervisors and senior managers.

The lock-up restrictions vary according to the specific stock exchange used.

The Notice on the Promulgation of the ‘Shenzhen Stock Exchange Shares Listing Rules’ provides that:• the director, supervisor and senior manager must declare and apply

for a lock-up of shares before the issuance of such shares, at the time of his or her appointment and increase of shares (article 3.1.7);

• the issuer cannot transfer his or her shares within one year as of IPO if such shares are held by the issuer before the IPO (article 5.1.5); and

• the controlling shareholder is not permitted to transfer or have the issuer buy back his or her shares owned before IPO within 36 months from the date of the IPO (article 5.1.6).

The Shanghai Stock Exchange has similar requirements in Notice On The Issuance Of The Rules For Listing Of Stocks On The Shanghai Stock Exchange (Revised 2012), as follows:• the largest shareholder cannot be permitted to transfer or have the

issuer buy back its shares within 36 months from the IPO (article 5.1.5);• a director, supervisor and senior manager cannot transfer his or her

shares within one year from the IPO or within six months after his or her resignation. Any changes of his or her shares during his or her term in the company must be declared, subject to the requirements pro-vided by the Stock Exchange (article 3.1.6); and

• if a director, supervisor, senior manager or shareholder holding more than 5 per cent of the company’s shares sells the shares within six months of purchasing the shares, or purchases the shares within six months since he or she sold the shares, the benefit from such sale or purchase will derive to the company. The board of directors shall col-lect such benefit and declare the relevant situation. (article 3.1.7).

The following are common methods for private equity sponsors to dispose of their stock in a portfolio company following its IPO:• through the stock exchange centre; and• through block trade platform (under the stock exchange centre).

Requirements for block trade provide that the number of shares is no less than 500,000 or the transaction amount is more than 3 million renminbi.



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Recently, the typical going-private transactions in China mainly targeted large state-owned enterprises publicly listed on the Hong Kong Stock Exchange and involved in the natural resource and agricultural industries such as China Petrol, China Pec Group, Aluminum Corporation of China and China Food Corporation. Strictly speaking, these companies cannot be regarded as engaging in a going-private transaction in mainland China because most of them went public in Hong Kong. Privatisations of these companies are mainly for restructuring purposes as they may have more than one listed subsidiary. According to the Report on the Development of Venture Investment in China (2009), the most popular targets for the inter-national private equity sponsors in China were green energy and biotech businesses. Semiconductor components, media and wireless communica-tion industries are also popular targets. IT continues to be a major area of interest.

Strictly speaking, there have been very few privatisation transactions in China (excluding the Hong Kong stock market), because the aura of being a public company in China is very high.

One of the most important industry-specific regulatory schemes in China is the above-mentioned CGFI, which indicates the Chinese govern-ment’s attitudes in directing foreign investment. Industries have been clas-sified into four different categories: allowed, encouraged, restricted and prohibited industries.

These categories reflect the extent to which foreign participation is allowed in a company and the variations that may occur within these cat-egories. For example, foreign shareholdings in a life insurance company cannot exceed 50 per cent, and those in a securities company shall not exceed one-third of the total shares, and the Chinese shareholder must be the majority shareholder of a joint-venture security company (both indus-tries, however, fall under the restricted category) (articles 7.2 and 7.3 of the Restricted Industries section of the CGFI). These restrictions have an implication on investment strategies, as exit strategies are more difficult to implement when an investor cannot be the majority shareholder.



In addition to the foreign investment restrictions provided in the CGFI as mentioned in question 17, China adopts a strict foreign exchange control policy that adds complexity and difficulties to private equity transactions if the target company is a Chinese public company. The foreign acquiring party must apply for approval to open a bank account in a foreign currency in order to receive capital for the private equity transaction with the local Administration of Foreign Exchange where the listed company is located within 15 days upon its receipt of the official approval from the MOC. All

transactions must generally be completed within 180 days upon receipt of the official approval. If the foreign acquiring party fails to complete the whole transaction within the above time limit, the official approval will automatically become invalid. The foreign acquiring party will, on the approval from the Chinese Administration of Foreign Exchange, purchase foreign currency and remit the capital abroad.

If the target company is a state-owned public company, the consid-erations must be taken into account. First, the consideration of the share transfer shall be evaluated by the state-run Assets Administration and Supervision Committee (article 55 of the Law on State-owned Assets). Second, if the acquiring company involves a key industry, has some influ-ence on national economic security or would lead to the transfer of control of a well-known Chinese brand owned by the target company, the contract-ing parties must apply for approval of the transaction from MOFCOM, otherwise the MOFCOM may prohibit the transaction. Third, since state-owned enterprises are large-scale companies, employment issues after the transaction are key. Finally, the equity transfer must be handled through an accredited Chinese equity exchange.



Different equity firms will have varying criteria in choosing the target company and different ways to realise their exits from the target com-pany. This will inevitably bring complexity and conflicts to the transaction. Furthermore, as discussed in question 13, certain requirements apply when the acquiring party acquires a Chinese company (such as financing abil-ity). Every participant must meet the requirements, which include those stated in questions 4 and 13. Although the funds used in LBOs are mainly from overseas, the financing party (such as the bank) will still request that the acquiring party invest more of their own capital, which is an indication of commitment to the acquisition. It may also be taken to mean that the acquiring party will not sell its shares in the target company within a short period of time and will opt for a long-term strategy instead.



The following provisions are usually included in a purchase agreement to facilitate closing.

Lock-up termThis prevents the target company from soliciting or accepting offers from other bidders. In practice, the lock-up term defines the negotiation as an exclusive arrangement and prohibits both parties from contracting, nego-tiating or concluding similar arrangements with any third parties who have an interest in the target company.

Closing conditionsA private equity buyer will make full payment on condition that the seller meets specific closing requirements. Normally, the requirements include:• the private equity buyer has completed a due diligence exercise on the

target company and is satisfied with the results;• the equity transfer has obtained all necessary internal approvals of

the target company and administrative approvals from the competent authorities;

• the seller has fully disclosed the business, operation, assets, liabilities and other details of the target company to the private equity buyer;

• there has been no adverse change in the business, operations, assets, liabilities or other circumstances of the target company; and

• every transaction condition should be fulfilled in a way that does not contravene Chinese law and that is to the satisfaction of the private equity buyer.

Update and trends

Reinforcement control on the fund manager and record-filing of fundsA circular titled ‘Distributing the Measures for the Registration of Private Equity Fund Managers and the Record-filing of Funds’ was issued by the Asset Management Association of China on 17 January 2014 and took effect on 7 February 2014.

According to the circular, a private fund is required to file the basic information of the fund manager, senior officers, shareholders, partners and the private fund to the private fund registration filing system.

In addition, upon finishing collection of the private funds, the fund manager is required to file information concerning the type of the fund, the investment orientation, the capital scale, investors and the fund contract to the private fund registration filing system.



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Termination rightsThe agreement may be terminated by mutual agreement. In addition, the rights to unilateral termination should be stipulated under certain cir-cumstances. If the closing conditions remain unsatisfied or are not waived within the lock-up period, either the private equity buyer or the seller may terminate the agreement in writing. If any of its representations and war-ranties are untrue or inaccurate, the private equity buyer may terminate the agreement.

Liquidated damagesIn the event that the agreement is terminated by the private equity buyer due to the seller’s failure to complete the formalities of the equity trans-fer, liquidated damages, which may be a certain percentage of the trans-fer price, are often imposed on the seller. Furthermore, if the penalty is insufficient to compensate the losses caused by the private equity buyer, additional compensation may be claimed (see question 7 for the applicable principles).

Caroline Berube [email protected]

B-1002, R&F Full Square PlazaNo. 16 Ma Chang RoadZhuJiang New City, Tianhe DistrictGuangzhou, GuangdongChina 510623


COLOMBIA Baker & McKenzie


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ColombiaJaime TrujilloBaker & McKenzie



Private equity transactions in Colombia usually involve buyouts (cash-outs) or recapitalisations (cash-ins), or a combination of both, with the objective of turning the relevant portfolio company around. Turn-arounds are usu-ally sought by both providing capital for growth and instilling best manage-ment and governance practices in the relevant target portfolio companies (which are typically family-owned, informally managed and with limited access to financing) aimed at unlocking the target’s growth potential.

It is not uncommon for the original owners to retain a partial interest in the target portfolio company, so private equity transactions in Colombia may also involve shareholders’ agreements regulating the governance of the company and the rights and obligations of the parties with respect to their shares.

Going-private transactions are extremely rare, because the typical Colombian target portfolio company is not listed on the stock exchange. In fact, mergers and acquisitions activity in Colombia is dominated by private transactions, as only a handful of transactions involve listed companies (in the past two years only 10 public tender offers took place).

The acquisition structures of private equity transactions are mostly tax driven, usually structured with an indirect sale exit strategy in mind (ie, at exit, the private equity shareholder will sell the shares of an offshore holding vehicle, and not the shares of the portfolio company), because, in principle, indirect sales of shares in Colombian companies are not taxed in Colombia. The jurisdiction of the offshore holding vehicle will be cho-sen on the basis of several considerations, including the Colombian double taxation treaty network.



The typical Colombian target portfolio company is privately held, so corpo-rate governance rules applicable to these companies are significantly less stringent than those applicable to public (ie, listed) companies.

When the target is a listed company (which, as mentioned above, is the exception) there are incentives to taking it private prior to the acquisition (delisting is sometimes a condition precedent to the acquisition) in order to avoid a mandatory public tender offer, or soon after the acquisition, in order to avoid corporate governance rules (which require a minimum num-ber of independent directors) or special disclosure requirements.



Going-private transactions are extremely rare, because the typical Colombian target portfolio company is not listed in the stock exchange. In any case, under Colombian law the decision to sell shares of public compa-nies lies exclusively with the shareholders, and the board of directors does not play a formal role in the process.

However, in practice, access to the information required by the pur-chaser is made possible through the management of the company. The information that shareholders have the right to access directly, regardless of the size of their stake and whether or not they control the target, is lim-ited to the financial statements, main accounting books and minute books, only 15 days before the annual meeting. Therefore, the selling shareholders must persuade (or otherwise prevail over) management to make the infor-mation available to the bidder. This will sometimes prompt complaints by other, non-selling shareholders, that the controlling shareholders are being afforded preferential treatment.

4 Disclosure issues


As explained below (see question 6), going-private transactions imply car-rying out a public tender offer addressed to all shareholders that either voted against the delisting or did not attend the shareholders’ meeting where the delisting was approved. Public tender offers are subject to spe-cial disclosure rules.



The timing aspects of a typical acquisition also apply to private equity transaction and usually consist of antitrust clearance and, if the target is a public company, a mandatory public tender offer.

Antitrust clearanceAntitrust clearance is required if the transaction involves all the following elements:• unrelated parties are engaged in the same economic activity with

regard to a sector of production, supply, distribution, or consumption of a given article, raw material, product, merchandise or service in Colombia;

• the parties establish a horizontal relationship, or participate in the same chain of value, establishing a vertical relationship; and

• turnover or total assets of the parties from the previous fiscal year, individually or combined, exceed the annual thresholds established by the Superintendency of Industry and Commerce (SIC) the com-petition authority. For operations undertaken in 2014, the thresholds

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are set at the peso equivalent of 100,000 minimum monthly wages (in Colombia the minimum wage if often times used as an index, in order to maintain thresholds), so for antitrust clearance purposes the applicable monthly wage is 616,027 pesos so the peso threshold figure would be 61.6027 billion pesos, approximately US$32 million.

When the combined market share is below 20 per cent, the parties can apply for an abbreviated notification procedure. In this case, the transac-tion is deemed as authorised on filing of a mere notification to the SIC by the parties.

If the percentage exceeds 20 per cent, the transaction must be expressly cleared by the SIC. The timeframe for clearance depends on the complexity of the competition issues triggered by the transaction, but on average can take from three to six months.

Public tender offerPublic tender offers are mandatory when:• any person (or group of persons sharing the same beneficial owner)

intends to acquire shares representing 25 per cent or more of the vot-ing shares of a company registered at a Colombian stock exchange;

• any person (or group of persons sharing the same beneficial owner) who already owns 25 per cent or more of the voting shares of the rel-evant company intends to increase its voting shares by more than 5 per cent;

• any person (or group of persons sharing the same beneficial owners) acquires voting shares representing 25 per cent or more of the target company as a result of a merger, in Colombia or abroad (in which an ‘ex-post’ public tender offer must be launched within three months of the transaction, unless the purchaser divests the relevant shares within three months of the merger);

• any person (or group of persons sharing the same beneficial owner) holds more than 90 per cent of the shares of the relevant listed com-pany, if:• this threshold was reached by means other than a public tender

offer for all of the shares in the company; and• the minority shareholders owning at least 1 per cent of the voting

shares of the target company request that a public tender offer is launched (in which case the public tender offer must be launched within three months of the date on which the 90 per cent thresh-old was exceeded); and

• the shareholders of the relevant listed company decide to delist the company by a majority shareholder vote (as opposed to a unanimous shareholder vote).

Any public tender offer must comply with the following requirements: • the bidder must file a formal request before the Financial

Superintendency of Colombia (SFC), with a draft of the notice of its intention to make the public tender offer, which must include:• the minimum and maximum number of shares that the bidder will

accept (with at least a 20 per cent margin between the two figures);• the price at which the shares will be paid;• date by which the offer must be accepted;• the name of the exchange broker to be used in the operation; and• information on any pre-agreed terms; and

• the bidder must also prepare and submit an offering memorandum for the SFC’s approval with the following information (in addition to the information contained in the public tender offer notice):

• name and principal place of business of the target company;• name, principal place of business and main corporate activity of

the bidder;• information on shares that the bidder already has in the target

company and any prearranged transactions or other agreements between the bidder and the management of the target company or other shareholders;

• a brief description of the tax, foreign exchange and foreign invest-ment regimes applicable to the securities offered as payment (if applicable);

• information on the methodology used to value the securities offered as payment (if any);

• certificates by the bidder and its investment bank on the accuracy of the offering memorandum and information on authorisations to issue the offer; and

• other information requested by the SFC; and

• once the above information is filed, the SFC must notify Bolsa de Valores de Colombia, the Colombian Stock Exchange (BVC), in order to suspend the negotiation of the shares until the day after the publica-tion of the public tender offer notice. The SFC has five days to make any comments it deems relevant;

• the public tender offer notice must be posted three times in the finance section of a national newspaper, the first within the five days following the expiration of the SFC’s term to make comments to the draft public tender offer notice and offering memorandum; the other postings can-not be spaced more than five calendar days apart. The public tender offer notice must also be posted in the official information bulletins issued by the BVC, on each day from the date the public tender offer notice is first published until the day set for acceptances;

• the acceptances to the public tender offer must be made on the date set for that effect in the public tender offer notice, at a special two-and-a-half hour round, under an open outcry system. If the number of acceptances meets the minimum amount of shares indicated by the bidder, then all acceptances are deemed to be final. If not, the bidder is not required to purchase the shares (but may freely elect to do so);

• if more acceptances are received than the maximum offer was made for, then the right to sell shares is allocated proportionally among those who accepted; and

• the bidder must establish a performance guarantee, covering a cer-tain percentage of the value of the transaction. The guarantee can be in the form of a stand-by letter of credit or a bank guarantee, among other options, and must be established before the public tender offer is launched.

The timeline for the public tender offer can be summarised as follows:• submission of the application to the SFC;• issuance of comments or expiration of the SFC’s term to issue com-

ments (five business days): eight days from the date of submission;• publication of the first notice in a national newspaper (within five cal-

endar days after the issuance of comments or expiration of SFC’s term to issue comments): 13 days from the date of submission at the latest;

• the start date for receipt of acceptances (five business days from the publication of the first notice): 20 days from the date of submission;

• the deadline for the acceptance of the tender offer (a minimum of 10 and a maximum of 30 business days from the start date for receipt of acceptances): 35 days from the date of submission at the earliest; and

• delivery of target shares by selling shareholders, payment by pur-chaser: 38 days from the date of submission.



Under Colombian law, the decision to sell shares of public companies lies exclusively with the shareholders; it does not contemplate mechanisms where a purchaser, or the management or the board of the target company can compel dissenting shareholders to sell their shares.

In addition to refusing to sells its shares, a dissenting shareholder has the following protections:• disclosure: Agreements, in which one party (the bidder) agrees to

launch a public tender offer and another party (the shareholder) com-mits to accept the public tender offer, must be disclosed to the SFC, the BVC and the market in general at least one month before the date on which they are to be perfected. This must include an indication of the main terms and conditions of the exchange or trading system of the transaction and, the proposed date and time of the transaction;

• interference with the takeover bid: Takeover bids in Colombia are regulated so that third parties (that is, parties that have not reached an agreement with the controlling shareholders) are given the oppor-tunity to interfere with a public tender offer that has been launched by a bidder who has reached an agreement with the controlling share-holder, and submit competing bids; and

• public tender offer: although the decision to delist a company’s shares simply requires a majority shareholder vote, the shareholders voting in favour of the delisting must carry out a public tender offer addressed to all shareholders that either voted against the delisting or did not attend the shareholders’ meeting where the delisting was approved.



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The public tender offer must be carried out within three months of the shareholders’ meeting. The delisting only becomes effective after the public tender offer is completed.



Purchase agreements for private equity transactions are usually very similar to purchase agreements for traditional acquisition transactions. However, some differences can be seen when a private equity buyer or seller is involved.

When the transaction involves a private equity buyer, the private equity buyer will be more aggressive than a typical strategic buyer in seek-ing that the seller’s liability not be limited by the buyer’s due diligence or disclosure by the seller. Thus, ‘pro-sandbagging’ clauses are not unheard of. A private equity buyer will also sometimes seek to subject completion of the transaction to the availability of financing, but in recent deals this has been usually rejected.

When the transaction involves a private equity seller the scope of rep-resentations and warranties is usually more limited than in agreements for traditional acquisition transactions, in matters such as the time span cov-ered by the representations and warranties, the actual knowledge of the sellers and the survival of the representations and warranties after comple-tion. Private equity sellers will also seek to limit indemnity obligations to amounts held in escrow (although this is becoming the market practice for all acquisition transactions).

Purchase agreements relating to listed companies are special, because the transfer of shares can only take place pursuant to a public tender offer through the stock exchange. In these agreements the prospective buyer’s obligation is to launch a public tender offer on the pre-agreed terms and conditions, and the other party’s (the selling shareholder’s) obligation is to accept the public tender offer, if it meets the pre-agreed terms.



While managers or directors remain employed by the target company, they must maintain their fiduciary duties with the company. Colombian law imposes obligations on ‘administrators’, including managers and directors, to act in good faith, not to misuse their position to advantage themselves or improperly use information of the company for their own gain. During negotiations, administrators who find themselves with a conflict of interest must not participate in such decisions.

Administrators have joint and several liability for the damages suf-fered by the company, shareholders or third parties as a result of their negligence and wilful misconduct, except where they had no knowledge of the act or omission, or voted against it and did not carry out such act. Any attempt to limit or exonerate administrators from such liability in the by-laws is null and void.

Therefore, administrators will need to analyse cases in which there may be a conflict of interest carefully and, when necessary, declare them-selves disabled.

9 Tax issues


Private equity transactions in Colombia should be carefully analysed so as to benefit from any tax advantage available because of the type of asset, the situation of the company or the nationality of the parties. Colombia has double taxation treaties under the OECD guidelines in effect with Canada, Chile, Mexico, Spain and Switzerland, and has signed treaties with India, Portugal, South Korea and the Czech Republic which are still undergoing approval procedures. It is in the process of negotiating tax treaties with

Belgium, France, Germany, Israel, Japan, the Netherlands, the United Arab Emirates, and the United States of America. The Andean Community treaties (in force with Peru, Bolivia and Ecuador) also contain some double taxation provisions.

Share acquisitions cannot be classified as asset acquisitions for tax purposes.

The general tax rules to be taken into account in Colombia are as below.

Deductibility and financing costsThe Colombian tax office considers that the cost of financing obtained for the acquisition of a Colombian company is not deductible in Colombia, unless the dividends distributed by the target are taxable. The rationale behind this conclusion is that, for an expense to be deductible, it must be necessary to generate taxable income: as a general rule, dividends distrib-uted by Colombian companies are not taxable if the profits associated with such dividends have already been taxed at the portfolio company level.

While this position is debatable, in practice it has led buyers to carry out their acquisitions through special purpose vehicles that receive the financ-ing and are subsequently merged into the target, thus effectively pushing down the acquisition financing to the target. This option is not available when the acquisition does not result in effective control of the target.

The deductibility of the cost of foreign borrowing from unrelated par-ties is subject to the same limitations, as well as the requirement that the relevant withholdings on interest are actually performed.

Interest payments made to foreign-related parties are also deductible under these same conditions, provided that the financing meets transfer-pricing regulations.

Colombian income tax law does not allow the deduction of interest paid on the amount of loans that, in average during the year, have exceeded a 3:1 debt to equity ratio if compared to the net tax equity of the taxpayer as of the end of the previous year. The debt will be determined as a weighted average of the borrowed amounts according to its duration in the fiscal year, under the methodology provided by the government. This limitation affects not only debts with foreign-related parties, but any debt that yields interest.

Withholding taxAs a general rule, interest paid on foreign loans is subject to a 14 per cent income tax withholding. The law provides certain exceptions, as follows: interest paid under loans granted for a period of less than one year are subject to a 33 per cent withholding tax rate, loans granted to Colombian financial institutions and certain loans related to foreign trade are subject to a 0 per cent rate. Reduced withholding rates are available under double taxation treaties.

Dividends paid by a Colombian company to its shareholders (either resident or non-resident) are not subject to withholding tax, provided that the relevant earnings of the company paying the dividends have been sub-ject to the applicable income tax. If not, such dividends would be subject to a withholding tax of 34 per cent.

Transfer TaxesThe transfer of shares in an SA or a SAS company (the most common corpo-rate structures in Colombia) is not subject to stamp or other transfer taxes. The transfer of shares in sociedades de responsabilidad limitada is subject to a registration tax of 0.7 per cent.

Income tax on disposalIt is common for the private equity shareholders to try to structure their acquisitions so that they can dispose of them indirectly (by selling the shares of an offshore holding vehicle, and not the shares of the Colombian portfolio company), because, in principle, indirect sales of shares in Colombian companies are not taxed in Colombia. The jurisdiction of the offshore holding vehicle will be chosen on the basis of several considera-tions, including the Colombian double taxation treaty network.

Assuming the disposal is structured as a direct sale of shares of the Colombian portfolio company, the profits derived from the sale of the shares will be taxed at a rate of 10 per cent if the seller has held the shares for a minimum of two years, or at a rate of 34 per cent if the seller has held them for less than two years. The sale of shares of a listed company will not be taxed if the shares sold by the relevant shareholder within the relevant fiscal year represent less than 10 per cent of the issued and outstanding shares of the company.



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Buyouts by private equity buyers are typically financed with debt. Debt financing will depend on the transaction and market conditions at the time. In principle, Colombian residents are allowed to freely obtain loans (domestic or foreign) to finance acquisitions.

Acquisition financing is usually obtained at the acquisition company level and then pushed down to the target by way of merger between the acquisition vehicle and the target.

Security is typically by way of a pledge of the target’s shares, a guaran-tee by the target and a fixed and floating charge over the assets of the target. Putting this security package in place can be a challenge because security granted by the target can usually be put in place only after the acquisition closes, which means that the lender may be relatively unsecured for a brief moment (between disbursement of the loan and closing of the acquisition).



Provisions relating to debt and equity financing are rare in Colombian pri-vate equity transactions. On occasion, when the original owners retain a partial interest in the target portfolio company, the relevant shareholders’ agreement will establish limitations on the push-down of the debt and, in general, the target’s debt to equity structure.



There is no precedent in Colombia for this type of fraud in transactions involving leverage.

Transactions taking place within a certain time before a seller files for bankruptcy, or is placed under mandatory liquidation, are at risk of being revoked by the government or judicial authority overseeing the bankruptcy or liquidation. Transactions taking place when the seller has already filed for bankruptcy, or is under mandatory liquidation, will require the consent of the authority overseeing the bankruptcy or the liquidator.

These issues are usually handled by requiring consents from the tar-get’s main creditors, or setting up security (trusts) for the benefit of such creditors, as prior conditions to the completion of the transaction.



Shareholders’ agreements entered into in connection with private equity transactions will typically regulate the governance of the company (busi-ness plans and annual budgets, special voting thresholds, anti-dilution pro-tection, board composition and other minority protections) and the rights and obligations of the parties with respect to their shares (lock-ups, rights of first offer or first refusal), and options (drags, tags, puts and calls). These types of provision are valid and binding between the shareholders, but some of them may not be as regards the target portfolio company unless validly incorporated into the company’s by-laws.

Regardless of whether a shareholders’ agreement exists, a minority shareholder will always have the following rights to:• attend and vote at shareholders meetings;• challenge legal validity of shareholder decisions;• review financial statements, main accounting books and minute books

within the 15 days prior to the annual meeting;

• veto the conversion of the company into a different type of company;• withhold approval required to avoid public tender offers;• frustrate the adoption of decisions by unanimous written consent of

shareholders (and directors); and• frustrate the possibility of holding shareholder meetings outside the

legal domicile of the company.



See question 5. Public tender offers are mandatory when: • any person (or group of persons sharing the same beneficial owner)

intends to acquire shares representing 25 per cent or more of the vot-ing shares of a company registered at a Colombian stock exchange;

• any person (or group of persons sharing the same beneficial owner) who already owns 25 per cent or more of the voting shares of the rel-evant company intends to increase its voting shares by more than 5 per cent;

• any person (or group of persons sharing the same beneficial owners) acquires voting shares representing 25 per cent or more of the target company as a result of a merger, in Colombia or abroad (in which an ‘ex-post’ public tender offer must be launched within three months of the transaction, unless the purchaser divests the relevant shares within three months of the merger);

• any person (or group of persons sharing the same beneficial owner) holds more than 90 per cent of the shares of the relevant listed com-pany, if:

• this threshold was reached by means other than a public tender offer for all of the shares in the company; and

• the minority shareholders owning at least 1 per cent of the voting shares of the target company request that a public tender offer is launched (in which case the public tender offer must be launched within three months of the date on which the 90 per cent threshold was exceeded); and

• the shareholders of the relevant listed company decide to delist the company by a majority shareholder vote (as opposed to a unanimous shareholder vote).

15 Exit strategies


The limitations on the ability of a private equity firm to sell its stake in a portfolio company are usually of a commercial or business nature, and rarely of a legal nature.

While many private equity transactions include the possibility of an IPO, and some shareholders’ agreements even regulate the terms and conditions of an eventual future IPO in significant detail, IPOs remain extremely rare as an actual exit strategy. This is probably attributable to the relative immaturity of the Colombian securities markets.

When the transaction involves a private equity seller, the scope of rep-resentations and warranties is usually more limited than in agreements for traditional acquisition transactions, in matters such as the time span cov-ered by the representations and warranties (sellers will attempt to limit this to the period they controlled the target), actual knowledge of the sellers and the survival of the representations and warranties after completion. Escrows are now commonplace and private equity sellers will also seek to limit indemnity obligations to amounts held in escrow.

This does not change if a private equity firm sells a portfolio company to another private equity firm (although negotiations are usually tougher).



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IPOs or portfolio companies are rare in Colombia. Most of the stipula-tions that you would typically find in a shareholders agreement relating to a private company could survive an IPO, but the enforceability of such an agreement regarding the portfolio company would likely be reduced as many of these provisions will not be capable of being validly incorporated into the company’s by-laws.



Going-private transactions are extremely rare, because the typical Colombian target portfolio company is not listed in the stock exchange.

Targets in private equity transactions are typically family-owned, informally managed and with limited access to financing. Private equity firms invest in these targets with the objective of turning them around, by both providing capital for growth and instilling best management and gov-ernance practices.

Private equity transactions in Colombia have not focused on any par-ticular industry, although in the last year we have seen an increase in trans-actions involving infrastructure, construction and real estate (including hotels and tourism).

Some representative private equity deals in the recent past include the acquisition of :• Hoteles Decameron SA an all-inclusive chain of hotels throughout

Latin America, by Terranum Hotels (controlled by the Santodomingo Group with significant minority participation by Equity International);

• a significant minority stake in Oleoducto Central SA (Ocensa) (a pipe-line transportation company) by a team of investors lead by Advent International;

• a significant minority stake in Corona SA (a building materials manu-facturer and retailer) by a team of investors lead by Victoria Capital Partners;

• Grupo Transmerquim (the second-largest chemical distributor in Latin America), by Advent International; and

• Grupo Coremar (a port operator and logistics services provider), by Altra Investments.



Foreign investments are permitted in all areas of the economy with the exception of activities related to defence and national security, and the processing and disposal of toxic, dangerous or radioactive waste not gener-ated in the country. A Colombian company can be 100 per cent foreign-owned, except for foreign investment in national broadcast television, which is limited to a maximum of 40 per cent ownership of the relevant operator.

Under the Colombian Constitution and foreign investment regula-tions, foreign investment in Colombia shall receive the same treatment as an investment made by Colombian nationals. The conditions for reim-bursement of foreign investment and remittance of profits in effect at the time the investment is registered may not be changed so as to affect foreign investment adversely, except on a temporary basis when the international reserves are lower than the value of three months of imports.

Foreign investments in Colombia do not require prior government approval. They must be registered with the Central Bank either automati-cally upon the receipt of currency in the country or by filing the relevant documents within the applicable term with the Central Bank. Registration of foreign investment guarantees the foreign investor access to the foreign exchange market to purchase convertible currency to remit dividends and repatriate the investment. The failure to report or register could result in the imposition of fines by pertinent agencies and could imply that the investor would have to rely on the free market for access to convertible cur-rency. The registration of foreign investment must be annually updated with the Central Bank.

Colombia has exchange controls, but these are relatively benign.All foreign currency for the operations listed below must be acquired

or handled through the so-called ‘exchange intermediaries’ (ie, Colombian banks, some financial institutions and exchange houses) or by using overseas registered foreign currency accounts known as ‘compensation’ accounts:• import and export of goods; • foreign loans and earnings related thereto;• foreign investment in Colombia and related earnings;• Colombian investment abroad and related earnings;• financial investments in securities issued or assets located abroad and

earnings related to them, except when investment is made with cur-rency originating from ‘free market’ operations (ie, operations that are not required to be made through the exchange market);

• guarantees in foreign currency; and• derivatives.

Update and trends

In line with what has been happening in other, more mature markets, insurance companies in Colombia have begun offering representations and warranties insurance, and dealmakers have begun considering such insurance seriously.

Starting in 2013, the capital gains tax applicable on the sale of shares held for the seller for at least two years is taxed at a rate of 10 per cent. This has made it easier for deals to be made and simplified the structure of transactions.

Jaime Trujillo [email protected]

Avenida 82 No. 10-62, Piso 6Bogotá DCColombia

Tel: +57 1 634 1570Fax: +57 1 376 2211www.bakermckenzie.com/colombia



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All other foreign currency operations may be made through the exchange market or the so-called free market. In general, Colombia regulations do not allow for the set-off of the payment obligations resulting from these transactions.

Unless the law specifically permits otherwise, the general rule is that payments between Colombian companies or individuals must be made in Colombian pesos, or through compensation accounts.



Club and group deals are not uncommon in Colombia. Apart from the usual governance issues (business plans and annual budgets, special voting thresholds, anti-dilution protection, board composition and other minor-ity protections) the issue that is probably given the most consideration is liquidity and the priority in the event of a disposal. While private equity firms are usually willing to have the same priority upon exit with other pri-vate equity firms, they will usually want to dispose of their entire holdings before the strategic partner is entitled to exit.



The factors that usually provide some uncertainty to closing for private equity deals in Colombia are usually antitrust clearance, public tender offers and third-party consents. While private equity buyers will also some-times seek to subject completion of the transaction to the availability of financing, the instances in which this is actually accepted by a seller are very few.

Penalty clauses are sometimes used to discourage the parties from failing to use their reasonable efforts towards satisfying conditions prec-edent, but will apply only when the relevant party has clearly breached a pre-closing covenant (such as applying for antitrust clearance or launch-ing a public tender offer). Termination payments (ie, giving the parties the option to walk away from a deal if they so choose, by paying a fee to the other party) are rare. Clauses giving a prospective buyer the right to recover expenses incurred, in the event a deal fails due to third-party interference, have been used in transactions requiring public tender offers.

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DenmarkEskil Bielefeldt, Kristian Tokkesdal and Peter Bruun NikolajsenDelacour Law Firm



Numerous different types of transaction occur within Danish private equity. The transactions range from traditional takeovers carried out by private equity funds based on leverage buyouts and a traditional share sale and purchase agreement to venture capital funds acquiring the majority of shares through the issuance of shares in a specific target company. In recent years only an extremely limited number of IPOs or going-private transactions have been completed within Denmark; however, an increas-ing number of transactions have been completed by private equity funds or as part of an industrial consolidation.

The preferred transaction structure in Danish private equity deals is to establish a Danish limited liability company as a single-purpose purchase vehicle and afterwards take out the acquisition, financing and acquiring the share capital of the target through the said vehicle.



In Denmark, corporate governance and transparency in the private equity and venture capital industry has been subject to growing discussion. There has also been discussion of whether to implement statutory transparency or particular corporate governance rules. As a consequence of this debate, the tax legislation has continually been changed, with an increasing focus on transparency and a reduction of the variable size of the income available for management in private equity funds.

All Danish limited liability companies whose shares are traded on the regulated market in Denmark must comply with the Recommendations for Corporate Governance in Denmark (the Recommendations) issued by the Danish Committee on Corporate Governance, in addition to require-ments arising from the Danish Companies Act and other stock market regulations.

The Recommendations are based on the ‘comply or explain’ principle. This entails that companies are obliged to observe the Recommendations. The companies may, under certain circumstances, decide not to comply with the Recommendations in some respects. However, the company must clearly announce that it has not complied with the Recommendations and state on which points it has not complied and the reasoning behind the non-compliance. Finally, a description of the actions taken instead must be given.

Compliance with the Recommendations implies a higher administra-tive burden and consequently higher costs for corporate governance in the companies listed on the regulated market compared to similar costs in non-listed companies.



The Danish Securities Trading Act is the principal regulatory instrument with respect to mandatory offers and tender offers. The law applies to acquisitions of shares on the regulated market, if the acquisition results in the acquirer becoming the majority shareholder of the company in ques-tion, provided the acquisition is conducted in conjunction with the target company.

The Takeover Bids Order supplements the provisions, inter alia, in the Securities Trading Act with respect to the obligation to submit a mandatory bid and the content of such bid and contains provisions that are applica-ble to tender offers. The takeover rules are administered by the Financial Supervisory Authority (the Danish FSA).

The board of directors has an obligation to prepare a report regard-ing the bid. The report must contain the board of directors’ opinion on the bid and the reasoning hereof, including an evaluation of the consequences hereof for all company interests, and the bidder’s strategic plans for the target company and the likely consequences hereof for the employment and the establishments.

Each member of the board of directors of a public company consider-ing entering into a going-private or private equity transaction has to assess if and to what extent they can and should assist in the transaction or if they have a conflict of interest. Generally, the board of directors takes part and assists in the transaction. Should a board member in the target company have a specific interest in the bidder or in a bidder in competition with the first bidder, such director will become incompetent and may not partici-pate in the handling of an issue relating to the bid.

The board may not attend to its own interests or be affected by either the interest of a single shareholder or certain shareholders. Should there be more than one bidder, the board must treat each bidder equally.

The board of directors of the target company must, at the request of the bidder, decide whether the target company should participate in a due diligence investigation. The due diligence investigation should be limited to factors relevant to issuing the bid.

4 Disclosure issues


Danish legislation does not impose heightened disclosure issues in connec-tion with going-private transactions or other private equity transactions. The company should, however, be aware that the information disclosed is capable of influencing the value of the company’s shares and, as a result, the company should disclose the given information to the public as soon as possible.

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In general, there are no specific timing considerations related to a going-private transaction or other private equity transactions.

As regards other private equity transactions, however, there seems to be an increased number of completions by the end of the individual target companies’ financial period. This is of course due to the fact that in numer-ous transactions the purchase price is calculated based on full-year figures. Furthermore, the above is based on the fact that numerous target compa-nies are affected by the Danish tax rules about joint taxation entailing that earnings are calculated on a group level and only taxed to the extent that aggregate earnings in that group exceed zero.



Danish legislation contains provisions regarding going-private in the Companies Act, the Danish Securities Trading Act and the Recommendations on Corporate Governance in Denmark.

In recent years we have seen quite some debate about the formal rela-tionship between said regulations. As a consequence of the aforesaid, the legislation is expected to be modified in the coming years.

Formally, a decision to go private can be taken by a simple majority of votes on a shareholders meeting. However, a decision to go private will require the articles of association to be amended, which requires at least two-thirds of the votes. Furthermore, the Danish stock exchange has incor-porated a procedure according to which a going-private transaction will not be accepted unless the minority of shareholders has received a voluntary takeover bid.

As consequence of the above, a going-private transaction will gener-ally require a majority of more than 90 per cent of the votes.



Earlier share sale and purchase agreements entered into by strategic sell-ers deviated from agreements entered into by private equity funds. Today a majority of the strategic sellers to some extent have adopted the private equity business model and hence the share sale and purchase agreements applied are quite similar.

All share sale and purchase agreements are of course drafted to con-tain an exact and full description of the terms on which the parties intend to complete the proposed transaction. Hence it is difficult to give more than a very general description of the provisions that are specific to private equity transactions.

The main focus areas in a share sale and purchase agreement are:• the size of the purchase price and the payment terms;• conditions precedent and closing conditions;• representations and warranties including limitations related to these;

and• restrictive covenants.

As regards the purchase price, this is normally calculated based on an enterprise value that is less net interest bearing debt and less the difference between the normalised working capital and the working capital level, as per closing.

As mentioned in question 20 there seem to be two different ways of handling conditions precedent and closing conditions. In private equity transactions, the private equity fund normally needs 10 to 15 business days between signing and closing to be able to draw down the funds from the investors and pay the purchase price.

Representations and warranties, including specific indemnities, are normally provided by the seller. However, the seller is often allowed to include limitations of his liability in case there is a breach. The limita-tions of sellers’ liability normally relates to a basket, de minimis, or a cap. Furthermore, a notice period and a statute of limitation may be introduced.

Restrictive covenants should normally be included in a share sale and purchase agreement.

In addition to the above, a share sale and purchase agreement should contain provisions regarding, for example, the cessation of joint taxation, the choice of law and venue, and general provisions including reference to other agreements.



Generally any manager, managing director or other officers of the target company are subject to rules and regulations referred in question 3 and there seem to be no real timing considerations.

As regards executive compensation issues, focus is traditionally given to tax considerations as Danish tax legislation is highly complex and the tax rates are significant.

9 Tax issues


In Denmark the most commonly used transaction method is transfer of shares. The alternative is transfer of assets, but this is used less frequently.

As a general rule, capital gains on shares for corporate shareholders are tax exempt provided that the shareholder in question holds more then 10 per cent of the shares. In addition, dividends are also tax exempt pro-vided that the shareholder in question holds more than 10 per cent of the shares.

If a corporate shareholder holds less than 10 per cent, capital gains and dividends are taxed under the applicable corporate tax rate.

However a change to the above-mentioned regulation was put forward in December 2012, by which all tax on capital gains from the sale of shares in a non-listed company is exempt for shareholders who are a limited liabil-ity company. This change of regulation was passed on 14 December 2012, taking effect from 1 January 2013.

Personal shareholders are under an obligation to pay tax on capital gains as well as dividends under the applicable tax rate.

As a general rule, interest accrued on acquisition financing may be deducted from the present and future income of the target company, pro-vided that the acquisition financing is either taken out from the target or the single-purpose vehicle holding a controlling interest in the target.

Denmark has no net wealth tax or share transfer duty and there are no capital duties.



A number of different types of debt instruments exist and they are utilised in various combinations in private equity transactions.

The actual acquisition financing is often obtained as a fixed-term loan.The establishment of actual acquisition financing is normally part

of a financing package, which also includes the setting up of credit facili-ties for financing the target’s working capital needs, and in addition it is not unusual that a sale and lease-back arrangement on specific assets is established.

The financial situation in the market has created a growing need for alternative financing. As a result it is not uncommon for a private equity purchaser to request that some part of the financing is provided by way of



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a vendor note, and the use of vendor notes representing a larger part of the debt has been increasing.

In general, private equity transactions are carried out on a cash-free and debt-free basis, meaning that the existing indebtedness has a direct effect on the purchase price. Usually, the purchaser refinances the exist-ing indebtedness in the target company in connection with the transac-tion. As a result, premature payment of the existing indebtedness must be addressed by the parties during the negotiations and solved before or upon completion of the transaction.



There are no significant differences between these types of transactions and therefore the financing agreements used in going-private transactions are similar to those used in other private equity transactions.

In a public-to-private transaction, however, it is important to consider the requirement that the financing shall be in place before an offer is made to the shareholders in a public company.



Fraudulent conveyance issues are extremely uncommon in private equity transactions.



In connection with any joint investment, it is recommended to enter into a shareholders’ agreement.

Shareholders’ agreements should contain provisions regarding the shareholders’ obligation (if any) to provide financial support to the target company in the nature of:• subordinate loans;• issuance of guarantees in favour of the company; and• acquisition of shares in the company.

Furthermore, clauses should be added regarding the consequences of non-compliance in this regard.

A shareholders’ agreement will normally also contain provisions regarding corporate governance issues such as board representation, since the minority owner will usually require board representation in relation to the ownership. It is also common that certain important issues are subject to veto provisions. This entails that the majority owner does not have abso-lute control over the target company.

The shareholders’ agreements also commonly contain provisions regarding tag-along rights, drag-along rights, right of first refusal and fur-thermore the parties often include an exit strategy.

Finally, it is common for a shareholders’ agreement to contain pro-visions regarding the issuance of shares to third parties such as manage-ment, board of directors, etc.

Regarding legal protection for minority shareholders, the Danish Companies Act contains provisions protecting minority shareholders whose provisions are not all mandatory. In general, these provisions con-sist of rules containing limitations in the majority’s right to make certain decisions and resolutions without the decision being supported by either two-thirds or nine-tenths of the votes, as the case may be. With regard to certain decisions, for instance, in case of a desire to change the financial rights related to a certain share class, any of the shareholders negatively affected by the decision must support the decision in order for it to be passed. In addition, a minority shareholder is entitled to request that a so-called minority shareholders’ auditor is appointed by the Danish Business Authority.

In respect of shareholders, the principle of equality also entails that all shareholders must be treated equally. This further entails that the share-holders’ meeting or the board of directors cannot make decisions that – intentionally or unintentionally – provide an undue advantage to share-holders or an undue disadvantage to another shareholder.



There are no specific requirements that may affect a private equity firm’s acquisition of a controlling stake (except, for example, acquisitions within the bank sector where certain approvals from relevant authorities may need to be obtained in advance).

If the acquisition concerns a listed company, an obligation to make a mandatory public offer to acquire all of the remaining shares may be invoked.

15 Exit strategies


Private equity funds are, in general, not subject to any specific or general limitations related to their exit through a trade sale or an IPO.

Previously, there seemed to be a difference in how post-closing recourse for the benefit of a purchaser was handled by private equity funds as opposed to other sellers. At present there seems to be no material difference.

If an exit is carried out through a trade sale, the private equity fund in question will often initiate a voluntary winding up procedure on the single-purpose vehicle holding the shares in the target. As a consequence of this, a purchaser should always focus on securing how a post-closing claim arising out of the share sale and purchase agreement should be fulfilled.

Normally, a purchaser will aim for the establishment of an escrow or covenants prohibiting the commencement of winding-up procedures, in addition to dividend restrictions and, if possible, equity warranties.



As a main rule, all rights and restrictions regulated in a shareholders’ agreement are terminated upon the completion of an IPO. As an excep-tion, certain restrictions may survive the termination of the agreement (eg, non-compete and non-solicitation).

Further, shareholders may be bound by restrictions following comple-tion of an IPO for a specific period of time, normally a period correspond-ing to the warranty period.



In the Danish market there has only been an extremely limited number of going-private transactions in recent years, and therefore no general guide-lines can be given.

However, focus in recent years has been on the renewable energy sec-tor and the banking industry.

With the ever-increasing focus on environment, the Danish renew-able energy sector has been growing rapidly and as a consequence there

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has been an increased focus from both Danish and foreign private equity funds as well as companies involved in the industry.

Furthermore due to the financial crisis, we have experienced a number of transactions involving banks in recent years.



Cross-border transactions do not have any unique structuring. Therefore the restrictions that may apply are – as a general rule – in all material respects the same as in a purely domestic transaction.

There is no general foreign investment restrictions and a strict non-discriminatory policy is maintained in relation to foreign investors (how-ever, some restrictions apply to foreign investments in sensitive areas such as the defence sector).



The economic situation throughout Europe has led to an increase in the number of joint ventures between both:• private equity funds; and• private equity funds and strategic partners.

There are no restrictions that prevent the establishment of these joint ven-tures, group deals or similar. However, antitrust regulation may impose an indirect restriction.The relationship between the parties in joint ventures is traditionally regulated in a shareholders’ agreement or similar, setting out the rights and obligations of each party.

When entering into a joint venture of this nature, the parties need to focus on the financial strength and capability of each party, the exit strat-egy of each party and the parties’ mutual strategy for the development of the target.



Simultaneous signing and closing is, of course, the most opportune way to avoid uncertainty of closing, and in recent years an increase in the number of transactions signed and closed simultaneously has been experienced.

Whether it is actually possible to sign and close simultaneously is traditionally dependent on the nature of purchasers’ financing, antitrust regulations and requirements, the outcome of due diligence and the nego-tiation of the purchase agreement between the seller and the purchaser.

Under Danish jurisdiction there seems to be two different ways of han-dling the issue of certainty of closing:

The no certainty modelIn some transactions, seller and purchaser agree that no certainty of clos-ing is needed if and to the extent both parties are actually able to walk away without any consequences for either of the parties. Originally, this model arose as a consequence of the Danish tax legislation, which means that, seen from a tax perspective, a transaction is deemed to be completed when the seller and the purchaser are no longer able to withdraw from it.

The no certainty model is traditionally used in conjunction with a clause stating that if the proposed transaction is not completed by a certain date the proposed transaction is to be considered cancelled by the parties unless they agree otherwise. This kind of clause is normally referred to as a drop-dead clause.

If the no-certainty model applies in a proposed transaction the parties will normally agree that, if the transaction is not completed, the parties will not be entitled to put forward any claim in this regard.

The certainty modelIn some transactions, seller and purchaser find it slightly more imperative to have certainty of closing when the share sale and purchase agreement has been signed.

Update and trends

Danish private equity funds have been looking for alternative ways to handle the risk of the future not living up to the parties’ expectations at the time of the transaction. Instead of earn-out elements or adjustable vendor loan notes, or both, we have seen a recent trend relating to share classes, where the sellers reinvest a part of the purchase price in the buying company in form of, for example, B-shares which are only entitled to receive dividend when the A-shares owned by the private equity fund have received an amount equal to the subscription price with an added interest of for example, 20 per cent per annum.

Eskil Bielefeldt [email protected] Kristian Tokkesdal [email protected] Peter Bruun Nikolajsen [email protected]

Aaboulevarden 138000 Aarhus CDenmark

Langebrogade 41411 Copenhagen KDenmark

Tel: +45 7011 1122Fax: +45 7011 [email protected]



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Certainty is achieved in a number of ways. In some share sale and pur-chase agreements, a break fee or an agreed penalty is simply introduced.

However, certainty is traditionally obtained by deploying a combina-tion of several different instruments.

Firstly, the number of closing conditions is reduced and ought to be handled as part of the negotiation of the share sale and purchase agreement.

Secondly, a waiver clause is included in the share sale and purchase agreement, allowing the party in question in his or her sole discretion to waive the condition and hence have the proposed transaction completed without obtaining the waived delivery or declaration as the case may be.

Thirdly, clauses regarding the payment of break fees and agreed pen-alties are introduced. These clauses are often supplemented by clauses stating that, if a party does not fulfil his or her closing obligations, then the other party may consider this a fundamental breach of the share sale and purchase agreement, thus entitling the aggrieved party to claim damages.

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Pierre Lafarge, Jean-Luc Marchand and Anne-Cécile DevilleLatournerie Wolfrom Avocats



Venture capital and seed capitalThese transactions involve entities at an early stage of development or companies starting the expansion of their business; venture capital differs from seed capital, as the latter is supposed to finance entities that have not reached start-up phases yet; seed financing is designed to finance research, assessment and development of an idea or an initial concept, whereas start-up financing is used for funding the development of production and the initial marketing.

Financing the development of such entities takes the form of equity (preferred shares, most of the time, with at least a liquidation preference).

Development transactionsThe companies involved in these transactions have reached their break-even point and wish to increase their activity. Development financing usually uses a combination of equity (sometimes with the issuance of pre-ferred shares or a combination of shares with stock warrants) and debt.

Buyout transactionsThese transactions concern closely held entities such as family companies or non-core business units of a group of companies that are sold as part of a carve-out. The financing of such deals uses a combination of equity, debt and quasi-equity (for example, mezzanine finance that usually takes the form of convertible or refundable bonds). The cash flow of the target com-pany enables the set up of a leverage transaction (LBO transactions), the target being bought by a special vehicle set up for the purpose of the deal; investors and managers of the target being the shareholders of this vehicle.

Turnaround transactionsTurnaround financing is designed to help entities facing financial difficul-ties; the biggest part of financing turnaround transaction takes the form of equity.

According to a survey prepared by the French Private Equity Association (AFIC) and Grant Thornton dated October 2014, the amount invested for investments closed during the first semester of 2014 increased compared to the same period of 2013 (a rise of 39 per cent of the amounts invested, up to €3.605 billion, whereas the number of entities receiving private equity funds increased by 17 per cent when compared to the first semester of 2013; this level being as high as in 2010).

The number of investments closed in the first semester of 2013 decreased by 8 per cent in comparison with the first semester of 2012. The amounts invested increased from €2.27 billion to €2.59 billion.

The number of buyout transactions remains relatively constant (the number of transactions has increased by 1 per cent during the first semester of 2013 compared to the same period in 2012; buyout transactions represent 60 per cent of amounts invested in private equity transactions, whereas venture capital transactions represent 10 per cent and capital development transactions 29 per cent).



French corporate law traditionally includes strong corporate governance principles. Some of these principles are contained in basic company law rules and are applicable without distinction to all companies (whether listed or not). Public companies listed on a regulated market (as defined by the Markets in Financial Instruments Directive of 21 April 2004) are also subject to specific corporate law rules and to the regulations issued by the French financial markets authority (AMF). Moreover, most of the listed corporations comply with recommendations of the corporate govern-ance code prepared either by the Association of Private Sector Companies (AFEP), the French Business Confederation (MEDEF) or by the French association Middlenext. AFEP and MEDEF represent French large listed companies and Middlenext represents French-listed SMEs and midcaps. The listed corporations which do not comply with all or part of above men-tioned corporate governance codes have to provide in the annual report submitted at the shareholders’ meeting the reasons why they do not comply with these rules. Consequently, listed corporations are generally subject to more restrictive rules on disclosure and transparency than unlisted com-panies. For instance, the earnings and advantages allocated to corporate executives shall be disclosed each year in the annual report submitted at the shareholders’ meeting. The report shall also contain information about ‘golden handshakes’ and retirement allowances. Moreover, these retire-ment allowances have to comply with some performance criteria approved by the supervisory board of the company. Since June 2013, the corporate governance code prepared by AFEP and MEDEF has recommended that the board of directors presents the compensation of executive directors at the annual shareholders’ meeting. This presentation should be followed by an advisory vote by the shareholders.

Going private in leveraged buyout or similar transactions allows free-dom from restricting rules and reporting obligations applicable to public companies listed on a regulated market. NYSE Alternext is an exchange-regulated market with a lighter regulatory regime. Modalities of transfer on the Alternext market were facilitated at the end of 2009.

There are no specific issues regarding companies that, following a pri-vate equity transaction, remain public or become public. Any rule applica-ble to public companies shall apply to these companies.

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It has always been a general principle in France that directors shall act in the best interests of the company, its business and its shareholders taken as a whole, and set aside their own interests.

Within the past 10 years, the legal precedents of the highest French court (the Court of Cassation) also developed a fiduciary duty of loyalty and a duty of transparency and information of directors towards sharehold-ers. The duty of loyalty mainly prohibits directors from creating a situation likely to generate a conflict of interest between their personal situation and the interests of the company, its business and its shareholders.

Within the framework of going-private transactions, as for any takeo-ver bids, the board of directors (or the supervisory board) has to disclose its reasoned opinion regarding the benefits of the offer or the consequences of the offer for the target company, its shareholders and its employees. The voting procedures by which this opinion was obtained are disclosed, with the possibility for dissenting members to request that their identity and position be mentioned. If the transaction is likely to cause conflicts of interests that could impair the objectivity of the reasoned opinion of the competent board or threaten the fair treatment of the shareholders, the AMF’s regulation requires the appointment of an independent appraiser. The AMF considers that the following situations are likely to cause such conflicts of interests or characterise an impairment of objectivity: if the tar-get company is already controlled by the offeror before the bid is launched; or if the senior managers of the target company, or the persons that control it, have entered into an agreement with the offeror that could compromise their independence, etc. The target company shall also appoint an inde-pendent appraiser before implementing a squeeze-out. This independent appraiser will prepare a report on the financial terms of the offer or transac-tion. The report’s conclusion takes the form of a fairness opinion.

Committees in charge of specific issues (for instance, remuneration committee, audit committee) may be set up in cases of private equity trans-actions. These committees can be deemed procedural safeguards because they control the board of directors or supervisory board and permit to apply, to a certain extent, general principles mentioned above. However, they have no decisional power and under no circumstances are they able to make a decision in place of the board of directors.

Corporate governance rules or laws ensure that these committees are composed of independent directors, meaning those who are not executive officers (eg, CEO or chairman of the board) or significant shareholders, to avoid any conflict of interests.

4 Disclosure issues


There are no heightened disclosure issues in connection with going-private transactions or other private equity transactions as such. The AMF regula-tions apply to going-private transactions and contain detailed provisions regarding the content of the offer documentation and the dealings in the target company’s shares to be disclosed to the market. Indeed, once a draft offer has been filed, any restrictive clause agreed by the parties concerned or their shareholders that could have an impact on the assessment of the offer or its outcome must be disclosed to the AMF and the public.



The timescale for a public offer is regulated precisely by the AMF’s regula-tion depending on whether the procedure is simplified or standard.

If the offeror acting alone or in concert holds less than half of the shares or voting rights of the target company, only the standard procedure shall apply. If the offeror holds more than half of the shares or voting rights of the target company, the simplified offer procedure may be used.

For a standard public offer, the term of the offer is at least 25 trading days and may be extended to not more than 35 trading days. At any time after the opening of the offer, but no later than five trading days before it closes, a competing offer on the securities of the target company may be filed with the AMF. Where the AMF determines the timetable for the competing offer, it aligns the closing dates of all competing bids on the furthermost date. During the offer period, and no later than five trading days before its closing, an offeror may improve upon the terms of its origi-nal offer or the most recent competing offer. Where the AMF declares an improved offer to be compliant, it determines whether to postpone the closing date of the offers and to void orders tendering securities to the ear-lier offers.

In principle, the outcome of the offer is published no later than nine trading days after the closing date.

If the AMF determines that the offer has succeeded, the offer is reo-pened within 10 trading days, for a minimum of 10 trading days.

A new French law, the ‘Florange Act’ dated 29 March 2014, strength-ens the role of the works council (WC) of the target company in connection with the standard offer procedure by introducing a duty to consult the WC (as before the enactment of the Florange Act the WC was only informed) and allowing the WC to be assisted by a qualified accountant. This measure is likely to extend the timetable of the public offering process because the target company must now wait until the WC has rendered formal opinion to decide whether to accept the takeover offer. The WC must give its formal opinion within one month of the draft offer being filed with the AMF. If not, the WC will be deemed to have been consulted. This one-month period may be extended by an express court order, if there are difficulties regard-ing the availability of information about the transaction.

The offer period for a simplified offer may be limited to 10 trading days in the case of a cash offer and to 15 trading days in other cases. Besides, a simplified offer cannot be reopened even if it has succeeded.

Concerning private equity transactions on a private company, the timetable will be essentially set up on the basis of negotiations between the parties.



Once the board of the target company has accepted the public offer, except in cases where the bidder holds at least 95 per cent of the share capital of the target company (a situation where a squeeze-out may be launched), each shareholder of the target company, regardless of its level of equity, may decide not to accept the offer, in whole or in part. Moreover, each shareholder of the target company is entitled to withdraw its acceptance during the offer period. If at the end of an offer, the offeror does not hold more than 50 per cent of the share capital or the voting rights, the offer is lapsed. In this event and subject to some conditions, the offeror will not be able to increase its shareholding, except if it launches a new offer that suc-ceeds, and in the case of mandatory offers (as defined in question 14), the voting rights of the offeror exceeding a certain level are suspended. This compulsory threshold of 50 per cent has been introduced by the Florange Act in order to prevent offerors proposing a low price with the view to obtain de facto control holding less than 50 per cent of the share capital. Note that AMF, on offeror’s demand, can dismiss and lower the compul-sory threshold if it seems impossible to be reached, because of character-istics outside the offer (eg, when the target is already controlled by a third party or because the majority control is impossible to acquire because of legal provisions or provisions of the by-laws).

In addition to this new compulsory threshold, the offer (except if this offer is a mandatory offer) may still include a voluntary acceptance thresh-old (which shall amount de facto to more than 50 per cent).

Moreover, the dissenting shareholders have the right to request from the AMF a declaration of non-compliance of the offer or bring a lawsuit against the decisions of the AMF. For example, the shareholders are enti-tled to challenge a declaration of compliance or to challenge an exemption or derogation from the obligation to make an offer to acquire 100 per cent of the share capital. Shareholders may also request provisional measures (eg, seizure of the shares acquired before the offer period whereas no dec-laration linked to the exceeding of a threshold has been made). In practice, almost all lawsuits have failed, either because the issue dealt specifically



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with the amount of the price (whereas the Court of Appeal of Paris does not control the price itself but only the methods used in order to determine the price), or because of procedural constraints.



The form and terms of purchase agreements in private equity transac-tions do not substantially differ from other mergers and acquisitions transactions.

Financing conditions are usually similar, even if during recent years the proportion of bullet debt in the financing was very significant and the covenants were very light. This situation has, however, changed recently and the proportion of the amortisation debt has increased as financing conditions have been restricted.

The scope of the representations and warranties in private equity transactions has become much more similar to those negotiated in merg-ers and acquisitions transactions; in particular, whereas it was common practice that no warranty was granted (except basic ones regarding shares), such a practice has become more isolated. The indemnification mecha-nisms are usually the same. They may vary, however, especially in venture capital transactions when there is no cash out; in these circumstances, the indemnification is seldom paid in cash but usually paid in kind (shares are allocated to the investors).

Break-up fees and reverse break-up fees are commonly agreed during negotiations.

Typically, the judicial remedy for breach of contract is monetary dam-ages or, in some limited cases, specific performance. A penalty clause (pro-viding an amount payable as penalty and indemnification for failure) may be included in the purchase agreement. However, the judge is not bound by this provision and may reduce or increase the amount payable in accord-ance with it. The agreement may also contain a specific performance clause, even if the validity of such provision is questionable.



As for any private equity transaction, participation of the management is essential in the scope of a going-private transaction in the view of strength-ening involvement and commitment.

There are no legal restrictions on the means by which management of the target company can participate in a going-private transaction. The common practice consists of the participation of the management in the bidding vehicle through subscription of shares, which implies investment of private funds by the managers. The management’s investment must be effective, for example, without a counter-guarantee protecting its invest-ment. The financial instruments to be issued must be assessed at their fair value. If the management already holds shares in the target capital, it will typically contribute its shares to the bidding company and receive shares of this company in consideration for its contribution.

The management of the target company can also participate in the transaction using a retrocession agreement on the selling price, call options between financial shareholders and management or stock options, free shares, preferred shares, warrants, etc.

The involvement of the company’s management is so important for investors that specific provisions regarding restrictions in the transfer of all or part of their shares are usually provided in shareholders’ agreements.

French law promotes the involvement of employees in private equity transactions. A mutual investment fund for employees (FCPE) is an instru-ment that can be composed of shares of the company up to 95 per cent and is entitled to enter into a shareholders’ agreement. In consideration for the tax advantages applicable to this instrument, employees must keep their shares for a minimum period of five years. Nevertheless, the involvement of employees can raise some confidentiality issues related to the contem-plated transaction.

Typically, management participation is discussed and usually agreed (or, at the very least, a term sheet is) prior to a going-private transaction. So,

to the best of our knowledge, there are no timing considerations to discuss management participation after a going-private transaction.

According to a new regulation adopted on 31 July 2014, on the occa-sion of the transfer of control of an SME, the employees shall be proposed to acquire the shares transferred. This proposal shall be made at least two months before the transfer; the seller remains free to choose the purchaser of his shares.

9 Tax issues


In France, private equity transactions are usually designed by a holding company acquiring the shares of the target. Offsetting financial and acqui-sition costs against the target income is usually reached via the tax consoli-dation regime where the holding and the target company are considered a unique entity for tax purposes. It may also be reached by the ‘look-through’ tax regime of the target. The most critical tax issues are linked to the offset-ting calendar, the ‘pre-consolidation losses’ and the possible restrictions of the tax consolidation regime where formerly related or partly related companies are concerned. More recently, the thin capitalisation rules’ new restrictions have also become a major issue in highly leveraged acquisition schemes.

Share deals are usually preferred to asset deals, due to the differences of legal and tax treatment of these types of transaction.

Asset deals give rise to the payment by the acquirer of transfer duties amounting to 5 per cent of the purchase price (or fair market value if higher; no tax is payable on the portion of the price below €23,000, and a reduced 3 per cent rate applies to the portion of the price between €23,000 and €200,000), while share acquisitions in a corporation usually triggers a transfer duty amounting to 0.1 per cent of the purchase price. If there is a partnership or a SARL (namely, equivalent to private company limited by shares), the share acquisition raises the transfer duty to 3 per cent (after tax relief equal, for each share, to the ratio between €23,000 and the total number of shares).

The seller is generally liable on the capital gain arising from an asset deal, while a qualifying parent company can benefit from a 88 per cent capital gain exemption in the case of disposal of shares in a subsidiary held for at least a two-year period. In addition, individual sellers benefit from a rollover on the capital gain where receiving new holding company (holdco) shares (only if the latter is submitted to corporation tax) in exchange for shares primarily held in the target (the capital gain taxation is then post-poned until disposal of the shares received in exchange). Besides, rebates are granted to individual sellers for capital gain tax computation, depend-ing on the shares holding delay.

The acquisition price is not tax-deductible, nor is it amortisable for the purchasing company. On the other hand, the other acquisition costs (such as transfer duties, auditor fees, bank fees, lawyers’ fees) are amortised over a five-year period.

As a general rule, financial expenses borne by the SPV for the target acquisition financing are tax-deductible, provided that the financing con-ditions remain at arm’s length. A set of rules limits the tax deductibility of interest expenses on loans granted by related companies where the interest rate exceeds the ordinary rate that could have been obtained on the market (2.79 per cent for fiscal year ending 31 December 2014).

Besides, thin capitalisation rules are based on the following mecha-nism – interest paid to related companies in excess of the following three points are not deductible (although part of the deduction can be postponed):• 1.5 times the level of the notional remuneration of the debtor compa-

ny’s net assets;• 25 per cent of the company’s EBITDA (enterprise value/earnings

before interest, taxes, depreciation and amortisation) (subject to spe-cific adjustments); or

• interest received from related companies.

In addition, the 2013 Finance Act introduced new regulations restricting the deduction of financial charges beyond €3 million to 75 per cent for financial years beginning on or after 1 January 2014.



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The interests paid as part of a loan from a financial institution but guaranteed by a related company are also affected by the deduction limit.

When the borrowing entity is a member of a tax-consolidated group, the above-mentioned criteria apply to consolidated financial data of the tax group (with intra-group loans being neutralised).

These thin capitalisation rules may not be applicable in certain cir-cumstances (for example, when the loan is granted by a financial insti-tution but not guaranteed by a related company or when the amount of non-deductible financial expenses is less than €150,000).

In addition, the ‘charasse provision’, a specific anti-high leveraged schemes mechanism applicable to tax-consolidated groups, denies the tax deduction of the financial expenses where an acquisition is made to a related entity or company (self-acquisition). Under these provisions, a por-tion of the financial expenses borne by the group is deemed to result from the self acquisition and therefore rejected during a nine-year period. As of 2010, the purchase of its shares by the company itself is no longer within the scope of the charasse provision.

The holdco is generally entitled to the participation exemption regime (exemption of 95 per cent of the dividend received from a qualifying par-ticipation) and thus is in principle in a tax loss-making position. The offset of the losses suffered at the SPV’s level with the profit deriving from the tar-get can be achieved by setting up a fiscal unity or tax consolidation group.

Among the various conditions to be fulfilled in order to set up a tax group, the holdco has to hold at least 95 per cent of the target company’s share capital (excluding, under certain conditions, the shares held by employees of the target company). Companies located in France but held via another company located in another EU country can elect for tax con-solidation membership, if the 95 per cent holding condition is met.

In order to avoid significant stuck pre-consolidated losses (losses that remain in the target accounts and which can only be offset against the acquisition vehicle’s profits and not as part of the group relief ), it can be useful to change the closing date of the financial year of the group members.

When no consolidated group can be set up (for example, when the SPV holds less than 95 per cent of the target’s share capital), an alternative way to achieve such a tax consolidation is to merge the target into the acquisition vehicle subsequent to the target acquisition. The French tax administra-tion used to consider that this ‘quick merger’ could be challenged pursuant to the abuse of law or the abnormal management decision incrimination. However, several court decisions have weakened this position.

In most cases, no interest or dividend withholding tax is levied in France on payments made by a company to a non-resident lender (pro-vided treaties and EC conditions are fulfilled).

Otherwise, an additional dividend contribution equal to 3 per cent of income distributed by companies subject to corporate tax in application since 2012 (SME and distributions between companies belonging to the same tax group are not concerned).



Three types of debt are usually used for the financing of going-private and private equity transactions (LBO transactions); these types are classified according to their priority of reimbursement, thus according to the risk and remuneration attached to these types of debt:• senior debt – the reimbursement of this debt is prior to junior debt; it

is divided into tranches (it is not unusual to have senior debt divided into three to four tranches; but it is usually less in the present economic circumstances); its maturity is from five to seven years, sometimes up to 10 years;

• second lien – this is a long-term debt (nine to 10-year maturity), which is warranted on the same assets as the senior debt but its reimburse-ment is subordinated to the prior reimbursement of the senior debt. This debt is usually subscribed by institutional investors, hedge funds or specialised funds; and

• junior debt (or mezzanine) – this debt is usually brought by mezzanine funds; it is subordinated to senior debt (more than 10-year maturity) and has a better remuneration than the latter. It is usually issued through bonds (often with warrants attached).

Before disruption in the credit markets occurred, one noticed an ever-higher burden of debt borne by the companies involved in buyout trans-actions; indeed, the debts subscribed as part of the transaction were usually bullet debts (most of the time reimbursed on the secondary, ter-tiary, LBO), the free cash flow of the target company being mainly used to finance acquisitions and to reimburse the debt subscribed for the financ-ing of investments. Today, although the secondary LBO market is starting to improve, divestments are often still delayed and not all targets are able to shoulder the reimbursement burden. According to a survey prepared by the AFIC, dated 20 January 2014, 14 per cent of companies involved in LBOs had not been able to comply with their covenants and the schedule of payment on 30 December 2011. Among those 14 per cent of companies that met difficulties with their debt in 2012, 6 per cent fulfilled their reimburse-ment schedule, 3.3 per cent have rescheduled without providing equity contribution and 3 per cent have rescheduled with equity contribution. The situation has not yet been resolved for 1.7 per cent of those companies.

Because of the scarcity of credit and the increase of the price of credit, the proportion of equity and bonds in financing has increased since 2007, the rest of the transaction being financed through amortising senior debt and mezzanine loans. Private investors became the first subscribers in pri-vate equity transactions since 2008. Moreover, due to the cost of senior debt and the fact that the number of leveraged buyouts remains low, finan-cial analysts anticipated the development of mezzanine financing. Such a development has, however, not been observed. The predominant propor-tion of senior debt leaves little room for mezzanine financing, which has become rare in private equity financing.

The shareholders of the holding company that has been set up in order to buy a target may pledge their shares in order to secure the loan granted to the holding company for the financing of the acquisition. Some difficul-ties may arise in the case of the holding company being quickly merged with the target after the acquisition: this leads to a situation where the assets of the target directly finance the purchase price of the share capi-tal itself; whereas pursuant to article L225-216 of the French Commercial Code, a company may not participate in the financing of its own share capi-tal, nor grant securities for the subscription or purchase of its own shares.



Financing a going-private transaction is fairly similar to financing any pri-vate equity transaction involving a private company. It generally includes debt financing and equity financing. A specificity is, according to the appli-cable law, that the acquisition of a listed company requires a public, definite and irrevocable offer to acquire securities of the target company. Another French specificity is that the offeror has no guarantee of obtaining 95 per cent of the voting rights and shares that will enable the offeror to launch a squeeze-out. Consequently, the offeror has no guarantee of obtaining the delisting of the target company.

Consequently, the offeror must have available funds to satisfy the entire cash consideration payable under the offer – this being guaranteed by at least one of the sponsoring institutions. The final amount of financing must be adjustable with regards to the number of securities that might be acquired and to a potential competing offer or an improved offer that could entail overpricing. The offeror shall also take into account the risk of not being able to obtain 100 per cent of the voting rights and shares, which will reduce the leverage of the transaction.



French insolvency law aims to avoid preferential treatment of some credi-tors where a company’s insolvency is imminent. The law declares void some contracts entered into as from the company’s insolvency (for exam-ple, any contract by which the debtor has more obligations than the other



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party or any contract by which the debtor makes a payment before the debt is mature). Liquidators and administrators have the power to challenge transactions entered into by the company within a period prior to the ini-tiation of the insolvency procedure, including powers to set aside a trans-action at an undervalue. The nullity of such contracts allows the debtor to rebuild its assets.

We have also observed that bankruptcy rules are sometimes used in order to try to urge the financial investors (especially the banks) to renego-tiate the terms and conditions of their financing.

In a going-private transaction, ‘fraudulent conveyance’ issues are also handled by representations and warranties, usually made by the shareholders and by the directors of the target company. French law lim-its the use of securities and loans. The French Commercial Code (article L225-216) provides that a company shall not advance funds, grant loans or provide guarantees to enable a third party to subscribe or purchase its own shares. This provision derives from the European Second Company Law Directive. In cases of violation of this provision, loans or warranties can be cancelled and directors incur a criminal liability. A report dated as of January 2008 submitted to the Ministry of Justice suggests abolishing the criminal liability provided in this case but the provision has not yet been amended. Moreover, some authors consider that article L225-216 of the French Commercial Code should be amended in order to harmonise French law with some other European regimes, such as English law, which is much more permissive.



Key provisions in shareholder agreements concern the following:

Corporate governanceThis issue is important for investors holding a minority stake in the tar-get company. Investors usually negotiate a number of seats at the board (board of directors or supervisory board, as the case may be). It is often negotiated that investors’ representatives have specific veto and informa-tion rights regarding material and strategic decisions, as well as decisions out of the ordinary course of business. The list of these decisions is looked at very carefully by investors, whose responsibility may be at stake in cases of bankruptcy if they are treated like other directors (even if they are members of a supervisory board). These veto and information rights may alternatively be mentioned in the company’s by-laws as part of the rights attached to preferred shares held by the investment funds; this insertion increases their enforceability towards the company.

SharesProvisions of shareholder agreements usually comprise pre-emption rights, drag-along and tag-along clauses, as well as buy or sell provisions; when there are several investors, those provisions may be triggered upon the initiative of a majority of the investment funds, and sometimes with the consent of one (or more) member of the founders.

Specific provisions regarding the subscription or the acquisition of shares by an industrial entity (contrary to a financial entity) are also often negotiated because of the impact of such operation on the liquidity or value of the stake held by the investment funds; the latter usually have a veto right combined with an exit right.

Regarding key managers, there are usually provisions regarding restrictions on the transfer of all or part of their shares, bad-leaver and good-leaver provisions (in favour of the investment funds), non-compete clauses and management packages (retrocession agreement, etc).

Statutory protection for minority shareholdersMinority shareholders may negotiate the subscription of preferred shares which grant them specific political rights (such as the right to have board members chosen on a list prepared by holders of such preferred shares, or the right to make audits); those rights may not be amended by the com-pany without the consent of a majority of preferred shareholders. Minority shareholders are also protected in the case of majority shareholders vot-ing in favour of decisions according to their own interest, which deviates from the corporate interest (abus de majorité); in those circumstances the

decision is voidable and minority shareholders may bring a claim for dam-ages against the majority shareholders who voted in favour of the disputed decision. Minority shareholders, as long as they represent (alone or jointly with other shareholders) at least 5 per cent of the share capital, are granted specific protection rights such as the right to initiate a proceeding in order to have a general meeting of shareholders convened, to ask to the man-agement of the company to add items to the agenda of the shareholders’ meeting or to ask questions of the management and have, as the case may be, an expert appointed in order to draft a report on a specific management decision.



Crossing of shareholding thresholds and declaration of intentFor transparency reasons, laws and regulations set-up a mandatory infor-mation procedure in the case of crossing a shareholding threshold.

The range of these share ownership thresholds starts at 5 per cent of the company’s shares or voting rights. The company’s by-laws can also set lower thresholds. The crossing of a threshold can occur after an individual or collective acquisition of shares or certain financial instruments can be converted into shares. A breach may also be the result of a variation of the company’s capital. A declaration of intent must be issued in the form of a short paragraph within a delay of five trading days, each time a threshold of 10, 15, 20, 25, 30, 33.33, 50, 66.66, 90 or 95 per cent is crossed. This declara-tion shall also be transmitted, within the same time limit, if the equity par-ticipation or voting rights fall below the above mentioned thresholds. The declaration is transmitted to the issuer, as well as the AMF, who informs the public. In the case of crossing a threshold of 10, 15, 20 or 25 per cent, the declaration of intent includes a description of the investor’s intentions for the six months that follow the crossing of the threshold. The content of the declaration of intent is described in the French Commercial Code and by the AMF regulations.

Mandatory takeover offerWhen an investor, acting alone or in concert, comes to hold more than 30 per cent of the issuer’s shares or voting rights, it is required to initiate an offer project for 100 per cent of the target company’s shares. Such an offer also becomes mandatory when an investor that owns between a 30 per cent and 50 per cent of voting rights increases its participation by at least 1 per cent within a 12-month period. The offer per share cannot be inferior to the highest amount for which a share was acquired by the offeror dur-ing the 12-month period prior to the crossing of shareholding thresholds. A modification of the price of the offer can however be authorised by the AMF if there has been a change in the target company’s characteristics. The proposed offer may not contain a clause requiring a minimum number of securities to be tendered in order for the offer to be declared successful.

Private companyRights of approval or pre-emptive rights are provided in many private com-panies, either by means of a shareholders’ agreement or specific mecha-nisms set up in the company’s by-laws.

15 Exit strategies


Shareholders’ agreements usually do not contain any prohibition on a private equity firm selling its stake in a portfolio company to another shareholder or to a third entity; more often there are restrictions such as pre-emptive rights, or in the case of an offer made by an ‘industrial entity’. After a certain period of time (for example, five years), these restrictions may not apply any more in the case, for instance, that the conditions to trig-ger drag-along provisions are met.



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In the event of a sale of a portfolio company, representations and warranties are often drafted certifying that the legal organisation of the portfolio company and its financial information are in accordance with all legal requirements and that the company is not liable for any mismanage-ment (for example, with regards to labour law or tax law) that may have occurred before the sale of the portfolio company. Thresholds are often set-up regarding the amount of the misrepresentation for the warranty to be effective.

Those representations are sometimes made by the management only, and not by the private equity firm, which, however, may agree to indemnify the buyer up to a certain amount (cap) in the case of a claim. In order to limit its risk, the private equity firm may be willing to put part of the share price received on an escrow account, designated to indemnify, as the case may be, the beneficiary of the warranties. The private equity firm may also subscribe to an insurance policy, the indemnity being paid by the insurance company. Finally, it may also refuse to contribute to representations and warranties and accordingly receive an acquisition price that is lower than the price received by the parties granting warranties.

The situation does not differ according to the buyer. Post-closing recourses are addressed the same way with a buyer being a private equity firm or an industrial entity.



Voting agreements are permitted to survive an IPO. However, when share-holders of a public company pursue a ‘common policy’ regarding the company and its governance, they are considered to be acting in concert. Consequently, they jointly support the obligations of mandatory informa-tion procedure in case of crossing a shareholding threshold together. If they come to hold together more than 30 per cent of the issuer’s shares or voting rights, they are jointly required to initiate a tender offer for 100 per cent of the target company’s shares.

Shareholders’ agreements entered into with respect to listed com-panies frequently provide for rules governing the transfer of shares such as lock-up clauses which restrain major shareholders and directors from selling their stock during a certain period of time following an IPO (six to 12 months), to preserve a minimum of stability of the shareholding. They usually also provide for liquidity mechanisms pursuant to which a certain amount of the company’s stock must be made available to the public and pre-emptive rights. If the pre-emption clauses concern shares representing at least 0.5 per cent of the capital or voting rights they must be disclosed to the company and to the AMF. Failing such disclosure, the effects of these clauses shall be suspended during the offer period. Moreover, the annual management report of listed companies should set out shareholders’ agreements of which the company is aware and that could restrict share

transfers and the exercise of voting rights when those agreements could have an impact on the assessment of an offer or its outcome.



Very few going-private transactions occur in France, mainly due to the level of shareholding above which a squeeze-out and a tax consolidation can be implemented: currently 95 per cent of shares and voting rights. Private equity professionals are currently seeking to obtain legislative changes.

Some companies are subject to specific regulations because of their purpose, which corresponds to a regulated activity under French law (for example, Decree of 14 May 2014 adds five more sectors of activities to the list of sensitive activities: electronic communication, public transpor-tation, energy supply, water supply, crucial facilities and public care set-tings). Consequently, within the framework of a private equity transaction, some corporate aspects must be specifically taken into account, mainly the shareholding (qualified persons in relation with the purpose of the company must hold a minimum percentage of the share capital) and the management (for example, corporate bodies of such company must be composed of qualified persons in relation to the purpose of the company).



Private equity operations that are realised in France frequently involve for-eign investors. One of the main aspects in the structuring of cross-border private equity transactions is the tax treatment applied to the proceeds deriving from the French target. First, the choice of the form of the SPV may impact the application of foreign tax pass-through regimes, such as the US ‘check the box regulations’. Moreover, investors have to examine whether some tax arbitrage structures can be implemented in order, for example, to achieve a ‘double-dip’ operation (for example, using the differ-ence of tax treatment existing in two different jurisdictions). One typical example would be the tax deduction at the French SPV’s level of interest expenses that would qualify as an exempt dividend in the hand of the for-eign recipient.

It is also necessary to structure the investment in order to reduce the withholding tax that may be levied on dividend payments made by the French SPV to the foreign investors as much as possible. As mentioned in question 9, as a general rule no withholding tax is levied on interest pay-ments made by French companies to lenders established abroad. However, interest charge is now subject to a partial deduction limitation as men-tioned in question 9.

It is also important to note that foreign investments in France are unrestricted: there is only a legal obligation to declare foreign investment in France. This declaration concerns direct investment (constitution of a

Update and trends

A new French law, the ‘Law to recapture the real economy’ (‘loi visant à reconquérir l’économie réelle’, dated 29 March 2014) (Florange Act) substantially amends French law on takeover bids. The main purpose of this law is to strengthen the protection of companies against all forms of external aggression and strengthen the stabilisation of ownership.

The main measures of the Florange Act are the following:• WC powers: The strengthening of the powers of the WC of a the

target company during a public offering;• the introduction of an expiry threshold for public offering at 50 per

cent: If the bidder does not hold more than 50 per cent of the share capital or voting rights of the target company at the end of the offer period, the public offer lapses;

• the revision of a minimum threshold generating a mandatory takeover offer: Today when an investor, acting alone or in concert, holding between 30 per cent and 50 per cent of voting rights increases its shareholding by at least 1 per cent within a 12 month period, it is required to initiate an offer project for 100 per cent of the target company’s shares (before the implementation of the Florange Act this threshold was set at 2 per cent per year);

• the abandonment of the board neutrality principle during the offer period: The board is now able to take any measure it wishes to frustrate an unsolicited bid, provided that it is not contrary to the powers expressly given to general meeting of shareholders and the company’s corporate interest and that the articles of association of the target company do not expressly forbid it. As the result, when faced with a hostile bid, the board of directors may now decide, without the prior approval of the general meeting of shareholders, to sell or acquire strategic assets, arrange a counter-offer or use special warrants (inspired by US-style rights plans) authorised before a hostile offer. Any such frustrating actions must be disclosed to the AMF; and

• automatic double voting rights: All the shareholders of a listed company that have held their shares for at least two years will be automatically granted double voting rights, except if the by-laws of the company provide the contrary. Before the implementation of the law there were no double voting rights for these shareholders if it was not expressly provided by the by-laws of the company or if the shareholders’ meeting had not decided it.



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company or acquisition of a branch of business) and indirect investment (changing the shareholding of a foreign company holding an interest in a French company). Nevertheless, some transactions do not need to be declared (for example, direct investment between companies belonging to the same group).

Some specific transactions must be duly authorised by the Ministry of Economy when the contemplated transaction participates in the exercise of public authority or pertains to activities likely to jeopardise public order, public safety or national defence interests and research in, and produc-tion or marketing of, arms, munitions or explosive powders or substances. When granted, the administrative approval may include specific condi-tions in order to ensure that the planned investment does not jeopardise French national interests.



‘Club’ deals or ‘group’ deals were not often used in France before the dis-ruption in the credit markets occurred, when the syndication of a debt did not raise specific concern. Since the financial turmoil, a leveraged loan is now arranged at an earlier stage of the transaction, in a club or group deal where up to five or six banks (and sometimes more) gather. There is no spe-cific legal provision with regard to a club or group deal in France.

Members of a club deal usually fix the terms of their relationship with regards to the voting rules, the corporate governance and the exit strategies by concluding a shareholders’ agreement. From a competition perspective, French and European authorities have not yet indicated whether club deals may raise competition issues.



Many private equity transactions include break-up fees and reverse break-up fees. Break-up fees or termination fees have to be paid by the seller to the buyer if the transaction is not consummated for reasons previously specified between the parties. Reverse break-up fees are the counterparts to break-up fees and are due by the private equity buyer if it does not close the deal in certain circumstances. The principal aim of these fees is to com-pensate the parties for their expenses and lost opportunity.

Confidentially agreements or non-disclosure agreements are also often concluded between the parties in order to protect sensitive informa-tion exchanged by the parties during the negotiations from being disclosed.

Closing conditions are common as well. For instance, acquisition agreements frequently include as a closing condition the receipt of a financing by the buyer.

MAC clauses may also be provided. According to such a clause, the buyer may not be obligated to close the transaction, in the event the seller experiences a ‘material adverse change’ or a ‘material adverse effect’.

Pierre Lafarge [email protected] Jean-Luc Marchand [email protected] Anne-Cécile Deville [email protected]

164 rue du Faubourg Saint Honoré75008 ParisFrance

Tel: +33 1 56 59 74 74Fax: +33 1 56 59 74 75www.latournerie-wolfrom.com

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GermanyThomas Sacher and Guido RuegenbergBeiten Burkhardt



As to different types of private equity transactions, from a legal standpoint the acquisition of stock remained the most important type of transaction in 2014. In particular, the leveraged buyout (LBO) is still the most impor-tant type of private equity transaction in our jurisdiction. By such LBO a majority or, increasingly, even a minority interest of the target company is acquired by the private equity investor, whereas the acquisition is funded only fractionally with equity but is instead leveraged. After the acquisi-tion, the leverage shall be defrayed by the free cash flow of the target company or even by debt-financed distributions. Regarding the structure commonly used for such transactions, the respective acquisition of stock is conducted by a special purpose vehicle (SPV), typically organised as a German Limited Liability Company (GmbH), whereas the SPV is directly or indirectly owned by the private equity fund. If the management of the target shall be incentivised by way of direct participation, the management typically preserves a minority shareholding in the SPV, held directly by each manager or indirectly for the management by a trust company, after or upon the acquisition. Besides the LBO, the number of venture capital investments substantially increased in 2014.

Apart from these, a private equity investor might technically also use profit-participation loans to invest in target companies. By such, the man-agement of the target remains, at least legally, unaffected by the private equity investor. Except as agreed explicitly otherwise between the parties, the private equity investor shall, in this scenario, not have any legal influ-ence on the management of the target, not even regarding structural deci-sions in the target company.

A private equity investor may also found a silent partnership according to section 230ff of the German Commercial Code (HGB) with the target company. Within such partnerships, the silent partner participates in the profit and the loss of the target company without being obliged to disclose its identity and investment in the target. Depending on the legal format of the target it might, however, be necessary to register the silent partnership with the respective commercial register and thus to at least disclose the participation of a third party in the target in general.



The implications of German corporate governance rules for private equity transactions might be diverse.

Firstly, under German law, corporate governance rules set out in the German Corporate Governance Code (DCGK), last amended in June 2014, in connection with section 161 of the German Stock Corporation Act (AktG) generally only affect listed companies directly. Therefore, only target companies listed on the stock exchange and thus essentially organ-ised as a stock corporation (AG) or a limited partnership of shares (KGaA) have to comply with the corporate governance rules. As a consequence,

any private equity investor targeting a listed company needs to comply with German corporate governance rules set out in the DCGK once having acquired the shares of the company.

Secondly, in the event that a non-listed company is the target of a pri-vate equity transaction, German corporate governance rules may also have an indirect influence on the private equity transaction. This is obvious for those corporate governance rules that are part of German law, for exam-ple, of the AktG or the German Law regarding Limited Liability Companies (GmbH-Gesetz). Furthermore, as financing banks or even private equity investors might be listed and organised as a stock corporation or as a lim-ited partnership of shares, they might have to comply with the corporate governance rules set out in the DCGK independently, which might easily have an influence on the structure of such private equity transaction.

If the private equity investor intends to conduct its exit via an IPO, strict compliance with applicable law and, in addition to that, with German corporate governance rules set out in the DCGK, is of course crucial.

There are in fact several advantages of going private in an LBO or simi-lar transaction.

First, investors gain large-scale flexibility as to the company form. In particular, there is no need to continue to operate the target company as a German stock corporation (AG). Instead, the target company can be con-verted into a GmbH or a limited partnership (KG). By such change in the company form, not only the maintenance and the administration of the portfolio company can be eased, but closer control over the management of the portfolio company for the investor can also be reached.

Second, once no longer listed, the portfolio company is not obliged to continue to comply with specific legal stock exchange requirements, which eases the maintenance and administration expenditures for the investor and, collaterally, reduces the costs for the portfolio company.

If the target company remains or becomes public following a private equity transaction, the company will have to bear additional costs in order to comply with German or different stock exchange requirements (or both). Besides, as a listed company, the portfolio company still needs to adhere to additional disclosure requirements due to both German stock exchange law and German corporate governance rules. Among other information, a listed portfolio company would have to disclose its directors’ salaries and, as the case may be, any directors’ transactions in shares of the portfolio company.



The specific issues facing boards of directors basically depend on the role of the public company within the transaction.

If the public company itself is the seller of the target, the management of the public company will, due to its binding legal competencies, be the competent body to represent the seller during the transaction process. Because of this the management will, within the course of such legal repre-sentation of the seller, essentially become aware of sensitive information

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(as to, for example, the timing of the transaction). Due to very strict and specific legal stock exchange regulations, the management of the public company therefore needs to be very careful regarding the disclosure of such sensitive information to both the shareholders of the public company and the public. In particular, the management of the public company shall not enable anyone to undertake insider trading. In the event that the man-agement shall be entitled to an additional compensation upon the closing of the transaction, such compensation itself needs to comply with specific legal requirements. In particular, such compensation must be approved by the competent body within the company (usually the supervisory board or a special committee thereof ) and the compensation must be adequate. As to the legal competencies of the management in general, at least for the closing of the transaction, the management of the seller needs the approval of the supervisory board as well. In very rare, exceptional cases, a respective resolution of the shareholders of the public company is deemed mandatory by German case law. Some companies may also stipulate addi-tional procedural safeguards or assign such decisions to a committee of the supervisory board; however, as far as stock companies are concerned the AktG is mandatory and stipulates certain minimum requirements as to the consent required for such transaction.

If the public company itself is the target of the transaction, its manage-ment has to accept a rather different personal role. As far as it is involved in the negotiations of the transaction between seller and potential buyer, the management of the public target company will have to decide what information could or should be disclosed without affecting or even violat-ing either the company’s or shareholders’ interests (or both). To avoid a personal liability, it is advisable for the management of the public target company to coordinate its steps very closely with the competent supervi-sory board and to consistently obtain respective approving resolutions. In general, any advantage offered or to be offered to the (senior) management or the supervisory board of the target company needs to be disclosed. In terms of a potential conflict of interest, there is no specific legal regula-tion regarding how to resolve such conflict or potential conflict. However, it is essential for the management to disclose any kind of such conflict of interest.

In the event of a takeover transaction, the management of the target company will have to comment on the takeover offer explicitly. As to the legal requirements of such comment, there are various specific issues that need to be addressed and fulfilled by the management regarding the takeover offer. Generally, under German law, the management of the tar-get company is not allowed to take active defensive measures against the takeover.

4 Disclosure issues


There have been heightened disclosure issues for private equity investors since 2008; since then not only listed companies and companies organised as an AG are subject to disclosure regulations under German law.

Before 2008, investors in listed companies in particular were (and still are) bound by various legal disclosure requirements that generally do not affect the usual private equity investor to the extent that an investment in a listed target company is not intended.

The German Securities Trading Act (WpHG) and the AktG both set up different thresholds for equity holdings in listed companies and com-panies organised as an AG that, when reached, exceeded or fallen below, trigger different disclosure requirements for an investor. As to the WpHG, whoever reaches, exceeds or falls below 3, 5, 10, 15, 20, 25, 30, 50 and 75 per cent of the voting rights in a listed company is obliged to notify both the company as well as the competent financial supervisory authority, the German Federal Financial Supervisory Authority. As a consequence thereof the company is obliged to publish such notification. Comparable notification obligations are valid with respect to financial instruments that grant a right to acquire shares in a listed company. In addition to this, sev-eral regulations also address persons who ‘act in concert’ in this regard. Concerning non-listed stock corporations, the AktG sets out that any shareholder reaching a threshold of more than 25 per cent, or more than 50 per cent in the capital of a non-listed stock corporation, or whenever a shareholder falls below such thresholds, such a shareholder is obliged to promptly notify the stock corporation. In the event that the shareholder fails to fulfil its aforementioned disclosing obligations, it will lose its entire

rights rooted in its shares. Following such notification the stock corpora-tion has to publish such changes.

Apart from these pre-existing rules, additional regulations were imple-mented in 2008 in Germany under the Federal Act to Limit Risks Related to Financial Investments. The main objective of the Act is to restrict unde-sirable activities of financial investors by enhancing transparency for their financial transactions without generally eliminating financial investors from such investments. Based on this Act, a potential acquirer shall now be obliged to disclose more information regarding his specific intentions with the target; his reasons for the respective transaction; and, in particular, the sources of the funds used. The examples used for the Act were similar reg-ulations in the US and France, in particular section 13d of the US Securities Exchange Act. Besides many other reflections in different fields of the law, the Act in particular states that a purchaser of an essential participation – whereas such participation shall be deemed essential once reaching or exceeding a threshold of 10 per cent of the voting rights – is now required to fully disclose the aforementioned information as to the purpose of and the funds for the transaction. However, exceptions from such disclosure requirements are possible.



Once a private equity investor intends to go private after the investment (regarding the advantages, see question 2), the investor needs to obtain, as a matter of course, an equity position in the target company that ena-bles him to obtain the required board resolutions (see question 6 regarding the recent changes in German case law) in the future. As the acquisition of such equity position in a listed company is subject to strict legal regula-tions under German law, the time frame for such transaction is basically determined by those legal regulations governing the acquisition of such majority interest in a listed company. According to case law in Germany, the time frame for a going-private transaction is basically determined by the regulations set out in the German Securities Acquisition and Takeover Act (WpÜG), since the required majority can only be obtained in accord-ance with the following time frame set out in the aforementioned Act:• a decision whereby the investor intends to place a public takeover offer

for the shares of the target company must be notified to the boards of any stock exchange where the shares of the target company or deriva-tives thereof are listed within due course. Such notification must also take place with the Federal Financial Supervisory Authority and finally be published in the respective media;

• within four weeks of the publication of the decision, the investor must then submit a comprehensive draft offer to the Federal Financial Supervisory Authority;

• such offer then needs to be published immediately after the Federal Financial Supervisory Authority has approved the publication or after 10 working days have expired without objections to the publication by the federal office;

• the acceptance period shall be at least four weeks but should, however, not exceed 10 weeks after the publication by the Federal Financial Supervisory Authority and;

• upon obtaining a majority of at least 95 per cent of the share capital of the target company throughout such bidding proceeding, the inves-tor can initiate a squeeze-out proceeding according to section 39a of the WpÜG within three months, starting with the expiry date of the acceptance period. Such squeeze-out in accordance with the WpÜG not only lowers the formal requirements but also simplifies the pro-cedure to determine the cash compensation for the squeezed-out minority.

If an investor already holds a majority of at least 95 per cent of the share capital of the target company he can initiate a squeeze-out proceeding in accordance with section 327a et seq of the AktG with a respective share-holders’ resolution according to a different schedule:• the minimum notification period for such shareholders’ meeting is 30

days. However, from a practical point of view, since the drafting of the required documents, and in particular the report regarding the ade-quate cash compensation for the minority shareholders usually takes several months, the legal minimum notification period is usually not sufficient;



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• once the aforementioned squeeze-out resolution has been conducted, it can only be challenged by the squeezed-out minority shareholders within one month upon the resolution. In the event of a lack of such formal challenge, the squeeze-out will be registered with the expiry of this period; and

• since any of the rather frequent potential disputes arising in connec-tion with the cash compensation for the squeezed-out minority share-holder can only be taken to special tribunals such disputes will, by law, therefore not delay the legally required registration and effectiveness of the squeeze-out.

Due to an amendment of the German Law regulating the Transformation of Companies in 2011 a new alternative to squeeze out minority sharehold-ers has been implemented. Since last year majority shareholders in the legal form of a stock corporation can initiate a squeeze-out proceeding if they control at least 90 per cent of the share capital of the target company. With respect to the necessary timeline there is no substantial difference to the other alternatives.

In private equity transactions, which are instead not affected by the regulations regarding listed companies, timing considerations are basically determined by financing and antitrust issues. In particular, in those cases in which the seller is not willing to accept a clause, after which the closing of the transaction shall be subject to proper financing of the purchaser, the signing is typically delayed until a sufficient financing commitment for the purchaser is finally granted. As to German Competition Law, the closing of a transaction shall not be carried out prior to the expiry of a one-month period after a required notification with the Federal Cartel Office has been made. Within this month, the Federal Cartel Office can decide whether to initiate further examinations of the transaction, which shall be completed at the latest within four months after the notification, or not.



A (minority) shareholder is still in a position to effectively dissent or object to a going-private transaction in case such delisting shall be accomplished throughout a cold delisting. Under German law, the typical measures used for such cold delisting, for example a change of the corporate form, a merger with a non-listed legal entity or a contribution of the company or its business to a non-listed company, require the consent of at least 75 per cent of the shareholders. As a squeeze-out of an objecting minority share-holder requires a majority of at least 90 or 95 per cent of the share capital (for details, see question 5), any minority shareholder(s) exceeding such threshold can practically prevent such measures effectively.

As, according to previous German case law, a formal delisting also requires a shareholders’ resolution as well as a cash compensation for objecting minority shareholders, such shareholders were until recently in the position to dissent or at least significantly delay a formal delisting as well. However, this legal situation has now changed significantly. With a decision dated 12 November 2013, the German Federal Court of Justice explicitly gave up its previous legal practice and stated that the company’s management and supervisory board may now decide together upon a for-mal delisting of the company, whereas an additional shareholders’ reso-lution shall not be deemed mandatory any more. In addition to that, the German Federal Court of Justice further denied cash compensations for objecting minority shareholders in case of such formal delisting. Following such decision, going-private transactions substantially increased in Germany as minority shareholders can no longer effectively avoid a formal delisting.



Generally, the provisions of purchase agreements in private equity transac-tions do not differ fundamentally from such provisions used and discussed in other purchase agreements. In other words, representations and war-ranties as well as mechanisms of purchase price adjustments are usually also the most important issues of private equity purchase agreements. However, if the private equity investor acts as a buyer, in most cases the

financing structure of his leveraged transaction will be absolutely crucial for the private equity investor. Therefore, MAC clauses consigning the content of the MAC clauses accepted by the private equity investor in his financing agreements are seen more often in the context of private equity transactions as compared to other transactions. However, due to the fact that strategic buyers are very competitive with their bids, in particular due to the premiums offered, private equity investors are not only required to offer higher prices but are increasingly also requested to provide transac-tion certainty, for example by agreeing to reverse break fees. If the private equity investor acts as the seller of a portfolio company, the amount of rep-resentations and warranties is very often intended to be reduced, for exam-ple, by a partial substitution for representations and warranties granted by the management of the portfolio company.



The participation of the management in a going-private transaction can be shaped in different ways. Firstly, equity participations may be used, whereas the management is either offered an interest in the target com-pany itself or, more often, in a respective trust company holding the shares of the target company. Secondly, it is also common to grant a management bonus, often offered in exchange for shorter termination periods of the management contracts. In cases where a shareholder position of the man-agement shall be avoided, phantom stocks are offered to the management. Finally, stock options may also be used for management participation. From a practical point of view, however, in most cases the aforemen-tioned instruments are usually combined to individual management par-ticipation schemes and designed to avoid negative tax implications for the management.

As to the principal executive compensation issues, such compensation of directors of an AG is required to be adequate. From a legal point of view, the compensation must be established with a view to the best interests only of the company, not its shareholders or directors. The violation of such principle might even qualify as a criminal offence by the members of the supervisory and the management board. In addition to that, the provisions of the WpÜG prohibit the offering of unjustified advantages, no matter if granted in cash or in any other kind, to members of the management or supervisory board of the target.

As to the legal obstacles of such management participation under German law, it is, however, advisable to disclose such as soon as possible although there are no strict legal timing considerations.

9 Tax issues


Generally, as regards tax, the intention in every transaction is to minimise the tax consequences. The main topics are the reduction of the tax expo-sure of the target and holding company, the tax deductibility of interest expenses triggered by the loans that fund the purchase price for acquiring the target and tax-efficient strategies for the repatriation of the target’s profits and a tax-efficient exit scenario. Against the background of the very strict German loss limitation rules, existing tax losses or tax loss carry-forwards should be used by the seller of shares prior to transferring the beneficial ownership of the shares, if possible. From a buyer’s perspective, such tax losses or tax loss carry-forwards are not of any commercial value in most cases. Furthermore, the real estate transfer tax consequences need to be borne in mind, as the indirect transfer of real estate by way of the acquisition of at least 95 per cent of the shares or interest (a commercial participation is sufficient) held directly or indirectly in the real estate hold-ing entity could trigger real estate transfer tax of 3.5 per cent to 6.5 per cent (depending on the federal state where the real estate is located). Finally, the seller needs to thoroughly check the historic share transfers to avoid



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any negative tax consequences because of reorganisation measures in the past.

Regarding the tax status of a target, it is typical to achieve a tax consoli-dation through a fiscal unity with the holding company in Germany if the target is a corporate entity. A fiscal unity allows the pooling of the profits of the target and the interest expenses of the acquiring holding company. In certain situations a debt push down strategy or a merger scenario may also be an instrument to minimise tax exposure in Germany.

The tax deductibility of interest expenses on debt financing exceed-ing the interest earned (Net Interest Expenses) is – simplified – generally limited to 30 per cent of the tax EBITDA of the interest paying entity (Interest Barrier Rule), except where the Net Interest Expenses are less than €3 million per year; the interest paying entity does not form part of a fully consolidated group (Non-Group Test); or in the case of the interest paying entity forming part of a fully consolidated group, this interest pay-ing entity’s equity ratio is, at most, 2 percentage points below the entire group’s equity ratio (Group Test). It should be noted that with respect to the Non-Group Test and the Group Test additional requirements need to be met, if the interest is paid to an affiliated company or a third party (like a bank), which can take recourse against such an affiliated company, unless the affiliated company receiving the interest payment or granting the col-lateral to the third party forms part of a fully consolidated group together with the interest paying entity. With regard to this Interest Barrier Rule, it is worth noting that any interest payment will be calculated irrespective of the nature of the interest (interest on a bank loan, shareholder loan, subor-dinated debt, etc).

Any intra-group transaction including intra-group financing needs to pass the at-arm’s length test and needs to be documented thoroughly pursuant to the domestic legal requirements applicable for transfer pricing documentation.

With regard to the exit, a sale of the shares held by a company in the target being a company, will also ensure a capital gains taxation pursuant to German domestic tax law within a range of approx. 0.8 per cent to 1.7 per cent in Germany (subject to applicable double taxation treaty, if any). The tax burden depends on whether the selling company is additionally subject to German trade tax because of a permanent establishment in Germany.

With regard to executive compensation there are no particular rules for a beneficial taxation, and generally any advantage because, for exam-ple, a reduced purchase price is taxed as salary at full income tax rates. Upon exercise of stock options below fair market value the difference between the exercise price and the market price is also an advantage, fully taxable as salary. If the acquired shares are sold, the privileging rules of the capital gains taxation apply.

An acquisition of shares of a target company does not offer a step-up. Only if the target has the legal form of a partnership that qualifies as trans-parent from a German tax perspective, the acquisition of the interest of the partnership will be classified as an asset deal for tax purposes that offers the opportunity for a step-up pursuant to general rules.



Since the credit crunch in September 2008 and due to the recent global economic situation, German banks have been and still are more restric-tive in granting substantial debt for private equity transactions. Thus, the typical debt instruments, such as senior loans and mezzanine instruments provided by banks or specialised lenders, remain the most common ones but currently are extremely rare. At the present time, an existing indebt-edness of a potential target company impedes the financing of a private equity transaction tremendously. Since the existing indebtedness of a tar-get reduces or even eliminates the ability of the target to provide security for financing debts of the transaction, such debt financing requires a higher equity portion for the investors. However, debt volumes have increased substantially in 2014 and will most likely further increase in 2015.



As to debt and equity financing provisions, going-private transactions are rather similar to any other private equity transaction. Generally, prior to announcing its intention to place a takeover offer, the bidder must have ensured that he is capable of fulfilling all of the payment obligations under such offer. Therefore, a confirmation of a third-party bank granting the necessary funds must be available.

As to the requirements of the lending institutions, securities such as share pledges and security assignments that were partly granted by the target company itself are deemed necessary. The essential documents and steps within the financing process are:• a term sheet summarising the structure of the financing;• the finance agreement itself;• the conclusion of various security agreements; and, if necessary• the separate execution of those documents in the course of the closing

of the transaction.



There are no specific ‘fraudulent conveyance’ issues raised in private equity transactions, provided that the German legal requirements for capi-tal preservation are fulfilled. According to German insolvency law, how-ever, there are certain restrictions as to the refund of shareholder loans or equivalents that might limit the possibilities of refinancing the leverage of the transaction.



If the investment is made by two or more private equity investors or the investor acquires less than 100 per cent of the target company, a share-holders’ agreement typically contains regulations regarding veto rights, purchase options, pre-emptive rights and tag-along and drag-along rights according to the individual exit strategy of the investors. Also, specific rights and obligations with regard to an intended IPO are often stipulated.

Due to the fact that the overall deal flow is moderate with only few large-scale landmark transactions and as the majority of private equity transactions are mid- or even small-cap transactions, private equity firms are increasingly also open for investments in minority interests. In these cases, however, a decisive board representation at the target is usually requested, such as in the supervisory board of a stock corporation or in an equivalent board of a limited liability company. Besides comprehensive information rights (most likely including full access to accounting docu-ments and people), consent rights, transfer of share restrictions for other shareholders and individual rights regarding purchase options, as well as the exit scenario, are often stipulated in the shareholders’ agreements. Apart from that, German corporate law provides for statutory provisions in favour of minority shareholders, in particular certain information rights and rights of inspection which cannot be waived in total, even by the share-holder itself. Besides, fundamental actions concerning the statute or exist-ence of the corporation in total require the consent of a qualified majority or even of all shareholders. The actual level and scope of such legal pro-tection for minority shareholders depends, however, on the respective legal form of the company. In general and subject to the disposition of the parties, German law sets out a higher level of minority shareholder pro-tection for a German limited partnership (KG) compared with a GmbH or an AG due to the legal principle that within limited partnerships the part-ners generally are deemed to have a closer relationship among each other whereas the relationship of shareholders of a limited liability company or a stock corporation is mainly characterised by the divestiture of capital and shareholder.



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Unlike the acquisition of a controlling stake in a private entity, the acquisi-tion of such a stake in a listed entity, a so-called public take-over, is regu-lated under German law. In this case, the regulatory regime provided by the WpÜG, which has been amended in the course of the implementation of the EU Takeover Directive in 2006 and is thus harmonised throughout the EU to some extent, must be observed by a private equity firm acquir-ing a controlling stake. Under the WpÜG, the obligation to submit a man-datory offer arises if a private equity firm acquires control over the target company, whereby ‘control’ shall mean the holding of at least 30 per cent of the voting rights in the target company. As to the Act to Limit Risks Related to Financial Investments the relevant thresholds for mandatory takeover offers must be calculated in line with the ‘acting in concert’ standards set out by the aforementioned Act (for more details see question 19). According to section 35 of the WpÜG, any person who directly or indirectly attains control of a target company is required, without undue delay and at the lat-est within seven calendar days, to publish this fact stating the size of his proportion of the voting rights. Within four weeks after publication of the attainment of control of a target company, the bidder is required to trans-mit an offer document to the federal agency and to publish an offer (for the timing considerations in general see question 5). With respect to private companies, there are no statutory limitations on the ability to acquire con-trol besides, of course, the relevant restrictions of German or EU anti-trust laws as well as the relevant restrictions of the German Foreign Trade and Payment Law (see question 18).

15 Exit strategies


From a practical standpoint, the recent global financial situation is still the main economic limitation for many private equity firms to exit their portfolio companies. Throughout 2014, the IPO market further recovered, however the conducting of an IPO of a portfolio company still remains less attractive compared with the sale of a portfolio company for most private equity firms.

Besides, in the case of an IPO, several legal requirements need to be observed. In particular, the portfolio company must be organised either as Societas Europea (SE), an AG or as German Limited Partnership by Shares (KGaA) prior to the IPO. Additionally, the legal requirements for a list-ing according to the German Stock Exchange Act and the German Stock Market Admission Rules have to be fulfilled, which typically results in com-prehensive preparation and even restructuring measures for the portfolio company.

As to post-closing recourse for the benefit of a buyer, private equity investors are generally very reluctant regarding the assumption of liability for the target company after the exit, in particular as the day-to-day busi-ness of the target or even a period prior to the own investment is concerned. Therefore, they try to minimise their liability by shortening the representa-tions and warranties, introducing low caps and substituting their own rep-resentations and warranties by such issues by the management. To ensure such exposure of the management, respective agreements between the management and the private equity investor are often already concluded in the course of the acquisition of the target by the private equity investor.

If a portfolio company is sold to another private equity firm the man-agement will typically reinvest in the target company. The representations and warranties of the seller will therefore be substituted by that of the rein-vesting management as far as the day to day business is concerned. Thus the situation for the seller is different as the buyer will rather accept such substitution than a strategic investor.



According to the AktG, rights to appointments to the board or veto rights for specific shareholders are possible to some extent, though this is very unusual. Since tag-along and drag-along rights can only be established in a shareholders’ agreement those shareholders investing in the company after the IPO are typically not bound by such agreements. As to registra-tion rights, private equity investors frequently establish such rights in the course of the acquisition of the target company although it is still contested whether such contractual rights are in fact enforceable. Post-IPO transfer restrictions on pre-IPO shareholders remain common. Generally, the pre-IPO shareholders are in most cases only entitled to sell a small portion of their stocks in the course of the IPO or within a defined timeframe after such. If, in accordance with a typical management participation model, the management participates directly as shareholder, it is usually bound by such lock-up restriction for a period of at least six to 12 months. Such lock-up periods for private equity investors seem to be increasingly shortened.



Although private equity transactions occur across almost all industry sec-tors, there seems to be a certain preference to invest in software, internet and IT undertakings and media and pharmaceutical companies (including biotech and medicine). A further investment target in 2014 was the infra-structure industry and will most likely remain so in 2015.

We do not see any industry-specific regulatory schemes that strongly tend to limit potential targets for private equity firms, although German legal requirements may complicate transactions in some industry sectors (for example, the defence industry).



A third-party bank must confirm the availability of funds for any cash com-ponent of the offer. The third-party bank therefore must be:• a German bank or a German financial service provider;• a non-German bank or financial service provider with its seat within

the European Economic Area; or• a non-German bank that maintains a branch in Germany with the

approval of the competent federal office.

With respect to foreign investment restrictions, the German Foreign Trade Act stipulates provisions which effectively enable the German Ministry of Economics and Technology to block any acquisition of stakes in German businesses if:• the purchaser is a non-EU person or 25 per cent or more of the voting

rights in the purchaser are owned by a non-EU person;• in the course of the transaction the purchaser directly or indirectly

obtains 25 per cent or more of the target’s voting rights; and• the transaction threatens the public order or the safety of the German

state.

However, the last requirement shall be construed narrowly and in accord-ance with EU law. From a practical standpoint, it thus seems rather unlikely that the German Foreign Trade Act will affect many cross-border transac-tions as long as sensible industry sectors are not concerned.



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If more than one private equity firm is participating in a group or club deal, the investors must team up to the extent that a homogeneous acting towards the portfolio company is assured, while at the same time ensuring the individual strategies of each private equity investor are still appreci-ated. Thus, various specific and explicit regulations between the investors are usually deemed necessary. As far as there is one predominant group member, the minority rights of the other members need to be protected. While the predominant member will emphasise the need, the group members will, at least to some extent, have to vote their shares in line to assure the factual capacity of act for the investors. If club or group mem-bers are equally strong, deadlock scenarios need to be regulated. Besides the internal organisation of the group or club members, the Act to Limit Risks Related to Financial Investments also needs to be considered, in particular since the relevant thresholds for mandatory takeover offers are also calculated in line with the ‘acting in concert’ standards set out by the

aforementioned Act. According to that, acting in concert is no longer lim-ited to a coordination of an exercise of voting rights in the shareholders’ meeting. Instead, cooperation apart from exercising voting rights may, in the future, result in an attribution of voting rights, as far as the cooperation is aimed at a ‘permanent and significant change of the issuer’s entrepre-neurial approach’. Club and group deals offer interesting opportunities to structure the financing of the acquisition tax efficiently against the back-ground of the German interest barrier rules that limit the tax deductibility of the interest expenses.



In 2014, transaction certainty was also a major issue in private equity trans-actions. As a consequence, private equity investors were still required to give up their (initial) requests for (strong) MAC and financing-out clauses but were still required to accept substantial reverse break fees or otherwise provide confidence that closing will take place.

Update and trends

What dominated in 2014 is likely to continue throughout 2015. The deal pipeline at the end of 2014 suggests that IPOs will remain popular and continue to be combined with running a mergers and acquisitions process in parallel (dual track structure) to increase transaction certainty for a contemplated exit at the highest possible price.

Buyouts in general are also seen as an area of strength set to continue. It is further anticipated that global funds will rather invest in developed markets, as they promise larger transactions. PE activity in southern Europe is also seen to be busy, as the monies collected earlier need to be put to work.

It can well be anticipated that financing conditions either further improve or remain basically unchanged in 2015. However, one of the challenges PE faces in 2015 could be revitalised mergers and acquisitions markets. The rising confidence in the global economy leads

many executives to believe that they will pick up in 2015. While this may improve deal and exit opportunities, the money that trade buyers have available may put deals again out of the reach of private equity houses. Another challenge may be the pension funds and the sovereign wealth funds; they have been in competition for quite some time and that competition may even increase. Competition to raise new funds is also said to remain fierce due to persistent oversupply.

So although 2015 may be more promising due to the economic climate, the challenges for the industry will increase at all levels of their activities.

However, as regards fundraising, private equity funds should benefit from the low interest rates, in particular with regard to the development of interest rates below zero.

Thomas Sacher [email protected] Guido Ruegenberg [email protected]

Westhafenplatz 1Westhafen Tower60327 Frankfurt/MainGermany


HONG KONG Ashurst Hong Kong


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Hong KongRobert Ogilvy Watson, Chin Yeoh and Adrian CheungAshurst Hong Kong



The majority of private equity investments take the form of pre-IPO investments, private investment in public equity (PIPEs) or private com-pany acquisitions. Sponsor-led take privates of listed companies are rare in Hong Kong. The principal reason is that many Hong Kong listed com-panies are controlled by shareholders holding a very large stake, often the founding family. This makes the execution of take privates, and in particu-lar, the acquisition of the shares of the dissenting minority, much more challenging.

Take privates primarily are effected through two means:• a general offer (which may be mandatory or voluntary) made under the

Code on Takeovers and Mergers (the Takeovers Code); or• a scheme of arrangement under which the company puts forward a

proposal that all of its shares (other than those held by the bidder) are to be cancelled in exchange for cash or shares.

Upstream shareholding structures for private equity transactions take a similar form to that seen in overseas markets, with offshore holding enti-ties commonly used. On the whole, the structures and amount of leverage deployed in debt financing of sponsor-led investments in Hong Kong tend to be less complex and less levered compared to sponsor-led transactions in Europe and the United States.



Much like in a number of other jurisdictions, one of the key advantages of taking a Hong Kong listed company private is a reduction in the burden of regulatory compliance. In Hong Kong, the principal sources of regulation of listed companies are the Listing Rules and the Securities and Futures Ordinance, which, among other things, require listed companies to comply with requirements relating to:• the holding of annual and extraordinary general meetings;• publication of annual and interim financial reports;• disclosure and shareholder approval requirements for certain notifi-

able transactions or transactions with connected persons of the listed company;

• announcements and circulars and the standard to which they must be prepared;

• disclosure of inside information to the market;• board composition, with a minimum requirement of at least one-third

of the board and at least three in number being independent non-executive directors;

• audit and remuneration committees of the board; and• the minimum free float of the company’s shares that must be held by

the public.

The Listing Rules incorporate a Corporate Governance Code, which speci-fies recommended best corporate governance practices (in relation to, among other things, directors and their securities transactions, commit-tees, remuneration and evaluation, accountability and audit, board delega-tion and communication with shareholders), but not mandatory rules. A listed company must state in each interim and annual report whether it has complied with the Corporate Governance Code provisions for the relevant accounting period and explain any deviations.

Any takeover, merger or privatisation involving a Hong Kong listed company would be regulated by the Takeovers Code. While it does not have the force of law, the Takeovers Code sets the standard of conduct expected in the context of such control transactions.

There have been a number of instances where sponsors and other investors have launched take-private transactions but have not succeeded in acquiring the shares of the dissenting minority and delisting. As shares of these companies remain listed and traded on the Hong Kong Stock Exchange, the company would be required to continue to comply with the corporate governance requirements set out above.

Where a sponsor has acquired control of a target company, but it remains listed on the Hong Kong Stock Exchange, the sponsor would be restricted in its ability to amend the articles of association of the company or agree that the company must give the sponsor special rights that are not available to other shareholders.



Confidentiality and announcementBefore any firm announcement of a takeover offer is made, the board of directors of the target company and their financial advisers must keep the proposed transaction confidential and must maintain ‘absolute secrecy’. The board may need to be prepared to make an announcement in response to any leak of information, even before the bidder is in a position to make a firm offer. Under the Takeovers Code, once a formal offer has been made, the target company must make an announcement.

Identity of the bidderWhen the board of directors of the target company becomes aware of a potential offer, it would need to understand the identity of the bidder and whether it would be in a position to fully implement the offer.

Information exchangeThe board of directors of the target company would need to consider the extent to which it furnishes a bidder with due diligence information. If a competing bidder emerges, information provided to one bidder must, on request, be provided to the competing bidder under the Takeovers Code. In the case of a management buyout, a bidder would also need to be care-ful with what information it provides to external providers or potential

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providers of finance, as such information must also be provided to the independent directors of the target company under the Takeovers Code.

Statements during the course of the offerUnder the Takeovers Code, the directors of the target company must not issue statements that may mislead the shareholders or the market or may create uncertainty.

Securities dealingsThe directors (or anyone who may have price-sensitive information, apart from the bidder) may not deal in the target company’s securities from when it is reasonable to expect that a takeover offer will be made until the announcement of the offer.

Committee of independent directorsWhere one or more directors of the target comany have an interest in the transaction or are part of the management team that the sponsor is back-ing, such directors would have a conflict of interest in their duty to act in the best interests of (and get the best deal for) the target company’s share-holders. In this circumstance, the board should constitute a committee of independent directors, whose responsibility would be to evaluate the offer from the bidder if an offer is announced, to advise the shareholders on the merits of the offer and to conduct negotiations with the bidder on behalf of the target company. There is no firm rule as to when the independent committee should be formed. However, it would be normal practice to form one as soon as any of the target company’s directors become formally involved with a sponsor.

Directors’ service contractsThe service contracts between a company and its directors will usually contain a provision that the director will devote all of his or her time and energy to the business of the company. Where this is the case, any directors involved with the offer for the target company will need to secure, from the independent directors of the target company, a release or waiver of this provision to allow them to devote time to the development of the bid; it should not be necessary for them to resign.

4 Disclosure issues


The Takeovers Code does not specifically contemplate going-private situa-tions similar to those governed by Rule 13-3 in the United States.

The committee of independent directors is required to retain a compe-tent independent financial adviser to advise it in respect of the offer. The target board’s circular must include the views of the independent directors and written advice from the independent financial adviser as to whether the offer is fair and reasonable and provide reasons.

The offer document to be sent to the shareholders of the target com-pany must also contain financial information about the target company, details of any arrangements made with any director, concert party or shareholder in respect of the offer and information about the bidder and the bidder’s intentions regarding the target company and its employees.

Any dealings in securities, options or derivatives of the target company by the bidder or any of its associates during an offer period and, for the six months preceding the offer period, must be publicly disclosed.

If, after a proposed offer, the shares of the company are to be delisted from the Hong Kong Stock Exchange, neither the bidder nor persons act-ing in concert with it may vote at the meeting of shareholders convened to approve the delisting.



Take privatesThere are two principal methods for effecting a take-private transaction in Hong Kong, namely, the bidder making a general offer and the company proposing a scheme of arrangement.

General offersThe Takeovers Code specifies a timetable for various stages of the offer. A takeover offer followed by compulsory acquisition usually takes three to six months. Once the bidder announces a formal offer, it has 21 days to post the formal offer document. The board of directors of the target company must then send to its shareholders a circular within 14 days of the offer docu-ment. The offer must be open for a minimum of 21 days (if the offer docu-ment and target board circular are posted together on the same day) or 28 days (if the target board circular is posted after the offer document) and may not become or be declared unconditional as to acceptances after 7pm on the 60th day after the day the initial offer document was posted. The main determining factor as to how long the offer will stay open is the level of acceptances and whether the minimum acceptance level is satisfied. The timetable set out above can be extended or modified by the Takeovers Executive, which may occur in the context of competing offers.

Schemes of arrangementUnder the Takeovers Code, a scheme of arrangement can only be imple-mented if, in addition to the voting requirements imposed by the law of the company’s jurisdiction of incorporation, the scheme is approved by at least 75 per cent of the votes attaching to the disinterested shares that are cast at a duly convened meeting of the disinterested shareholders and the number of votes cast against the resolution must be not more than 10 per cent of the votes attaching to all disinterested shares. The scheme of arrangement must also be approved by the court. After a proposed scheme of arrange-ment is announced by the target company, it must post the scheme docu-ments to its shareholders within 21 days and give at least 21 days’ notice of a general meeting of the shareholders. Once the scheme is approved by the shareholders and sanctioned by the court, it will be effective upon registra-tion of the court order at the Companies Registry. A scheme of arrange-ment will usually take three to four months to complete.

Pre-IPO investments, PIPEs and private company acquisitionsAs these are privately negotiated transactions, there are no regulations requiring that these transactions occur according to a particular time schedule.

Except in very exceptional circumstances, pre-IPO investments must be completed either at least 28 clear days before the date of the first sub-mission of the first IPO listing application form or 180 clear days before the first day of trading of the listed company’s securities.



General offersWhere a general offer is made, a dissenting shareholder may choose not to accept the offer. However, if the bidder and persons acting in concert with it succeed in acquiring 90 per cent or more of the shares to which the offer relates (which would not include the shares already held by them), the shares held by the remaining shareholders may be compulsorily acquired at the offer price.

Schemes of arrangementThe requirements for approval of a scheme of arrangement will depend on the company law of the jurisdiction of incorporation of the company (com-panies incorporated in certain selected jurisdictions may also be listed on the Hong Kong Stock Exchange). In the case of a Hong Kong company, the scheme of arrangement must be approved by at least 75 per cent of the votes attaching to the disinterested shares that are cast at the meeting of the holders of the disinterested shares and the number of votes cast against the resolution to approve the scheme must not be more than 10 per cent of the votes attaching to all disinterested shares. A dissenting shareholder may choose to vote against the scheme. However, if the scheme is never-theless approved by the disinterested shareholders and sanctioned by the court, the dissenting shareholders’ shares would be cancelled for consid-eration pursuant to the scheme.



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Representations and warrantiesAcquisitions of private companiesA sponsor-led acquisition that is a management buyout would differ from a typical transaction between a buyer and a seller because the manage-ment team investing with the sponsor often has a deeper knowledge of the business than the seller. On this basis, sellers are often reluctant to give a full set of representations and warranties unless they are qualified by the awareness of the seller (which may be limited if the seller is not involved in day-to-day management). Further, it is not uncommon for a seller to require the acquisition agreement to specify that knowledge of manage-ment is imputed to the purchaser and accordingly limit the purchaser’s ability to claim against warranties.

Take privatesIt is less common for a sponsor (or any other bidder) to be able to obtain business representations and warranties in the context of a take private. However, it may be possible to include limited representations and war-ranties in agreements entered into with the target company (for example, a break fee agreement or transaction implementation agreement) or with a controlling shareholder (for example, an agreement to purchase its shares before an offer is made or a scheme is proposed, or an undertaking to accept an offer or vote in favour of a scheme proposal).

Where the sponsor uncovers significant due diligence issues that need to be rectified or where the sponsor requires the target company to take certain actions or enter into certain transactions prior to the sponsor making a take-over offer, it would be possible for the sponsor to make a pre-conditional pos-sible offer announcement (specifying the completion of these actions as the preconditions), subject to consultation with the Takeovers Executive.

Exit planningTransaction agreements in respect of pre-IPO investments and private company acquisitions often set out the principles for planned exit transac-tions for the sponsor, including specification of the exit options available, timing, return and pricing thresholds, process, advisers and execution.



Management retaining an interestIt may be beneficial for a sponsor to be able to retain the services of the target’s existing management, but they would need to be given sufficient incentive to stay on in the form of a continuing financial involvement in the business. The methods by which this may be achieved may vary and may include, in particular, the granting of equity-based incentives such as shares or share options. In a take-private transaction, where the manage-ment are also existing shareholders, this inevitably will mean that they are offered a deal that is different from that being offered to other sharehold-ers. This arrangement may amount to a ‘special deal’, which would be pro-hibited by the Takeovers Code if entered into during or for six months after a takeover offer closes. However, the Takeovers Executive may consent to such arrangements in certain circumstances. The Takeovers Executive would consider a number of factors, including whether the risks as well as the rewards associated with an equity shareholding would apply to the retained interest, whether an independent financial adviser to the target company will give a fairness opinion on the arrangements and whether the arrangements will be approved by an independent shareholder vote in the case where management together will hold more than 5 per cent of the equity of the target company.

Management as a joint offerorAs an alternative to management retaining an interest through the grant of equity-based incentives, the transaction may be structured such that man-agement will be a joint offeror with the sponsor under the Takeovers Code.

To assess whether a person is a joint offeror, the Takeovers Executive would consider the proportion of the bidding vehicle equity that the person would own, the extent to which the person could exert significant influence over the bidding vehicle and the conduct of the bid, the person’s contribu-tion to the bidding vehicle through other means (for example, a contribu-tion of assets) and any arrangements that exist for the person to exit from the bidding vehicle.

Employment agreementsSponsors may also incentivise management shareholders by offering employment on more attractive terms, such as increased salary, bonus or participation in other incentive programmes. Such incentives would not be capable of being extended to all shareholders and may be prohibited spe-cial deals under the Takeovers Code unless the consent of the Takeovers Executive is obtained.

9 Tax issues


Profits taxProfits derived from carrying on a business in Hong Kong are subject to profits tax. However, only profits that arise in or are derived from Hong Kong (that is, Hong Kong-source profits) are subject to Hong Kong tax. The current rate for tax on assessable profits for Hong Kong companies is 16.5 per cent. Interest and other costs payable in connection with debt financing provided to a Hong Kong business are deductible from revenues in the calculation of assessable profits.

DividendsThere is no withholding tax applicable to dividends paid by a Hong Kong company that is subject to Hong Kong profits tax.

Capital gains taxNo capital gains tax is generally payable in respect of capital gains made on a transfer upon an exit. However, if the sale is made in the course of a busi-ness carried out in Hong Kong, profits tax may be assessable.

Employment benefitsBenefits associated with stock-based awards arising from a person’s employment will be subject to salaries tax. The tax liability will be calcu-lated based on the open market value of the relevant shares on the exercise date. There is no specific tax rule in Hong Kong that applies to golden para-chute payments to executives.

Stamp dutyThe transfer of shares in a Hong Kong company (whether private or pub-licly listed) must be stamped. The rate of duty is 0.1 per cent payable by each of the purchaser and seller involved in a transaction, giving an effec-tive rate of 0.2 per cent. Duty is charged on the sales consideration or the fair market value, whichever is the higher.



The principal source of debt in Hong Kong private equity transactions is usually senior debt from bank lenders, generally in the form of a secured term loan and working capital facility. Junior debt in the form of mezzanine finance, second lien or structurally subordinated debt is less common com-pared to private equity transactions in Europe or the United States, mainly because the universe of investors investing in this asset class in Asia is rela-tively smaller. Margin loan financings in Hong Kong are not uncommon and may be used as one source of financing for PIPE transactions.



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A take private or an acquisition of a private company may lead to a breach of change of control provisions or covenants under existing debt arrangements of the target company, which may lead to the negotiation of a waiver or potentially early repayment. If the target company has issued convertible securities then the Takeovers Code requires that the bidder make an appropriate offer for such convertible securities, which is nor-mally calculated based on the price offered for the shares under the offer.

A Hong Kong company and its subsidiaries are prohibited from giv-ing financial assistance to a person acquiring the shares of a Hong Kong company before or at the time of the acquisition or to reduce any liability incurred by any person for the purpose of acquiring the shares. Financial assistance is broadly defined and can take many forms, including the target’s group companies granting security over their assets to secure the acquisition finance loan of the sponsor or any refinancing. It may be possible for the companies who propose to give what would otherwise be unlawful financial assistance to undertake whitewash procedures to ena-ble the financial assistance to be given lawfully, requiring, in most cases, board approval, solvency statements to be given by the directors and the approval of the financial assistance by the shareholders. An exemption to shareholder approval exists if the financial assistance (including previ-ous financial assistance granted under such exemption that has not been repaid) does not exceed 5 per cent of shareholder funds.



Debt documentationSecurityThe financing banks will usually take security (at the time the offer is announced) over the bidding vehicle or vehicles and their assets. These assets will include the target company’s shares at the time the offer becomes wholly unconditional. The banks will usually take security over the target group to secure the acquisition financing as soon as possible after the offer has gone unconditional (ie, after the financial assistance white-washes have been undertaken).

Acceptance conditionFor a general offer, the financing banks will normally expect to control the point at which the bidding vehicle can waive the acceptance condition. They may insist that 90 per cent acceptance must be obtained in order to remove any residual risk that the target company will not be wholly acquired.

Other conditionsFinancing banks will likely expect that their consent must be obtained for the waiver of other conditions; the practical importance of this is less sig-nificant, as the Takeovers Code specifies that the circumstances that give rise to the right to invoke a condition must be of material significance to the bidder in the context of the offer.

Other termsFinancing banks will likely expect that their consent must be obtained for any change to the fundamental terms of the offer such as the price or form of consideration.

Certainty of fundsThe Takeovers Code requires that an announcement of an offer includes confirmation from the bidder’s financial adviser that the bidder has suf-ficient resources to satisfy full acceptance of the offer. This certainty of funds statement must also be included in the offer document. The bidder’s financial adviser may request to see equity commitment letters and bank financing confirmation.

Commitment feesGiven that the bidder will require financing banks to be committed to lend from the point that the offer is announced, the banks will be looking to receive a commitment fee during the period from the announcement to the date upon which the facilities are drawn down. The bidding vehicle, often a newly formed company, will often not have the financial resources to meet those fees if the offer is unsuccessful.

Equity documentationConditionalityThe equity subscription documents are often only conditional on the offer becoming wholly unconditional. Completion of the equity subscription will often then trigger drawdown under the debt documents.

Control of the bidding vehicleThe sponsor would want to maintain strict contractual rights of control over the bidding vehicle during the bid process. In particular, any actions connected with the offer itself should be at the discretion of the sponsor. Management who hold shares in the bidding vehicle are often subject to an undertaking not to buy any of the target company’s shares, to avoid any consequences for the offer.

Representations and warrantiesIn the context of a management buyout, the sponsor will usually seek war-ranties from the directors of the target company who are on the manage-ment team.



Certain types of transactions entered into within a specified time period prior to the liquidation of a Hong Kong incorporated company may be chal-lenged or set aside by a liquidator of the company. These include extortion-ate extensions of credit, unfair preferences and floating charges granted by the company and transactions made with an intent to defraud its creditors.

Sponsors and providers of finance would need to be vigilant of the financial condition of their portfolio companies and how this may change with economic circumstances to identify as soon as possible potential risks of insolvency so that they can be appropriately addressed.

Representations and warranties may be included in financing docu-mentation in respect of insolvency events and financial condition.



Private companiesTransaction agreements in respect of pre-IPO investments and private company acquisitions often provide for shareholder rights to protect the sponsor’s economic interests. Common shareholder rights include veto rights, anti-dilution rights, information rights, pre-emptive rights, direc-tor nomination rights and management appointment rights. Shareholders’ agreements also often include provisions relating to proposed exit strate-gies for the sponsor. Subject to certain limited exceptions, the Hong Kong Stock Exchange generally would not allow any special shareholder rights granted to pre-IPO investors to survive an IPO.

Minority shareholders in a Hong Kong company (listed or unlisted) are also protected under the Companies Ordinance by specific voting majori-ties required for certain corporate actions. A special resolution passed by at least 75 per cent of the shareholders present and voting at a meeting is required for certain actions, including any amendment of the articles of association, a voluntary winding-up, variation of class rights, reduction of share capital and redemption or purchase of the company’s shares. In respect of delistings and privatisations, such corporate actions will need to be approved by at least 75 per cent of the votes attaching to the disinter-ested shares that are cast at a duly-convened meeting of the holders of the disinterested shares and the number of votes cast against the resolution must not be more than 10 per cent of the votes attaching to all disinterested shares.

Listed companiesAlthough not very common, it is possible for shareholders in a listed com-pany to enter into a shareholders’ agreement that specifies how the share-holders agree to vote in general meetings and considers other strategic and business objectives of the company. Such agreement would most likely



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render the shareholders parties acting in concert for the purposes of the Takeovers Code.

As a general principle, the Hong Kong Stock Exchange would be reluc-tant to permit a listed company to grant rights to a shareholder which are not otherwise available to the general body of shareholders (for example, anti-dilution or nomination rights). However, such restriction would not apply to, for example, rights given to a sponsor as holder of a convertible debt instrument, provided that such rights do not survive conversion of the debt into equity securities.

The Listing Rules provide a level of protection to all minority share-holders, in particular, through requirements that certain transactions such as notifiable transactions that exceed certain size tests or transactions with connected persons of the company be conditional upon approval of the independent shareholders at a general meeting (and in certain cases the independent directors must also obtain the advice of an independ-ent financial adviser as to whether the proposed transactions are fair and reasonable to the independent shareholders, which will be included in the circular despatched to the shareholders) and that any issue of shares other than on a pro-rata basis must be approved by the shareholders by way of general or specific mandate.



Under the Takeovers Code, a person who acquires 30 per cent or more of the voting rights in a company subject to the Takeovers Code, or a per-son, holding between 30 per cent and 50 per cent of the voting rights in the company, who increases the percentage of voting rights they hold by more than 2 per cent from the lowest percentage holding of that person in the 12-month period ending on and inclusive of the date of acquisition, must make a mandatory general offer for all of the shares in the company that they do not own. A mandatory general offer must be made in cash, or be accompanied by a cash alternative, at the highest price paid by the offeror or any person acting in concert with it for shares of that class during the offer period and six months prior to its commencement. A mandatory general offer cannot be subject to any conditions, other than a condition as to percentage of acceptances, without the Takeovers Executive’s consent (which would normally be granted for regulatory consents).

Given that many Hong Kong listed companies have a controlling shareholder holding a large stake, in order to secure control, a sponsor would need to either agree to acquire the controlling shareholder’s stake and then make a mandatory general offer or scheme proposal, or launch a voluntary general offer or a make a scheme proposal with an undertaking of the controlling shareholder or shareholders to accept the offer or vote in favour of the scheme.

If the target company is to remain listed after the sponsor transaction, it would need to ensure that a minimum percentage of its shares (usually 25 per cent) remain in public hands. Therefore, if a sponsor is not able to squeeze out minority shareholders it may need to place down further shares to independent investors after completion of the offer to raise the public float to the minimum level. If the sponsor has an intention to keep the target company listed, it may consider making a partial offer at a level that would not result in the shares in public hands dropping below the min-imum required level.

15 Exit strategies


If the sponsor is a controlling shareholder of a portfolio company that will conduct an IPO, it will be required under the Listing Rules to undertake, for the six months from the date of the IPO prospectus, not to dispose of, enter into any agreement to dispose of, or create options, rights, interests or encumbrances in respect of its shares in the portfolio company. In the following six months, the Listing Rules prohibit the sponsor from entering into any such transactions if, as a result, the sponsor would cease to be a

controlling shareholder of the portfolio company. Although not a Listing Rule requirement, the IPO underwriters typically require that for a particu-lar period following listing (usually 180 days) certain key shareholders are restricted from selling their shares.

Any IPO of a portfolio company must satisfy the Hong Kong Stock Exchange’s listing requirements in terms of jurisdiction of incorporation, financial performance track record, preparation of accounts, corporate governance, trading record, management continuity and minimum mar-ket capitalisation.

In the context of a trade sale of a portfolio company, a sponsor secur-ing a clean exit who is unwilling to give any warranties about the business may suggest that representations and warranties made by management be backed by warranty and indemnity insurance (the cost of which is often factored into the purchase price). The use of warranty and indemnity insurance is slowly increasing as policies have now become more cost-competitive. Where the transaction is a secondary buyout and the man-agement team are being retained, it may be less likely that a warranty and indemnity insurance policy is taken. Where a selling sponsor is willing to give warranties about the business, the transaction documents often limit the warranties by knowledge, limit the time in which warranty claims are permitted and impose minimum and maximum aggregate thresholds for claim amounts.



Special rights given to pre-IPO investors that survive after listing are, in general, contrary to the general principle underlying the Listing Rules that holders of listed securities should be treated fairly and equally.

However, the Hong Kong Stock Exchange recognises that certain shareholder rights may be able to survive listing without creating undue prejudice to the general body of shareholders. Examples of shareholder rights which may survive listing according to Hong Kong Stock Exchange guidance include:• rights of first refusal and tag-along rights, which are purely contractual

rights between shareholders;• rights to nominate senior management and board committee repre-

sentatives provided that such appointments are subject to a decision of the board;

• a profit guarantee arrangement where the compensation is settled by a shareholder and not the listed company;

• a negative pledge provided that it is part of a loan agreement and in the form widely accepted and not egregious;

• a prohibition on the listed company issuing shares or other securities to a direct competitor of the pre-IPO investor or on more favourable terms to that issued to the pre-IPO investor, provided that such pro-hibition would not apply if it would result in a breach of the directors’ fiduciary duties; and

• information rights provided that the information is made available to the public at the same time.

See our response to question 15 in respect of lock-up restrictions.



Private equity and take private transactions in Hong Kong cross a number of industries, from real estate to mining, consumer businesses and manu-facturing. A large number of private and listed companies in Hong Kong have subsidiaries and business operations in China. On this basis, private equity firms can invest in Hong Kong companies that are subject to corpo-rate governance requirements and Listing Rules of a standard comparable with many developed markets, as a means of gaining exposure to growing businesses in China.



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Although the Hong Kong Competition Ordinance has been passed by the legislative council, as at the date of this publication, it is yet to come into effect. Restrictions apply to certain investments in the television pro-gramming and sound broadcasting, telecommunications, banking, insur-ance and securities industries.



There is no Hong Kong law that generally prohibits or restricts foreign investment into Hong Kong. Certain restrictions apply to foreign investors or entities making investments in limited industries such as banking, tel-evision and sound broadcasting and civil aviation.

Hong Kong does not have any exchange controls or any restrictions on the flow of funds from or to overseas in the provision of financing or remittance of profits.



Sponsors who already hold stakes in the target company who may consider participating in a club deal would need to be mindful of not triggering a mandatory general offer. If sponsors have an agreement or understanding to cooperate or to obtain or consolidate control of a listed company through the acquisition by any of them of voting rights in the company, they will most likely be ‘acting in concert’ for the purposes of the Takeovers Code.

Under the Takeovers Code, if an offer is to be made by more than one offeror or by a company formed by a group of investors, the Takeovers Executive will consider the offerors or the investors to be in a consor-tium. The Takeovers Executive must be consulted before any members or potential members of a consortium purchases any securities of the target company.



Take privatesFrom the point of view of the target company, certainty of whether a takeover offer will proceed will often depend on the ability of the bidder to invoke a condition to the offer. Bidders often include a minimum accept-ance condition (typically set at the squeeze-out threshold to enable the bidder to get to 100 per cent by compulsorily acquiring the shares of the minority), but it is often the case that the minimum acceptance condition needs to be waived early in order to encourage the flow of acceptances. Other conditions must not be subjective in nature or depend on the bid-der’s own judgement, and the bidder should not invoke a condition unless the circumstances that give the right to invoke the condition are of material significance to the bidder in the context of its offer.

Private company acquisitionsSponsors may include various conditions precedent to completion of an acquisition of shares of a private company, including the availability of finance (in contrast to take-private deals where certainty of funds must exist when an offer is made), material adverse change clauses, receipt of regulatory approvals and actions taken to rectify due diligence issues. Such conditions are often hotly negotiated by the buyer and seller.

Update and trends

There have been very few sponsor-led take-private transactions in Hong Kong in recent years. Most of the take-private transactions launched have not been successful. In April 2014, private equity firm Blackstone was successful in acquiring an approximately 87 per cent stake in Hong Kong listed company Tysan Holdings through a voluntary general offer. Blackstone subsequently placed shares to independent investors to reduce its stake to 75 per cent to maintain the minimum public float. In December 2014, private equity firm Carlyle Group agreed to buy a stake in Hong Kong Stock Exchange listed Asia Satellite Telecommunications Holdings Limited and announced that it would make a mandatory general offer for the remaining shares in the company if the acquisition is completed. It remains to be seen whether this will be the start of more sponsor-led take privates in Hong Kong.

Robert Ogilvy Watson [email protected] Chin Yeoh [email protected] Adrian Cheung [email protected]

11/F Jardine House1 Connaught Place, CentralHong Kong

Tel: +852 2846 8989Fax: +852 2868 0898www.ashurst.com

INDIA J Sagar Associates


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IndiaRupinder Malik, Sidharrth Shankar and Shantanu JindelJ Sagar Associates



Private equity transactions taking place in India are varied in nature and can broadly be categorised into three types: early stage and venture capi-tal, growth stage, and buyouts. The target companies for the majority of the private equity transactions that occur in India are either private or closely held public unlisted companies. Private equity investments in listed companies are relatively less frequent, on account of acquisitions of listed companies being highly regulated and limitations on enforceability of a number of shareholder rights typically sought by private equity investors. For a background on the types of companies, see question 2.

On account of regulatory reasons (outlined in the answers below) lev-eraged buyouts (LBOs) are not common in India, unlike various other juris-dictions including the US and the UK.

The most common structures involved in private equity investments in Indian companies involve either a primary subscription or a secondary purchase of existing securities or a combination of both. Lately, the trend of various private equity investors has been to avoid taking a large amount of direct exposure in the form of pure equity, and instead structure their investments as a combination of equity shares and convertible instruments (namely, compulsorily convertible preference shares or compulsorily con-vertible debentures) that may convert in terms of pre-defined performance milestones or other parameters of a like nature.

Under the Indian exchange control norms, only equity shares, fully and mandatorily convertible preference shares and debentures, and war-rants qualify as equity investments. All other structured instruments that are not fully and mandatorily convertible in nature are considered as ‘debt’, thereby requiring compliance with the external commercial borrowings (ECB) guidelines prescribed by the Reserve Bank of India (RBI), India’s central bank. Notably, the ECB guidelines are far more stringent than the regulations governing equity investments into India.



In order to address the implications of various corporate governance rules for private equity transactions, it will be worthwhile to touch briefly upon the nature and classes of companies that are regulated in terms of the (Indian) Companies Act, 2013, namely:(i) private company; and(ii) public company.

Public companies are in turn classified into listed and unlisted companies.The Companies Act, 2013, which has stringent corporate govern-

ance requirement, (for example, in terms of compliance and disclosures) has replaced the dated Companies Act, 1956 to a major extent. What has complicated the entire company law framework is the fact that the tran-sition from the Companies Act, 1956 to the Companies Act, 2013 was in

a phased manner (and not in one go) and there are certain provisions of the Companies Act, 1956 which are still applicable (until the correspond-ing provision in the Companies Act, 2013 is brought into force). Under the Companies Act 1956, the private companies were exempted from a num-ber of provisions, thereby being subject to far lesser scrutiny and regulatory compliances than public companies as well as private companies which are subsidiaries of public companies. However, under the Companies Act, 2013, the private companies (even the ones which are not subsidiar-ies of public companies) are subject to higher compliance and reporting requirements.

Listed companies are most highly regulated in terms of stringent dis-closure and corporate governance norms, much like the position exist-ing in other jurisdictions. Some of the key regulations applicable to all listed companies have been issued by the Securities Exchange Board of India (SEBI) – India’s capital market regulator. The regulations such as the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations) and the SEBI (Prohibition of Insider Trading) Regulations, 1992 (Insider Trading Regulations) are a couple of key regula-tions issued by the capital market regulator. A company, upon being listed, is also required to execute a listing agreement with the recognised stock exchange or stock exchanges (such as the Bombay Stock Exchange and the National Stock Exchange) on which its securities are listed. We have discussed some of the recent and significant changes introduced by SEBI with respect to the Insider Trading Regulations and the listing agreement in detail in the ‘Update and trends’ section.

In view of the above discussions, though the advantages of private companies from the legal compliance perspective have reduced, we, however, believe that it may still be more advantageous to have a pri-vate company post the private equity funding to avoid certain regulatory requirements. However, unlike other jurisdictions, the avenues to under-take a going-private transaction in India are significantly limited.



Under the Companies Act, 2013, every director is required to disclose his interest or concern at the first meeting of the board in which he or she participates as a director and thereafter at the first meeting of the board in every financial year or whenever there is any change in the disclosures already made, then at the first board meeting held after such change. Furthermore, every director of a company, who is in any way concerned with, or interested in, a contract or arrangement or proposed contract or arrangement (entered into or to be entered into) with a body corporate in which such director has certain direct or indirect interests, cannot partici-pate in a meeting where such contract or arrangement is being discussed. A large number of material transactions proposed to be undertaken by a public company (including a subscription to securities of a public company by a private equity fund through a private placement) requires approval by way of a special resolution of the shareholders (namely a shareholder

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resolution that is required to be passed by a majority of 75 per cent of the shareholders present and voting), thereby reducing the overall control exercised by the board of directors of a public company.

In the case of public listed companies, where a private equity trans-action leads to an acquisition of a stake above specified thresholds (see question 14) or of control (as defined in the Takeover Regulations) in the target company, thereby triggering the open offer requirements under the Takeover Regulations, a number of additional obligations become applica-ble to the target company’s board of directors as well as the target company itself.

4 Disclosure issues


As mentioned briefly in question 2, the scope of undertaking a going-private transaction in India is limited to the options of the delisting of an existing listed company and conversion of a public company into a private company. In the case of listed companies, both the processes (delisting as well as conversion into a private company) would need to take place con-junctively; in the case of public unlisted companies only the latter would apply for the purpose of executing a going-private transaction. The other kinds of going-private transactions that take place in other jurisdictions, such as by way of a merger, tender offer or a reverse stock split, are not prevalent in India.

Delisting of shares of a listed company is governed by the SEBI (Delisting of Equity Shares) Regulations, 2009 (Delisting Regulations). For a delisting to be permitted under the Delisting Regulations, the company must be listed for a period of at least three years, and furthermore, the del-isting cannot be made pursuant to a buy-back or preferential allotment of shares by the company.

From a corporate governance requirement, a delisting is required to be approved by the board of directors as well as shareholders of the target company by way of a special resolution. However, unlike standard special resolutions which are required to be passed by a majority of 75 per cent of the shareholders present and voting, the Delisting Regulations provide that a special resolution for the purposes of approving a proposed delisting shall be acted upon only if the votes cast by public shareholders in favour of the proposal amount to at least two times the number of votes cast by public shareholders against it. Therefore, it is not possible for the promot-ers to force their decision of delisting the company on the public sharehold-ers, and receiving the approval of the public shareholders is not always a certainty.

Another important regulatory requirement is that of obtaining an in-principle approval from the stock exchanges where the company’s shares have been listed. However, such in-principle approval from the stock exchanges would not be forthcoming in the absence of the sharehold-ers’ approval of the delisting proposal. Approvals may further be required from the RBI, the Foreign Investment Promotion Board (FIPB) and the Competition Commission of India (CCI), on an as-applicable basis.

Once all approvals have been received by the acquirer, the acquirer is required to make a public announcement in the newspapers, followed by the letter of offer to the public shareholders of the listed target. Various disclosures are required to be made by the acquirer under the public announcement and the letter of offer, such as information about the acquirer (including the acquirer’s financial position), present and post-delisting capital structure, determination of the floor price, disclosures regarding the minimum acceptance condition for success of the offer and details as to the indicative offer price being offered by the acquirer, among others.

As regards the conversion of a public company into a private com-pany, a public company is required to alter its charter documents by way of a special resolution passed by the shareholders in a general meeting and subsequently also obtaining the approval of the registrar of companies (ROC) to authorise such conversion. Upon receipt of the approval from the ROC, certain administrative requirements also need to be adhered to by the company, including but not limited to obtaining a fresh certificate of incorporation.

Interestingly, SEBI has, recently, reviewed the existing regulation on the delisting of equity securities and has approved certain changes to the SEBI (Delisting of Equity Shares) Regulations, 2009. Some of these critical changes are as follows:• the delisting will be considered successful only when:

• the shareholding of the acquirer, together with the shares ten-dered by public shareholders, reaches 90 per cent of the total share capital of the company; and

• if at least 25 per cent of the number of public shareholders, holding shares in dematerialised form as on the date of the board meeting which approves the delisting proposal, tender in the reverse book building process;

• the promoter, or promoter group, will be prohibited from making a del-isting offer if any entity belonging to such a group has sold shares in the company during a period of six months prior to the date of the board meeting which approves the delisting proposal;

• timelines for completing the delisting process has been reduced from 137 calendar days (approximately 117 working days) to 76 working days; and

• the option to the acquirer to delist the shares of the company directly through the Delisting Regulations pursuant to triggering Takeover Regulations has been provided. However, if the delisting attempt fails, the acquirer would be required to complete the mandatory open offer process under the Takeover Regulations and pay interest at the rate of 10 per cent per annum for the delayed open offer.

In light of these changes, de-listing and going-private transactions would continue to remain a challenge.



The timelines involved in the completion of a going-private transaction involving a voluntary delisting offer can range anywhere from three to four months. However, depending on the number of governmental and regula-tory approvals that may be required, such as obtaining the approvals of the RBI, FIPB and the CCI, the timelines may get stretched up to eight months. The process of conversion of a public company into a private company can take anywhere between two to four) months.

Timing considerations for other private equity transactions involving a substantial acquisition of stake or an acquisition of control (as defined under the Takeover Regulations) in a listed company usually also take any-where between three to four months, although the Takeover Regulations envisage the consummation of a public takeover bid within 57 days from the date of a public announcement.

Private equity transactions in unlisted public companies and private companies can typically be closed in shorter timelines (as compared to public acquisitions and going-private transactions via the delisting route). However, the timing considerations in the case of such transactions would also depend on a number of factors, including, inter alia, the fulfilment of the conditions precedent, such as obtaining relevant governmental approv-als from the RBI and FIPB, or other due diligence-driven prior conditions.

6 Dissenting sha reholders’ rights


It is worth noting that from a corporate governance requirement, a delist-ing is required to be approved by the board of directors as well as share-holders of the target company, by way of a special resolution. However, unlike standard special resolutions that are required to be passed by a majority of 75 per cent of the shareholders present and voting, the Delisting Regulations provide that a special resolution for the purposes of approving a proposed delisting shall be acted upon only if the votes cast by public shareholders in favour of such proposal amount to at least twice the number of votes cast by public shareholders against it. Therefore, it is not possible for the promoters to force their decision of delisting the company on the public shareholders and receiving the approval of public shareholders is not always guaranteed.



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The exit price in a delisting is book built where the promoter quotes a floor price, and the shareholders in turn quote prices at which they would be willing to tender their shares. It is the price at which the maximum number of shares is tendered by the public shareholders that is regarded as the final offer price. Therefore, there is always a theoretical possibility of certain public shareholders artificially inflating the stock price, thereby defeating the delisting process, which cannot be wholly addressed or miti-gated by the acquirers. A successful going-private transaction, therefore, is predicated on the promoters and the public shareholders really forming consensus on the exit price.

Separately, as mentioned in question 4, conversion of a public com-pany into a private company requires an alteration of the company’s mem-orandum and articles of association by way of a special resolution passed by the shareholders in a general meeting.



On account of the restrictions surrounding LBOs in India (as explained in our response to questions 10 and 11), covenants related to financing are not typically employed in Indian private equity transactions. Consequently, consummation of a private equity transaction is not linked to the ability of a private equity investor to arrange financing from banks or other financial institutions.

Private equity transactions typically witness extensive representations and warranties, backed by corresponding indemnities, being sought from the target company and its promoters in relation to the target’s business and operations which find a place in most purchase agreements.

Target companies and promoters resist indemnification obligations that run in perpetuity. Typically, the limitation period for raising any indemnity claims on the target or the promoters, or both, is negotiated keeping the statute of limitation in mind.

Conversely, if a private equity fund acting as a seller in a sale and pur-chase transaction is selling its stake to an Indian resident company, then in such cases private equity investors resist providing representations and warranties, other than those pertaining to authority to execute the transac-tion document and title to the securities owned by them in the company and are usually hesitant to provide any form of indemnities. If the private equity fund is selling to another private equity fund the representation and warranties continue to be similar as stated above, however, the indemnity may extend to tax claims that may arise on such sale. This is usually in the case when the funds are investing in India from tax havens.



Typically, private equity investors look to ensure that the promoters and other key managerial personnel stay committed to the growth of the busi-ness and continue to maintain an executive role in the target, following the private equity funding in the target. It is therefore common to see private equity investors requiring the promoters and key management personnel to execute detailed employment agreements, containing protective pro-visions in relation to non-compete, non-solicitation and confidentiality with a view to ensure that the individuals possessing the requisite know-how and experience stay in the target company post consummation of an investment.

Compensation provided to the promoters and key management team of the target can be structured both through cash as well as equity-based incentives such as Employee Stock Option Plans (ESOPs). The payment of monetary compensation and vesting of such ESOPs can be structured in a way so that any compensation to the promoters and management is linked to the target meeting the predefined performance milestones. However, the Companies Act, 2013 read with the Companies (Share Capital and Debentures) Rules, 2014, excludes, inter alia, independent directors, a promoter who is also an employee and a director holding more than 10 per cent of the outstanding equity shares of the company. Accordingly, ESOP

schemes cannot be used to provide performance-based incentives to indi-viduals falling in the aforementioned categories.

From a timing perspective, management involvement and compensa-tion issues are usually negotiated and documented upfront during the term sheet stage itself so as to ensure certainty in the dealmaking process.

9 Tax issues


In India, long-term capital gains on the sale of any shares (where the hold-ing period is greater than 36 months) is subject to tax at 10.506 per cent to 21.012 per cent while short-term capital gains on sale of any shares (where the holding period is less than 36 months) is taxed at 16.22 per cent to 43.26 per cent. Non-resident investors investing through jurisdictions with which India has a favourable tax treaty will be able to achieve tax efficiencies in terms of tax on capital gains.

Some of the favourable tax treaties under which capital gains tax on sale of shares (of an Indian company) is not payable in India include Mauritius, Singapore, Netherlands and Cyprus. As an example, in terms of the India–Mauritius tax treaty, capital gains made by a Mauritian resident from the sale of shares of an Indian company is not taxable in India if the Mauritian resident does not have a permanent establishment in India.

However, notably, the ‘general anti-avoidance regulations’ (GAAR), introduced by the Finance Act 2012 (scheduled to come into effect from 1 April 2016), seeks to raise the threshold of substance required to be met for receiving any beneficial treatment under a favourable tax treaty.

A company incorporated in India, even if it has received investments from a non-resident private equity investor, will be an Indian tax resident and subject to corporate tax at 33.99 per cent. Dividends distributed by an Indian company are subject to an effective tax rate of 20.50 per cent pay-able by the Indian company declaring dividend. No further tax is payable on such dividends by the recipient shareholders.

Dividends on both equity and preference shares are below the line items and not tax-deductible. On the other hand, interest on borrowings used for working capital and business purposes will be tax-deductible in the hands of a borrowing Indian company.

Employees working with an Indian company are subject to tax as indi-viduals on their aggregate income from all sources at the end of a relevant tax year. Indian tax law follows a progressive slab rate system in the case of individuals, with the peak rate of tax being 33.99 per cent. The income element embedded in stock options (fair market value less exercise price) as well as severance packages are taxed as salaries.

Currently, the right to election is not available to the buyer to treat acquisition of shares as an acquisition of assets under Indian tax laws.



On account of three fundamental regulatory hurdles (described herein), the use of debt financing in Indian private equity transactions in India is not common. First, the RBI prohibits domestic banks from providing loans or financial assistance that have as their end use the purchase of securities of an Indian company. Second, under the Indian exchange control regula-tions, any foreign owned or controlled Indian company is also prohibited from leveraging funds from the domestic market for the purposes of mak-ing downstream investments. Lastly, the Companies Act, 2013 also stipu-lates restrictions on the purchase by a company or giving of loans by it for the purchase of its own shares or the shares of its holding company, and therefore, also poses a regulatory hurdle to undertaking a LBO transaction.

Since equity and other fully and mandatorily convertible debentures and preference shares are unsecured, such investments would rank behind secured creditors. The existing indebtedness of a target company can also have the effect of diluting the liquidation preference rights available to pri-vate equity investors.



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In addition to the restrictions on debt financing explained above, the creation of any form of security interest in favour of a non-resident invest-ing in the equity shares or compulsorily convertible instruments (regarded as equity) issued by an Indian company is not permitted under the Indian exchange control regulations.



In view of question 10, setting out the key limitations to the use of debt financing in private equity transactions and undertaking LBOs in India, financing provisions are not commonplace in private equity transactions taking place in India.



In view of questions 10 and 11, since private equity investments in Indian companies do not typically involve leverage, fraudulent conveyance issues do not arise. However, as a matter of practice, even in non-leveraged private equity transactions extensive representations and warranties in relation to the target’s solvency are usually included in the definitive agreements.



Much like most private equity transactions taking place in other jurisdic-tions, minority shareholder rights commonly documented in shareholders’ agreements include:• right to appoint representatives on the board of directors and commit-

tees thereof;• affirmative vote matters, requiring the prior consent of the investors;• pre-emptive rights to participate pro rata in any future capital raising

by the target;• share transfer restrictions on the sale or disposition of shares by the

promoters such as a right of first offer (ROFO), right of first refusal (ROFR) and tag-along rights;

• anti-dilution rights for down round protection;• exit rights: these include the right to obtain an exit by way of an IPO,

strategic sale rights, buy-back of shares or a put option in favour of the private equity investor;

• drag-along rights that usually trigger upon a failure on the part of the promoters to provide a timely exit; and

• liquidation preference.

Shareholders’ agreements also place lock-in restrictions (and sometimes, ROFO or ROFR) on the shares of the promoters so as to ensure that they continue to be involved in the running of the target’s business and have direct exposure in terms of shareholding in the target.

The statutory or legal protections granted to minority investors are found under the Companies Act, 1956 (also under the Companies Act, 2013, however, pending notification and creation of National Company Law Tribunal) and become applicable across varying thresholds of share-holding percentage that may be held by shareholders of an Indian com-pany. Shareholders holding 10 per cent or more of a company’s equity share capital are entitled to apply to the Company Law Board (CLB) to report oppression of the minority or mismanagement of the company by the persons in control of the company or majority shareholders, or both, and they are also entitled to requisition an extraordinary general meeting of the company.

Shareholders holding more than 25 per cent of a company’s equity share capital can exercise negative control by virtue of their ability to block special resolutions. Under the Companies Act, 2013 (as well as the applica-ble sections of the Companies Act, 1956) a number of significant corporate actions require the passing of a special resolution by the shareholders of a

company. Such matters include, inter alia, alteration of the memorandum and articles of association of the company, mergers and amalgamations, reduction of capital, issue of shares to persons other than existing share-holders (in cases of a public company) and winding-up of the company.



Two fundamental regulatory frameworks that may impact the ability of a private equity firm to acquire a controlling stake of an Indian company comprise the Takeover Regulations and Indian exchange control regula-tions (applicable to all kinds of companies).

In terms of the Takeover Regulations, any acquisition of shares or vot-ing rights entitling the acquirer (along with persons acting in concert) to exercise 25 per cent or more of voting rights in the target company would require such acquirer (and the persons acting in concert) to make a pub-lic announcement of an open offer to acquire at least 26 per cent of the voting shares from the public shareholders of the target. The Takeover Regulations also lay down norms for creeping acquisitions in cases where an acquirer already holds a substantial amount of shareholding in the Indian target company, restricting the ability of such acquirer to easily con-solidate shareholding in the target.

Under the Indian Exchange Control Regulations, although a signifi-cant majority of the sectors have been placed under the 100 per cent auto-matic route for foreign direct investment (FDI) (ie, where FDI is permitted up 100 per cent without the requirement of obtaining any prior regulatory approvals either from the RBI or the FIPB), acquisition of controlling stakes in other sectors may be difficult on account of FDI in such sectors being subject to ceilings or sector caps, and in some cases requiring the prior approval of the FIPB, which is not always forthcoming.

15 Exit strategies


Private saleUsually, unless there are restrictions on the sale of shares such as a ROFO, ROFR or tag-along rights that are incorporated in the shareholders’ agree-ment and, consequently, in the target company’s articles of association, a private sale of shares of a portfolio company in favour of a third party purchaser is a possible exit route, subject to compliance with applicable guidelines under the Indian exchange control regulations, prescribed by the RBI as well as certain limitations imposed by the Companies Act, 2013. The pricing guidelines mandate that a transfer of shares by a non-resident investor in favour of a resident cannot take place at a price higher than the value calculated as per any of the internationally accepted pricing method-ologies for valuation of shares at an arm’s length basis by a SEBI-registered category I merchant banker or a chartered accountant. In the case of listed companies, the benchmark pricing is the preferential allotment pricing guidelines issued by the SEBI, from time to time. Foreign Venture Capital Investors (FVCIs), registered with the SEBI are, however, exempt from entry and exit pricing conditions.

These pricing guidelines have been revised in July 2014, and liberal-ise the way valuation of shares will be done, as far as foreign investment in Indian companies is concerned. The earlier regime mandated that the valuation of shares be done in accordance with the discounted free cash flow method of share valuation.

Furthermore, the RBI has legitimised inclusion of options and the right to exit in the investment agreements subject to certain conditions. As a result of this, a non-resident investor can exercise put-option on the resi-dent, subject to the following conditions:• there should be a minimum lock-in period of one year or a minimum

lock-in period as prescribed under FDI Policy, whichever is higher. The lock-in period will be effective from the date of allotment of shares; and



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• the non-resident investor exercising option or right, or both will be eligible to exit without any ‘assured return’. The shares being sold by the non-resident to the resident should be at a price not exceeding the price arrived at, as per the pricing guidelines. This means that the non-resident investor cannot be guaranteed a price that it will get for its shares (when such shares are sold by the non-resident investor desir-ing to exit the Indian company).

Accordingly, no securities containing an optionality clause to exit at an assured price can be issued to a non-resident by an Indian company. Any such security, if issued, would not be considered to be an ‘eligible instru-ment’ for the purposes of the FDI regulations.

IPOAn exit by way of an IPO is one of the foremost exit rights typically sought by private equity funds and documented in shareholders’ agreements. Usually, an exit through an offer for sale (OFS), in terms of which a private equity fund may offload its existing shares as part of an IPO, is also negoti-ated by private equity funds.

From a regulatory standpoint, an OFS is treated similarly to an IPO in respect of a majority of the obligations and compliances required to be met by an Indian company. The SEBI has prescribed the conditions required to be fulfilled by an issuer proposing to make an IPO (whether or not by way of an OFS). These preconditions pertain to minimum net tangible assets, the track record of distributable profits and net worth, among other conditions. An issuer company not satisfying any of the conditions may still be able to carry out an IPO or OFS in the case of the issuer, inter alia, undertaking to allot at least 50 per cent of the net offer to the public to qualified institu-tional buyers and to refund all subscription monies if it fails to make such allocations to the qualified institutional buyers.

From a contract-drafting perspective, an exit by way of an IPO or an OFS is usually documented on a ‘best effort’ or a ‘reasonable endeavour’ basis, as against creating a binding obligation on the promoters of the tar-get company to provide such exits. It is difficult for a private equity investor to ‘drive’ or ‘force’ an IPO, since the requirements of the law state that the offer document needs to be signed by all the directors of the company, and therefore despite contractual obligations to provide such an exit (even if placed on the promoters of the target), the promoters and other directors could always cite their fiduciary duties towards the company as a ground for not causing an IPO, should they feel that causing an IPO is not aligned with their fiduciary duties towards the company.

Although IPO and OFS exit rights are commonly placed in sharehold-ers’ agreements, the enforceability of such IPO or OFS rights has not yet been tested by the courts of law in India. In view of this, there are no clear precedents in terms of judicial pronouncements existing on the subject matter of enforceability of IPO or OFS rights.

Post-closing recourseIrrespective of the nature of the buyer, private equity firms are usually hesitant to provide post-closing recourse for the benefit of buyers, except for basic representations and warranties in relation to capacity and title to shares and corresponding indemnities. Escrow and insurance have yet not picked up in India and are not commonplace in private equity stake sales. However, on account of the present tax climate, there is a growing recogni-tion of tax indemnities being provided by sellers as a post-closing recourse for the benefit of buyers.



As a condition of receiving the listing approval from the stock exchanges on which an issuer company desires to list its shares, all special rights avail-able with shareholders under an existing shareholders’ agreement includ-ing special rights in relation to voting are required to be removed from the company’s articles of association. In fact, as a matter of practice, most shareholders’ agreements clearly provide that all governance and other superior rights (other than those available under the Companies Act) avail-able with existing shareholders of the target shall fall away upon an IPO.

Applicable regulations framed by the SEBI provide a bifurcated regime governing lock-in restrictions on pre-issue share capital held by promot-ers as well as non-promoters. For promoters, the minimum promoters’ contribution shall be locked in for a period of three years from the date of commencement of commercial production or the date of allotment in the public issue, whichever is later. The expression ‘date of commencement of commercial production’ means the last date of the month in which com-mercial production in a manufacturing company is expected to commence, as stated in the offer document. Promoters’ holding in excess of minimum promoters’ contribution shall be locked in for a period of one year. In this regard, the term ‘minimum promoters’ contribution’ in the case of an IPO has been defined as not less than 20 per cent of the post-issue capital. On the other hand, the entire pre-issue capital held by persons other than pro-moters shall be locked in for a period of one year. FVCIs registered with the SEBI are, however, exempt from such lock-in restrictions, provided they have held securities of the issuer company for at least one year prior to the date of filing the draft prospectus with the SEBI.

With the pro-reform approach of the new government and the mar-kets showing a continuous upward trend, exit through listing has become a preferred option. Furthermore, this also has certain advantages from a taxation perspective. That being said, it is still not uncommon to see a non-resident private equity investor exiting a portfolio company by sale of shares to another non-resident, especially where such transfer of shares by a non-resident to another non-resident does not need a prior approval of the FIPB.



The IT and Information Technology Enabled Services (ITES) sector received a majority of the total private equity investments made in India during the late 1990s and the early 2000s. However, with the burst of the dot-com bubble in 2000, private investors broadened their portfolio to cover other sectors. The period between 2005 and 2007 saw a steady rise in the number of private equity transactions taking place in the engineer-ing, construction, real estate, telecom and infrastructure sector. Banking and financial services, health care, engineering, construction, real estate and infrastructure sectors received a large chunk of private equity fund-ing between 2008 and 2009. Infrastructure (especially power, renewable energy, roads and highways) witnessed a significant rise in private equity investments in terms of deal size during 2009 and early 2011. 2011 and 2012 witnessed a steady growth in private equity investments in banking and financial services, IT and ITES services, retail and consumer products, but were dominated by investments in infrastructure, technology, real estate, hospitality and construction. In the year 2013, health care (includ-ing pharma) and banking and financial services saw the largest increase in volume. With the recent liberalisation of FDI Policy in the construction development sector and the medical devices sector, it would not be sur-prising if, in the near future, the construction-development as well as the health-care and pharma (and particularly, medical devices) sector see fur-ther rounds of investments.

As described in question 14, potential targets may be limited on account of the sector restrictions and minimum capitalisation norms placed under Indian exchange control regulations. Often, the requirement of obtaining prior approval from the FIPB for consummating a transaction may operate as a deterrent for private equity firms.



Structuring a cross-border private equity transaction is primarily driven by two key considerations, namely, analysing the compliance of the proposed private equity transaction with applicable Indian exchange control regula-tions and addressing taxation implications related to the proposed invest-ment structure, with a view to curtail tax leakage at the time of liquidation of an investment.

As mentioned in question 14, the Indian exchange control regulations place certain limits on the amount of FDI allowed in certain sectors, and in some cases oblige the parties to take the prior approval of the FIPB. In



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a few sectors such as non-banking financial companies, certain minimum capitalisation norms have also been prescribed. The RBI has also pre-scribed pricing guidelines for the issue of securities to a non-resident as well as any transfer of securities of an Indian company between a resident and non-resident (irrespective of the non-resident being the seller or the purchaser). Further, as enumerated in our previous responses, under the Indian exchange control regulations, only equity shares (fully and partly paid), fully and mandatorily convertible preference shares and deben-tures and warrants qualify as equity investments, and all other structured instruments that are not fully and mandatorily convertible in nature are considered as ‘debt’, thereby requiring compliance with the stringent ECB guidelines, typically not suitable for private equity transactions.

Tax considerations are of paramount importance in the structuring of a cross-border private equity transaction. Typically, foreign invest-ments into India are routed through an offshore tax favourable jurisdiction so as to benefit from such jurisdiction’s favourable tax treaty with India. Other than the benefits available under the tax treaty between India and the offshore jurisdiction, the choice of an offshore entity also depends on the domestic tax laws of that particular offshore jurisdiction as well as the nature of income stream desired from the proposed investment. The juris-dictions often used for inbound investments into India include Mauritius,

Singapore, the Netherlands and Cyprus. However, as mentioned in ques-tion 9, GAAR, if implemented in its current form (though not yet officially in force) will have the effect of raising the thresholds of substance that will be required to be met for receiving any beneficial treatment under a favour-able tax treaty.

In addition to the above, now, a foreign investor can no longer be pro-vided an assured return upon its exit. As a result of this, where an agree-ment was executed under the earlier regime and the non-resident investor was assured an IRR-based return on its exit, such contracts would see enforceability issues under the new regime (where the non-resident is yet to exit) and would require restructuring of the exit mechanism.



In cases where multiple private equity firms are participating in a club or group deal, the most important factor to keep in mind is the alignment of their objectives and their inter se rights in the target. To avoid any conflicts between the various private equity funds in their exercise of management

Update and trends

While we have discussed some of the relevant changes in the laws in the text above, from the transaction perspective, the private equity funds that had invested in the economic boom of 2008–2009, exited their portfolio companies in 2014. Most of such exits were due to the culmination of the life of such funds. According to sources, FIIs have pumped almost US$40 billion into Indian stocks and debt this year on expectations that economic growth will quicken under the new pro-reform government regime. The inflow is also significantly higher in debt compared to equities. However, the trend in investment into equity is likely to pick up (especially in the small capitalisation and the mid-capitalisation companies) by April 2015, as by then the reforms brought about by the new government will start showing some effect, as far as the ease of doing business in India is concerned.

Recently, SEBI introduced a series of capital market reforms. These relate to insider trading, delisting, enforceability of the listing agreement and several other matters. We have, in our response to question 4, already provided a brief overview of how the delisting landscape has changed, in light of the changes introduced by SEBI. Below is a snapshot of how the current regime of the Insider Trading Regulations and the listing agreement will make way for a new (and probably a stricter) regime.

Insider Trading RegulationsThe definition of ‘insider’ has been widened to include ‘persons connected on the basis of being in any contractual, fiduciary or employment relationship that allows such person access to unpublished

price sensitive information (UPSI)’. Also, any person who is in possession of, or has access to UPSI, would also be an insider. As regards the communication of UPSI, certain allowance has been made for ‘legitimate purposes, performance of duties or discharge of legal obligations’. In making this significant change, SEBI has given heed to the need for communication of UPSI in genuine commercial or investment transactions, such as due diligence for a private equity investments, which fall within the scope of the prohibition under the existing regime. Further, where communication of UPSI is permitted, such as in the case of due diligence, the UPSI must be disclosed to the markets at least two days prior to the trading in the securities. This is necessitated so that information symmetry is created in the market such that no investor has any undue advantage.

Listing agreementsUnder the current regime, an unlisted company desiring the listing of its securities, is required to execute a listing agreement with the stock exchange, where it seeks to list its securities. In order to obviate any confusion regarding the enforceability of the listing requirements, and also to streamline the disclosures and corporate governance norms, SEBI has decided to convert the listing agreement into the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2014. These regulations are intended ‘to consolidate and streamline the provisions of existing listing agreements thereby ensuring better enforceability’ and apply to all types of securities, including shares, convertibles, Indian depository receipts, mutual fund units and securitised debt instruments.

Rupinder Malik [email protected] Sidharrth Shankar [email protected] Shantanu Jindel [email protected]

Sandstone Crest, Opposite Park Plaza HotelSushant Lok - Ph 1Gurgaon 122 009India

Tel: +91 124 4390 639Fax: +91 124 4390 617www.jsalaw.com



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or governance rights in the target as well as to ensure that the target is run in a fair and democratic manner, transaction documents typically provide for decisions to be taken by a super majority (wherein the term ‘super-majority’ may be defined in terms of percentage shareholding in the target held by the various investors). The concept of super majority may be used as standard to cut across all aspects of management or governance of the target company, including voting on affirmative vote matters.

Tricky issues that typically arise in club or group deals also include negotiating and drafting inter se liquidation preference and anti-dilution rights of the various investors and become more complicated in the case of private equity funds investing through multiple funding rounds at different stages of the target’s life cycle.



Sellers and target companies are usually reluctant to provide extensive closing conditions as their interest lies in being able to close the transac-tion in time. However, closing conditions such as obtaining regulatory and other third-party approvals are commonly agreed to by sellers and target companies alike.

Break fees, though far less common in India (as compared to other jurisdictions like the US and the UK) have been resorted to in the past by sellers that invite third-party investors to purchase their stake in a target company through a bid process. Under such arrangements, in the event that despite the target company and the promoters fulfilling all the con-ditions precedent applicable to each of them, the investor fails to infuse capital within the time specified or commits any breach of warranties prior to closing, it could trigger the right of the seller to appropriate a break fee specified for such an eventuality. Typically, the break fee component of the total investment amount is set aside in a separate escrow account in terms of a separate escrow agreement between the purchaser, the seller and the escrow agent.

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Joel HogarthAshurst LLP



Despite the success of a handful of high-profile buyout transactions in recent years, the majority of Indonesian private equity transactions still take the form of minority equity or quasi-equity investments into private companies. These often take the form of convertible or hybrid investments prior to IPO for foreign ownership and other strategic reasons. 2014 has been characterised by this type of transaction, although larger buyout transactions have taken place in previous years.

Highlight deals for this year included Everstone Capital’s control-ling stake acquisitions in the Domino’s Pizza and Burger King Franchises, an investment of US$100 million in online marketplace Tokopedia by a consortium led by Softbank, and Leapfrog Capital’s investment in retail financial services company Reliance Capital. There was considerable inno-vation in the market – PT Pasifik Satellite Nusantara closed a significant investment using a domestic private equity fund (RDPT) structure and PT Nusantara Infrastructure Tbk successfully closed its telecommunications tower business funding as an Islamic financing. Notwithstanding a very difficult year for the resources sector in general, investment in infrastruc-ture and logistics has remained strong, and there has been a considerable amount of consolidation and restructuring in the resources sector.

Private equity deals in Indonesia are structured on a case-by-case basis, depending on the nature of the deal – whether controlling or minor-ity, public or private – as well as applicable foreign ownership and regulatory restrictions, tax and enforcement considerations. While many investments can be structured as direct equity deals (particularly in unrestricted sec-tors), it is increasingly common to structure investments with a view to avoiding a conversion of the target to foreign ownership status (PMA) prior to IPO. This is usually done by structuring the investment as a convertible or hybrid instrument which will ‘convert’ into equity on a planned IPO (at which point a conversion to PMA status is not required). While there are significant advantages to this approach, there are also disadvantages from an enforceability and control perspective.



Indonesian corporate law broadly follows the Dutch system, which man-dates a two-tier governance structure consisting of a board of directors and a board of commissioners. Both directors and commissioners owe fiduci-ary duties to shareholders in carrying out their functions, although their roles are very different. Directors are responsible for the day-to-day opera-tion of the business, with commissioners exercising a supervisory role. The approval of the commissioners is required for specific matters man-dated by the company law, the articles of association and capital markets rules (OJK Rules) issued by the Financial Services Authority (OJK). These include routine approval of the annual budget and business plan, as well

as material transactions such as granting security over the company’s sub-stantial assets and merger or acquisition plans.

Law No. 40 of 2007 (the Company Law) also mandates that certain corporate actions require approval of an increased majority resolution of shareholders. Amendments to the articles require an affirmative resolu-tion of two-thirds in attendance at a meeting at which two-thirds of the outstanding shares are represented (article 88), although most companies’ articles provide that this should be an affirmative resolution of three-quar-ters in attendance at a meeting at which three-quarters of the outstanding shares are represented. Other actions requiring a ‘three-quarters’ resolu-tion under the Company Law include mergers, acquisitions and voluntary bankruptcy proceedings (article 89).

Indonesian public companies are subject to regulatory oversight by the OJK and are required to comply with the OJK Rules as well as the Indonesian stock exchange (IDX) rules (IDX Rules) and the Central Securities Depository. In particular, material transactions by public com-panies with a value exceeding 20 per cent of the company’s equity require an independent valuation report certifying the fairness of the transaction and, if the transaction exceeds 50 per cent of the equity value of the com-pany, a shareholders’ resolution is also required (OJK Rule IX.E.2). In addi-tion, transactions between a public company and its related parties require an independent valuation report and – if a conflict of interest is deemed to have arisen – the approval of a majority of independent (namely, disinter-ested) shareholders (OJK Rule IX.E.1).

Although the regulatory oversight of public companies is significantly greater than that of a private company, it remains extremely difficult to take an Indonesian company private.



The vast majority of Indonesian public companies are still controlled by a single shareholder or connected group of shareholders. As a consequence, most private equity transactions are negotiated at shareholder level rather than directly with the target company. However, it is routine for the target company to be directed by its controlling shareholder to cooperate with a potential acquirer in enabling it to conduct due diligence and evaluate the business of the target company. In this case, the board of directors will be concerned to ensure that the company’s confidential information and trade secrets are well protected.

It is typical for private equity transactions to be approved by both the board of commissioners and the board of directors. A shareholders’ res-olution may be required under the rules on conflict of interest and affili-ated person transactions under OJK Rule IX.E.1 and material transactions under OJK Rule IX.E.2 discussed above, and it is not uncommon to seek shareholders’ approval, even where not expressly required under the OJK Rules. If the transaction involves a change of control, this will also require consideration of the takeover provisions of the OJK rules (see below).

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If board members or controlling shareholders have an interest in the transaction, this is likely to require an independent valuation report and may require a resolution of independent (ie, disinterested) shareholders under OJK Rule IX.E.1. The OJK is also entitled to review the contents of the resolution and valuation report and may require further disclosures to be made or even comment on the substance of the transaction. While this type of approval can generally be obtained in an appropriate case, the preparatory work required can be significant and needs to be factored into transaction timing.

4 Disclosure issues


Delisting is regulated under Regulation I-I of the IDX Rules. Regulation I-I requires a disclosure statement circulated to shareholders and published in national newspapers setting out, inter alia, the plan to go private, the terms of the offer to purchase shares of minority shareholders, the purchase price of the shares and the relationship between the company and the person taking the company private. For the reasons set out above, delisting of Indonesian companies is not common.

Whether or not an Indonesian company is taken private, acquisition of a controlling stake in an Indonesian listed company will generally require a tender offer for substantially all the remaining shares of that company. There is a voluntary regime for periodic notifications on an acquisition pro-cess, as well as a requirement to announce the acquisition documentation as soon as it is signed together with disclosure on the acquirer and their reasons for acquiring control.



Equity transactions will require foreign investment approval from the Capital Investment Coordination Board (BKPM), which can only be obtained after all required regulatory approvals have been obtained from the appropriate ministry or regional administrative authorities. Depending on the industry and regions in which the target business operates, these regulatory approvals can take anything from a few weeks to several months to obtain.

Transactions involving controlling stakes in listed companies are gen-erally more complex and time-consuming. A true going-private transac-tion would be expected to involve many months of scrutiny by the OJK and other regulators. Even if a transaction does not involve an attempt to go private, it may involve a tender offer for the remaining public shares. This type of transaction is still relatively infrequent in Indonesia and is likely to be subject to a significant degree of regulatory oversight by the OJK and, in practice, add at least two to three months to the transaction time frame.

On the other end of the spectrum, transactions involving non-control-ling stakes in listed companies or private companies in industries in which foreign investment is common can be completed in a short period of time.



It is extremely difficult to take an Indonesian company private. The going-private transaction needs to be approved by a majority of independent shareholders in a shareholders’ resolution in which the majority share-holder and its connected parties are prohibited from voting. The resulting private company must have fewer than 50 shareholders, and the major-ity shareholder must offer to acquire the stake of any dissenting share-holder at the highest trading price over the past two years, plus a return on investment.

Due to these onerous rules, only one Indonesian company has gone private in recent years – PT Aqua Golden Mississippi Tbk, a mineral water producer majority owned by Danone – which reportedly took four attempts over a period of 12 years. None have so far occurred in the private equity context.

Accordingly, most buyouts of Indonesian public companies do not contemplate taking the company private, even if the outstanding public float is extremely small after the transaction. For example, in the buyout of Matahari Department Stores by CVC Capital Partners, the remaining pub-lic float amounted to approximately 2 per cent of the outstanding shares. The successful public market exit of that investment in 2013 was a ‘re-IPO’ of shares that were already technically listed, but for which there had previ-ously been no real trading float.



Purchase agreements vary significantly in Indonesia depending on the negotiating strength of the parties and the transaction structure. While the documents are usually based on ‘equity’ terms, the use of alternative transaction structures such as convertible and hybrid instruments (as well as more innovative structures such as domestic RDPT funds and Islamic Financing) is becoming more common due to significant regulatory advan-tages. This can lead to highly customised documents which contain ele-ments of both debt and equity terms as well as enhancements for practical control.

The documents usually contain ‘investment’ terms and ‘control’ terms. The investment terms tend to broadly follow international stand-ards and include most investor protections found in more mature markets, although it is not uncommon for these to be negotiated heavily – in particu-lar, significant materiality thresholds on warranties, limitation of liability baskets and class disclosures are common. Typical minority control terms such as board representation and ‘reserved matter’ protection are com-mon, although the extent of these is often negotiated.

Most foreign investors will insist on a neutral venue for dispute reso-lution. Indonesia does not recognise foreign court judgments, but is a party to the 1958 New York Convention on Recognition of Foreign Arbitral Awards. Offshore arbitration in Singapore or Hong Kong is most common. Indonesian civil procedure does provide for enforcement by registration of foreign arbitral awards, but investors should note that this is unlikely to be straightforward in practice.



Securing the support of key members of the existing management team is an important element of an Indonesian buyout transaction, particularly those responsible for maintaining relationships with the various industry regulators applicable to the business. It is not uncommon for a purchaser to require two to three year contracts with designated individuals as a condi-tion to the purchase agreement. These ‘key man’ discussions often com-mence early in the process as their cooperation can be crucial in obtaining the regulatory clearances and otherwise implementing the transaction.

There are no specific requirements for management compensation on a ‘going-private’ transaction.

9 Tax issues


Indonesia is a relatively high-tax jurisdiction and, along with foreign own-ership restrictions, tax is one of the main drivers of transaction structur-ing. The main tax considerations in private equity transactions depend on the ultimate investor base of the private equity fund; particularly whether the fund has US taxpayer LPs or whether it is comprised mostly of US tax-exempt or offshore LPs.



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For a fund with mostly US tax-exempt or offshore investors, tax struc-turing will generally focus on an efficient exit structure as well as efficient repatriation of offshore income. Payments of dividends, interest and roy-alties to an offshore party are subject to 20 per cent withholding tax in Indonesia unless relief is available under an applicable double taxation treaty. In addition, absent an applicable tax treaty, the sale of shares in an Indonesian private company by an offshore party is subject to 5 per cent final tax on the sale amount in lieu of onshore capital gains tax. This sale tax is withheld against the Indonesian company and applies whether or not there is any actual gain on the sales price – accordingly, this can be a signifi-cant structuring issue. It is common for the anticipated exit to be a domes-tic IPO, due to the favourable tax treatment on sale of shares in a public company (currently 0.6 per cent founders and transfer tax). However, investors will also want to anticipate the possibility of a tax-efficient exit in circumstances where an IPO is not possible.

For a fund with mostly US taxpayer LPs, the main objectives of the tax structuring will generally be to preserve capital gains treatment in the US on an exit as well as ensuring the availability of tax credits in the US for tax paid in Indonesia. This approach is not primarily concerned with minimis-ing Indonesian taxes, except to the extent that the overall tax burden would be higher than applicable in the US. However, utilisation of an applicable tax treaty can still be useful to enhance exit options, provide a structure which can efficiently be adopted by a non-US taxpayer buyer, and mini-mise situations in which Indonesian tax may be payable where no credit is available in the US.

As a result, private equity investments are typically structured through an intermediate company in a jurisdiction with a favourable double taxa-tion treaty with Indonesia. This requires compliance with anti-treaty shop-ping measures introduced by the Indonesian tax authorities in 2009, which contain a number of criteria required to evaluate whether an offshore entity has sufficient ‘substance’ to qualify for treaty benefits. There are also anti-avoidance measures targeted at the transfer of shares in a special purpose holding company in a ‘tax-haven’ jurisdiction. Accordingly, tax structuring needs to be carefully planned to ensure sufficient substance in the immedi-ate holding company as well as compliance with the technical criteria of the regulations.

The jurisdiction of choice has historically been Singapore, although more recently funds have attempted to make use of a new Indonesia–Hong Kong tax treaty came into effect in April 2013 which also has sig-nificant advantages, particularly for funds with US taxpayer LPs. The new Indonesia–Hong Kong tax treaty that contains an exemption from the 5 per cent final tax on an offshore sale of private company shares, avoiding the need for an offshore sale structure, although there have been questions regarding the practical operation of this structure. In selecting any such jurisdiction, an ability to comply with the substance requirements under Indonesia’s anti-treaty shopping measures is an essential consideration. The jurisdictions in which the private equity fund has substantial opera-tions would usually be considered first – operations in Luxembourg, UAE or the Netherlands (or other jurisdictions with a treaty with Indonesia) may also open up structuring options.



Many private equity transactions are not leveraged in Indonesia, but most types of debt financing are available in an appropriate context. There are no margin or offshore lending restrictions in Indonesia and debt financing is generally limited by the credit of the relevant borrowing entity and any available credit support.

Indonesia does not have financial assistance rules, and, while a trans-action does require corporate benefit, it is usually possible to structure a borrowing with recourse directly to the target company. This can take the form of an offshore syndicated loan, high-yield bond or domestic loan facilities.



As discussed, true going-private transactions are rare in Indonesia. However, many private equity transactions will require financing, and it is not uncommon to include a financing condition in the purchase docu-mentation. Strong sellers will generally take the view that financing is at the buyer’s risk and may argue for a break fee if it cannot complete due to inability to raise financing.

In addition, if the transaction involves a tender offer for shares of a listed company, OJK Rules IX.F.1 (for voluntary tender offers) and IX.H.1 (for mandatory tender offers) require a statement by an independent accountant, bank or underwriter that the party conducting the offer has sufficiently certain funds to finance the offer.



Indonesia’s fraudulent conveyance laws are based on the Civil Law ‘actio Pauliana’, codified in articles 41–44 of the Indonesian Bankruptcy Law (No. 37 of 2004). This provides a broad right to cancel any transaction entered into that the bankrupt knew (or should have known) would prejudice credi-tors. Knowledge is presumed in the case of certain transactions entered into up to one year preceding the bankruptcy that are unduly onerous to the bankrupt, including the grant of third-party guarantees or third-party security.

Approaches to these issues vary from transaction to transaction depending on the views of the particular lender group and Indonesian counsel instructed, and there is no single preferred solution to these issues. However, in our experience, there is a growing consensus that third-party security or guarantees by the target company are more risky than lend-ing money to the target company directly. According to the consensus approach, it is preferable to lend money to the target company and have this lent to the purchaser for the purpose of acquiring its shares. A spread on interest charged to the purchaser against that paid under the third-party loan is intended to provide the requisite corporate benefit to avoid ‘actio Pauliana’ arguments.



Shareholders’ agreements in Indonesia are generally similar to those in other jurisdictions with minor amendments for the two-tier governance system inherent in Indonesian company law. In practice, these can vary significantly in scope and detail depending on negotiations between the parties, but private equity firms making minority investments will typi-cally request representation on both the board of directors and the board of commissioners, and include a comprehensive list of reserved matters that require the consent of the minority shareholders. Governance rights can be protected effectively to the extent reflected in the target company articles, as it is difficult in practice for Indonesian companies to carry out corporate actions or enter into transactions contrary to their constitutional documents.

The Company Law provides that certain actions must require a spe-cial resolution with quorum and voting thresholds of two-thirds (article amendments) or three-quarters (mergers, acquisitions, consolidations or divisions) respectively. The articles of association of most companies include higher thresholds for article amendments and may include other corporate actions. Article 61 of the Company Law provides a very general right for shareholders to claim for damages caused by ‘unjust’ and ‘unrea-sonable’ actions of the company, and article 62 provides a specific right for buyback if the damages are caused due to an amendment in the articles of association, material asset transfer (50 per cent of the company’s assets) or merger, acquisition, consolidation or division. These rights are very



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generally drafted and it is usually preferable to rely on specific provisions of the articles or investment documents where possible.

Many private equity funds also require a significant degree of day-to-day governance in their minority investee companies. These may include rights to appoint a chief financial officer, who may be a required account signatory and have rights to approve significant transactions in the ordi-nary course of business.

Rights of first refusal (or similar) are very common in Indonesia, and private equity firms often have difficulty resisting these, although rights of first offer are becoming more common and it is generally possible to nego-tiate a carve-out if an intended exit (for example, a qualifying IPO) has not occurred within a defined time frame. Tag and drag rights or put and call option rights are also becoming more common. Private equity funds often request downside protection on private investments (for example, a put option with a minimum return on investment), particularly in scenar-ios such as deadlock or failure to achieve the desired exit scenario within a defined time frame. However, these provisions are usually strongly resisted by sellers and targets, and even where agreed can be difficult to enforce in practice.



Acquisitions of shares in a public company which result in a ‘change of con-trol’ will trigger a mandatory tender offer under the OJK Rules. A change of control occurs if a person acquires 50 per cent of the total issues shares or ‘it acquires the capability to directly or indirectly direct the management or policies of the company in any manner’. The second part of this test is very broad and it can be difficult to tell in practice whether a ‘change of control’ has occurred for mandatory take over purposes.

If a mandatory tender offer is triggered, this will require the new con-troller to make an offer for all the outstanding shares in the company. The mandatory tender offer is subject to minimum pricing at the highest aver-age trading price in the 90 days preceding the offer – as mandatory tender offers are infrequent in Indonesia, it can be difficult to maintain confiden-tiality, which can result in trading pushing the minimum offer price up significantly.

Another unusual feature of the Indonesian mandatory tender regime is that a controller acquiring more than 80 per cent of the public company is required to ‘sell back’ to the market at least a 20 per cent public float over a two-year period (or, if lower, the public float prior to the tender). Additionally, if the change of control also triggers a foreign ownership threshold, the controller is required to sell-down to the relevant maximum foreign ownership percentage.

There is a significantly different regime for voluntary tender offers, which are governed by a separate regulation. In particular this does not require a selldown to maintain the public float, although it would not avoid a foreign ownership restriction. Accordingly it is usually worth weighing up the comparative benefits of the two approaches in considering acquisition strategy.

Acquisition of a controlling stake of a public or private company also requires 30 days’ notice under article 127 of the Company Law, which must be published in two newspapers of general circulation. This is intended to give creditors of the company or other interested parties an opportunity to object to the transfer, although in practice objections are very rare.

15 Exit strategies


Initial public offering on the Indonesian stock exchange is often the pre-ferred exit strategy, and can usually be accomplished in a reasonable time frame (around six months) when the company is ready to go public. Listing a company’s shares has significant tax benefits (total tax 0.6 per cent of exit price, compared to 25–30 per cent capital gains tax for unlisted companies), and has significant regulatory advantages as well – particularly in relation

to foreign ownership restrictions, although it will not increase the maxi-mum percentage ownership of the controlling shareholder.

Sometimes an exit is structured to take place concurrently with an IPO as an acquisition of a controlling stake on IPO will benefit from the tax treatment of listed shares, but will not trigger a mandatory tender offer. Other common forms of exit are IPO of an offshore holding company (often in Singapore or Hong Kong) or a trade sale. In each case, these need to be structured at the time of investment, as an inefficient structure can result in a significant tax burden.

Retention of purchase price and escrow are not uncommon in Indonesian exits, although private equity firms usually limit these to very low percentages (for example, 3 to 5 per cent). Recourse against the fund itself is sometimes asked for, but almost never given. Warranty and indem-nity insurance can also be a very useful solution in the case of a private equity exit.



Shareholders’ agreements for Indonesian public companies need to be disclosed and tend to be discouraged by the OJK on policy grounds. It is possible to maintain shareholders agreements in place in an appropriate case, although this can involve a lengthy conversation with the regulator, who may require the scope of rights to be scaled back. In addition, sig-nificant shareholder rights are likely to cause the investor to be deemed a co-controller, with the implication that transfer of those rights would be considered a change of control requiring a mandatory takeover.

A possible workaround is to have the controlling stake held in a JV company and maintain shareholders rights at the JV company level, although there are tax disadvantages to this approach on exit. An alterna-tive approach is to make use of the two-tier corporate governance structure inherent in Indonesian law through an enhanced level of governance for the commissioners. A commissioner appointment right is not generally considered to constitute ‘control’, and this has been successfully used in a number of private equity transactions. We have also seen a portion of the investment retained in ‘debt’ form after IPO to retain control rights on cer-tain transactions.

If the private equity investor is treated as a founder (which will usually be the case), it will be subject to an eight-month lock-up period on IPO. After IPO, the private equity may sell down through the public market or transfer through a private placement or block trade.



Going-private transactions are rare in Indonesia. Most private equity trans-actions in Indonesia have been either natural resource or energy-related (including logistics), infrastructure (particularly telecommunication tow-ers) or consumer-related (including consumer finance and media). Foreign ownership restrictions (discussed in question 18) are the main limitations on potential targets of private equity firms, although more often these limit the type and structure of the transaction rather than prohibiting the trans-action altogether.

Notable transactions over the past few years have included: Adaro Energy (coal mining); Orchard Maritime Logistics (coal barging); Bukit Makmur Mandiri Utama (mining contractor); Managed Pressure Operations (oilfield services); Bank Pensiunan Tabungan Nasional (BTPN) (banking and consumer finance); Media Nusantara Citra (Integrated media); Blitz Megaplex (cinema and media); Alfamart (retail); Margautama Nusantara (toll roads), Solusi Tunas Pratama (telecommunications towers) and Matahari Department Stores (retail). Private transactions have also been concluded in the airline, air services, real estate, oil and gas, clean energy, metal mining, and insurance sectors (to name a few).



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The main issues particular to structuring cross-border transactions are foreign ownership and licensing restrictions. Together with tax (discussed above), these are the key drivers in the structuring of private equity trans-actions and may even affect the overall viability of a deal.

Foreign ownership restrictions in Indonesia arise in a number of forms. The main legislation governing foreign ownership is the Foreign Investment Law (Law No. 25 of 2007), which provides for government reg-ulation of a ‘negative list’ of industries closed or partially open to foreign investment. While the Indonesian market is progressively opening up to foreign investment, the most recent negative list (Presidential Regulation 36 of 2010) extends to over 100 pages and covers many sectors. A new draft regulation is expected to come into force in 2014.

Other foreign ownership restrictions may appear in specific legisla-tion, particularly in the media and broadcasting sectors. In addition, from time to time, ministries have imposed their own foreign ownership restric-tions – most notably in 2008, when the Ministry of Telecommunications passed a regulation prohibiting foreign investment in the telecommu-nications tower sector, notwithstanding that the sector was open to for-eign investment under the then-applicable negative list. Complications may also arise where separate legislation provides for domestic licensing requirements, most obviously where a licence may only be held by a 100 per cent domestic capital company, or may have additional restrictions on licenses granted to foreign capital companies.

The foreign ownership restrictions are generally aimed at voting con-trol, and do not prohibit economic transactions with restricted industries. Convertible and profit sharing instruments are not prohibited so long as they cannot be converted unless and until lawful to do so (often after an IPO) and have cash settlement as a default. Islamic financing (which gen-erally provides for an equity based return) is becoming increasingly com-mon in a private equity context. However, care needs to be taken to ensure that the arrangement does not amount to effective control or the right to vote shares in the restricted industry, as this may be deemed a ‘nominee’ arrangement that is expressly unenforceable under the Foreign Investment Law.

New regulations in 2013 have formalised the application of foreign ownership laws with respect to listed companies, although the details have not yet been fully worked out. It is clear that an Indonesian-listed company is subject to the foreign ownership restrictions if it has a foreign controller; however, foreign investors are not subject to the foreign ownership restric-tions if the company is Indonesian-controlled. A provision in the first regu-lation of 2013 requiring a foreign-controlled listed company to convert to foreign ownership (PMA) status was superseded by a revised regulation later in the year, no doubt due to significant potential knock-on effects of such a conversion. This leaves a very interesting situation for domestic subsidiaries of foreign-owned listed companies, which may not be subject to the current rules, although they would have been caught by the earlier regulation and it may be premature to rely on this state of affairs continu-ing indefinitely. On the other hand, the BKPM has generally been careful

to include ‘grandfathering’ provisions with respect to changes in foreign investment rules.

A number of techniques have been developed to structure investments into sectors that contain various types of foreign ownership restrictions. These depend on the nature of the applicable restrictions and the degree of economic ownership and control desired by the foreign investor. While it is often possible to close a transaction using these structures, they need to be carefully structured to comply with the applicable restrictions, and the risk of future challenge also needs careful analysis.



Typically, club arrangements are agreed between the syndicates at the offshore level. This often takes the form of a consortium agreement at an early stage in the deal, which will generally cover cost sharing, exclusivity and cooperation between the parties and set out each party’s expected eco-nomic share of the investment and their respective roles in negotiating the transaction. This would generally be superseded by a formal sharehold-ers’ agreement at the offshore investment vehicle level at the conclusion of the transaction. Co-investment arrangements are typically dealt with in a similar manner.



Major transactions in Indonesia are often subject to a number of regula-tory approvals prior to closing that will require both buyer and seller coop-eration and that are not in the full control of either party. To the extent that transaction financing is raised by the target company, this will also require close cooperation between the buyer and seller. Accordingly, the pre-closing phase of many purchase agreements is cast as a ‘best-efforts’

Update and trends

While there have been control investments in 2014 (notably Everstone’s investment in the Burger King and Domino’s Pizza franchises), the market has been characterised by minority investments. 2014 has seen considerable innovation in structures designed to retain target companies’ fully domestic status in anticipation of a planned IPO. These have included more sophisticated convertible and hybrid investment structures – in particular the use of debt and warrant combinations and Islamic finance – as well as a market first use of a domestic private equity fund (RDPT). This has necessitated more sophisticated control structures, both prior to IPO, where the private equity fund will not directly hold shares in the target) – as well as after IPO, where the private equity fund may wish to retain investor protections.

Joel Hogarth [email protected]

12 Marina Boulevard#24-01 Marina Bay Financial Centre Tower 3Singapore 018982

Tel: +65 6602 9176Fax: +65 6221 5484www.ashurst.com



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collaboration between buyer and seller rather than a strict allocation of responsibilities between the parties.

As a result, it is common not to have significant consequences for either side for failure of conditions precedent. Some purchase agreements even include an express right for either side to walk away at any time prior to closing – particularly in the context of a minority investment where buyer and seller will be acting as joint venture partners after the invest-ment. While there is a clear effect on transaction certainty, this seems to reflect a philosophy that there is no point forcing a party to go ahead with the marriage if they cannot arrange the wedding together.

A recent development is the adoption of break fees to ensure that a party cannot simply walk away without consequences. Break fees are still uncommon in Indonesia and are usually limited to non-compliance with a condition clearly allocated as the responsibility of one party (such as obtaining corporate approvals or raising financing) or more generally not acting in good faith to proceed to transaction closing. There is an element of subjectivity in this and generally this is only considered to have ‘teeth’ if the break fees are placed into escrow on signing. As a last resort, enti-tlement to the break fee could be determined by an arbitrator and paid directly from the escrow account.

Legance – Avvocati Associati ITALY


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Marco Gubitosi and Filippo TroisiLegance – Avvocati Associati



In line with the other major European jurisdictions there is a vast array of types of private equity related transactions in the Italian investment landscape.

Indeed, the industry is traditionally divided in two broad categories of investments: venture capital and private equity buyouts, both with their relevant sub-categories (eg, from early-stage funding, expansion financing to replacement capital or buyouts – leveraged or not – and up to special situ-ations and turn-around) although the actual boundaries between them are nowadays quite approximate and often overlap.

Focusing on buyout transactions, this category includes the most common types of transactions taking place in Italy. It typically involves the acquisition of the entire or a majority stake in a privately owned tar-get company. However, the acquisition of minority stakes is very common in the Italian small and mid-size markets, usually carried out by domestic private equity firms or Italian public-captive funds. The buyout types might usually include:• buyout or institutional buyout (IBO), whereby the acquisition of the

target is carried out by one or more private equity houses;• management buyout (MBO), whereby the acquisition of the target is

sponsored and carried out primarily by the management of the tar-get itself, usually but not necessarily, backed by a private equity firm. Where the management of the target in carrying out the MBO is com-plemented by other external managers, the transaction is also known as buy-in management buyout (BIMBO). On the contrary, where the acquisition is carried out exclusively by a new and external manage-ment team the same is referred to as management buy-in (MBI). It is worth nothing that the Italian market is suited to MBO-related trans-actions as the Italian market mainly consists of family-owned business and with a very limited numbers of listed companies;

• take-private or public-to-private or P2P transactions, whereby the acquisition and subsequent delisting of a listed company is under-taken by one or more private equity houses. This type of transaction accounts for a very limited volume of transactions. Private invest-ments in public equities (PIPE) transactions, whereby the target is not delisted, are very rare; and

• secondary buyouts, whereby a private equity house, which backed the original buyout, sells its portfolio company or stake to a different pri-vate equity house or sponsor (usually for the purposes of replacement capital) are nowadays common it Italy.

Buyouts of privately owned companies are often structured as a share pur-chase (through special purposes vehicles) and very rarely as asset purchase (due to significant tax and asset transferability issues), and usually carried out as cash transactions. Buyouts of listed companies are structured as takeovers pursuant to the specific applicable laws.

Large buyout transactions in Italy are mainly carried out by interna-tional or pan-European funds and structured by means of a combination of equity, quasi-equity and debt (although the relevant leverage levels have tended to be lower in recent years). In small and mid-size market deals, leverage and bridge loans are not so common owing to the peculiarities of the Italian market and its targets.



Corporate governance rules depend on the corporate type of the relevant legal entity. Target companies of private equity transactions are typically organised as SpA (joint-stock company) or Srl (limited liability company). In both cases, the assets and liabilities of such companies are legally dis-tinct from the assets and liabilities of their shareholders or quota-holders who are not jointly responsible for the obligations assumed by the com-pany. However, SpA is the legal regime more suitable for companies having a widely spread share capital or that intend to have recourse to the capital markets (all listed companies have to be incorporated as an SpA).

The main corporate governance rules of both SpA and Srl relevant for a private equity transaction include:• directors’ duties, responsibility and conflicts of interest;• supermajorities required for shareholders’ and board meetings

resolutions;• models of management and control; and• exercise of the ‘direction and coordination’ activity over the target (a

special legal regime which applies to all the entities exercising a strong influence over the target).

The most significant benefits in terms of corporate governance further to a going-private transaction are the following:• greater simplicity of the organisational structure and reduction of the

ongoing related costs;• less burdensome rules on disclosure and transparency obligations;• greater simplicity in the appointment of the company’s management

and control bodies; and• greater flexibility in setting out the company corporate rules.

Companies that, following a private equity transaction, remain or become public companies have to comply with any rule applicable to Italian listed companies.



In the event of a public tender offer and during the relevant period, the directors of a listed company shall refrain from taking actions that may jeopardise the achievement of the scope of the offer, unless such actions are authorised by a shareholders’ meeting resolution of the target company (the so-called passivity rule). Notwithstanding, the target’s shareholders

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may decide to exclude the application of the passivity rule to their company by amending the target’s by-laws accordingly.

The applicable law does not expressly identify what acts would fall within the scope of the passivity rule; as a consequence, its applicability will need to be verified case by case. In this respect, however, it is worth considering that the mere research of an alternative bidder is considered to be outside the scope of the passivity rule.

Furthermore, authorisation by the shareholders’ meeting is required also for the implementation of any decision taken before the coming into effect of the passivity rule as indicated above, provided that such decision:• has not been wholly or partly implemented;• is not included within the decisions relating to the ordinary course of

the company’s activities; and• where implemented, might be in contrast with the achievement of the

offer’s purposes.

Finally, the target’s independent directors who are not related parties to the bidder shall draw up a grounded opinion containing their assessment on the offer and the fairness of the price, having the right to request the aid of an independent expert of their choice, at the cost of the target.

4 Disclosure issues


In principle, there are no heightened disclosure issues in connection with private equity transactions (except for the ‘golden share’ rules applicable to companies operating in protected sectors (see question 18)). However, in the event of a voluntary public tender offer for an Italian listed company, specific provisions apply. In particular:• the bidder’s decision to launch such offer shall be disclosed to the

Italian market regulator (CONSOB) and the market with an ad hoc notice as soon as the relevant decision is taken (CONSOB regulations provide guidelines and instructions on the information to be disclosed to the market through such notice);

• once approved by CONSOB, an offer document must be published; and

• the management body of the bidder and the target are required to comply with certain information duties as regards the representatives of their respective employees or, where there are no such representa-tives, as regards the employees themselves.

In any case, according to the applicable transparency rules, any person (individual or entity) whose aggregate interests (direct or indirect) in the voting shares of a listed company are equal, exceed or fall below certain thresholds shall disclose such information to both the relevant issuer and CONSOB.



If the going-private transaction is carried out through a merger between a listed company with and into a private company, the process may take between approximately 90 and 120 days from the approval of the merger plan by the management bodies of the merging companies. Where a going-private transaction is carried out through a tender offer, an offer document shall be filed by the bidder with CONSOB within 20 days of the decision to launch the offer. CONSOB will approve the document within 15 days, although such term can be suspended once for maximum 15 days. In cases where regulatory approvals are necessary, CONSOB clears the offer docu-ment within five days of the granting of such approvals.

Before the beginning of the offering period, the bidder shall provide CONSOB with a performance guarantee (cash confirmation). The offering period is to be agreed upon with the Italian stock exchange and shall be between 15 and 40 business days for voluntary or partial tender offers and between 15 and 25 business days for mandatory offers. Under certain cir-cumstances, following the settlement date of the tender offer, the offering period can be re-opened for further five business days.

The timing of other kinds of private equity transactions concerning private companies is extremely variable and depends, among other things, on the regulatory approvals (including antitrust clearance) that may be necessary case by case to close the deal.



When a tender offer is launched, any shareholder is free to determine whether to tender its shares (in whole or in part). It is common practice that the bidder makes the offer subject to a certain amount of shares being tendered. In any case, if the bidder comes to hold shares representing at least 95 per cent of the target’s share capital, the bidder has a squeeze-out right provided that it expressly declared to avail itself of such right in the tender offer document.

Unless the by-laws of the target provide for an express derogation, the target company shall refrain from taking actions aimed at hindering the success of the tender offer without the prior approval of the shareholders’ meeting (see question 3).

In the context of a merger, dissenting shareholders are free to vote against it but the relevant resolution will nonetheless be adopted in the case of the necessary quorum being reached. In addition, dissenting share-holders representing at least one thousandth of the share capital may chal-lenge the merger resolution, but the relevant challenge shall be based on the alleged breach of the law and the company by-laws, and evidence shall be provided in courts.



During the last few years, purchase agreements executed in the context of private equity transactions have become more and more similar to those relating to standard mergers and acquisitions deals. This is particularly true for what concerns the scope of representations and warranties granted by the sellers in buyout transactions which are now wider than they used to be and encompass disclosures on a large scale. Price adjustments and indemnification methods are also structured as in standard mergers and acquisitions deals, although private equity operators, when acting as sell-ers, prefer to avoid earn-out and long-term liability provisions that limit their capability to quickly reinvest the proceedings deriving from the sale. A stronger emphasis is generally placed on the financial covenants of the target that are crucial for the buyer in case of leveraged acquisitions.

Non-compete and other similar obligations are paramount and heavily negotiated when the seller is an industrial player.

Remedies for breach of contract typically consist of indemnification provisions and, except for exceptional circumstances, do not include spe-cific performance duties.

Arbitration clauses are usually preferred to standard dispute resolu-tions methods. Other typical provisions are those related to the abortion or early termination of the deal (see question 20).



Two possible structures allow the management of an Italian listed com-pany to participate in a going-private transaction involving such company:• direct participation in the buyout alongside a private equity firm (in a

management buyout), or• through incentives to remain directors or employees of the target after

the closing of the transaction.

In a management buyout, directors’ and employees’ compensation may often take the form of a participation in the company’s profits or a stock option plan or special classes of shares with preferential dividend rights. Directors’ compensation is generally determined by the shareholders’ meeting at the time of their appointment while executive directors may receive additional compensation through a board of directors’ resolution.

Management incentives can be in conflict with the corporate interest if granted as an exclusive consideration for the role played by management



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in the success of a private equity transaction; in such a case, incentives can be clawed back by the company following an ad hoc court decision.

9 Tax issues


Italian private equity transactions are generally structured as share deals and mainly focus on the acquisition of the controlling participation of SpA or of Srl companies. Irrespective of their legal status, both SpA and Srl are subject to the same tax provisions, as follows:• both types of companies are subject to corporate income tax at a 27.5

per cent rate and regional tax on productive activities (IRAP), gener-ally applying at a 3.9 per cent rate; and

• thin capitalisation rules apply in respect of interest on financing (regardless of whether the lender is related to the financed entity or not); in particular, any passive interest is deductible within the amount of active interest earned and – for the exceeding portion – within the 30 per cent of the EBITDA. Remuneration on equity instruments is gener-ally not deductible for the payor.

Under the Italian participation exemption regime, capital gains derived by an Italian company from the assignment of the participation in the target can be exempt from tax for 95 per cent of the amount thereof. Non-Italian corporate shareholders may be exempt from taxation in Italy on such capi-tal gains under the applicable tax treaty, if any, or, in certain cases, under Italian domestic law.

Executive compensation in whatever form (including both cash and share compensation) is subject to personal individual taxation, at progres-sive rates, in the hands of the executive and is deductible for IRES purposes as an employment cost. From the 2015 tax year, it would also be deductible for IRAP purposes, provided that it refers to indefinite time jobs.

The tax regime applicable to an asset deal is in principle more burden-some under both an income tax and an indirect tax perspective. Italian law does not set out specific rules for requalifying a share deal as an asset deal, provided that the Italian tax authorities may rely on general anti-abuse rules for such purposes.



Bank credit facilities are the most common type of debt used to fund pri-vate equity transactions.

Depending on the size and marketability of the project, such credit facilities can be allocated among lending institutions on the basis of dif-ferent levels of seniority. Senior debt is usually a long-term loan secured by the holding company and target’s assets. Subordinated debt, instead, is structured either as a second lien tranche or, sometimes, as a mezzanine tranche.

Despite the recent enactment by the Italian government of new legis-lation aimed at removing certain restrictions to the issuance of corporate bonds – thus favouring corporate bonds as an alternative to traditional bank lending – the percentage of bonds issuances in the context of private equity transactions has remained relatively low also due to the incompat-ibility of such debt instruments with the set of covenants and undertakings typically required by lenders in the context of acquisition financings. On the other hand, the use of vendor loans has been frequently considered as a suitable alternative.

It may be worth noting that structures involving short-term bridge financing in favour of the investing company (to fund the acquisition) or its shareholders (to grant a shareholder loan) and subsequent, post-merger, refinancing were often used to overcome certain legal limitations arising in the context of leveraged acquisitions. However, this practice has become progressively less frequent as long-term acquisition financings have been developed by the market practice in light of the introduction in the Italian

legal framework of new provisions which restricted the general prohibition of financial assistance and expressly allowed merger-leveraged buyout transactions under certain specific conditions.

In principle, no margin loan requirements apply to acquisition financ-ings in Italy.

As to restrictions on the granting of security, these typically need to be considered under Italian bankruptcy law (see question 12). In addition, it is worth mentioning that formal requirements imposed by Italian law may reduce the range of security arrangements available in other jurisdictions (eg, floating charge, second ranking pledge, parallel debt structures and security trustee).

As to issues arising from the existing target’s indebtedness, please note that it is common practice that the relevant financial documents pro-vide for change-of-control clauses, negative covenants and restrictions that need to be carefully evaluated during the structuring phase of the transaction.



In transactions funded with bank debt, in addition to the facilities agree-ment, financial documentation includes the security package and an inter-creditor agreement. Separate hedging agreements are often used to hedge interest rate or exchange rate liabilities arising under the credit documentation.

Moreover, it is not uncommon that the shareholders of the acquisi-tion company are required to execute a commitment letter to confirm to the lenders their obligation to execute equity contribution in favour of the company up to an agreed amount.

Acquisition facilities agreements are normally heavily negotiated documents providing for a number of undertakings, representation and warranties primarily devised to monitor and keep the investment struc-ture and the associated risks under control of creditors, at the outset of the transaction and during the life of the loan. Mandatory prepayment provi-sions linked to major changes in the investment structure are also normally embedded in the documentation.

Finally, under Italian law, the acquisition of a listed company is nor-mally performed through a public and irrevocable tender offer to all the stockholders of the target company (see question 14). In such a case, the credit documentation shall grant the bidder the necessary financial resources to satisfy the entire cash consideration potentially payable under the tender offer. In this respect, specific provisions are inserted in order to regulate the conduction of the tender offer (for example, by prescribing the level of acceptances that the bidder must obtain), the subsequent squeeze-out (if any) as well as to allow the final amount of financing to be adjustable with regards to the number of shares that might be acquired by the bidder or to any potential competing offer, or both.



Following the enactment of the current regulation on financial assistance (see question 10) and the introduction of certain provisions of the Italian bankruptcy law aimed at avoiding preferential treatments between credi-tors, fraudulent conveyance issues have been mitigated. However case law reports show that, when target companies are declared bankrupt after being involved in LBO transactions, the risk for directors and managers involved in the relevant transaction to face fraudulent conveyance charges cannot be excluded. In this regard, it is not uncommon that lenders request specific representations and warranties from the shareholders and direc-tors of the target company that the applicable legal procedures have been duly complied with.

In addition to the above, according to the Italian bankruptcy law any transactions entered into by a company after being declared insolvent may be invalidated and the relevant administrative receiver has the power to revoke any act or transactions executed by the company within a certain period prior to the opening of the insolvency proceeding. In cases of viola-tion of these provisions, directors may also incur liability.



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In such respect, the transaction documents as well as the credit docu-mentation often provide for representations and warranties of the parties in relation to the fact that no insolvency or similar proceedings have been started or threatened as regards the target company and neither the target company nor any of its subsidiaries, directors or officers has engaged in any activity or conduct violating any applicable laws and regulations.



Key provisions in shareholders’ agreements entered into in connection with minority investments mainly concern:• representation in the management and control bodies;• rights to appoint key officers;• a special quorum with veto rights to minorities in significant resolu-

tions of the board of directors’ meetings or shareholders’ meetings, or both;

• deadlock mechanisms (to prevent standstills in the shareholders’ meetings or board of directors’ meetings);

• share transfer restrictions;• exit rights; and• fixed-term duration (maximum five years for private companies incor-

porated as an SpA (joint-stock company) and maximum of three years for listed companies).

A legal protection for minority shareholders applicable to private compa-nies is the company action for liability as regards directors which can be taken by shareholders representing 20 per cent of the corporate capital or a different percentage provided in the by-laws. In any case, this can be no higher than 33.33 per cent of the corporate capital.

In addition, the following statutory protections for minority share-holders apply to listed companies:• ongoing disclosure obligations as regards the public;• the right of withdrawal from the shareholders’ agreement without

advance notice in the case of a mandatory tender offer; and• company action for liability as regards directors which can be taken by

shareholders representing 2.5 per cent or a lower percentage provided in the by-laws and in the shareholders’ agreement.



The ‘control’ of an Italian company can be acquired in several different ways including by:• launching a voluntary tender offer over a company’s shares listed on a

regulated market;• acquiring the controlling stake through a share purchase agreement

entered into with the majority shareholder or shareholders of either a listed or unlisted company;

• merging by incorporation with a listed or unlisted company; and• subscribing to a capital increase of a listed or unlisted company.

One of the most common structures to acquire the control of an Italian listed company is to launch a voluntary tender offer for the company’s shares. Generally, voluntary tender offers launched over the share capital of a public company are conditioned upon the offeror achieving either:• the 50 per cent +1 voting rights threshold that would allow the bidder

to control the target’s ordinary shareholders’ meetings; or• the 66.67 per cent voting rights threshold that would allow the bidder

to control also the target’s extraordinary shareholders’ meetings.

The principal alternative structure to a voluntary public offer is a share purchase agreement with the key shareholder or shareholders of a public company for the acquisition of the controlling stake in such company. Such method is commonly used for the acquisition of the controlling stake in private companies.

The control of an Italian listed or unlisted company can be achieved also through a merger by incorporation. Although mergers between public and private companies are rarely used in Italy, this kind of structure has been used for important integrations among major Italian banks.

Another way to acquire the control of an Italian listed or unlisted com-pany is the subscription to a capital increase reserved to third-party inves-tors. Due to the financial crisis of the past five years, structures such as the subscription to ‘reserved’ capital increases by one or more ‘white knight’ investors have often been used to restructure public or private companies at risk of bankruptcy.

In any case, as to the acquisition of a controlling stake in an Italian listed company, please consider that whoever comes to hold this, directly or indirectly, under certain circumstances will be obliged to launch a public tender offer over all the securities issued by the public company that entitle the holders to vote, even on specific items, at the ordinary and extraordi-nary shareholders’ meetings. These circumstances are:• as a result of the purchases of shares, a shareholding in the share

capital of a listed company, other than a ‘small-medium enterprise’ (as defined by the Consolidated Law on Finance), exceeding the 25 per cent threshold, provided that there is no other shareholder hold-ing an higher stake;

• as a result of the purchases of shares, a shareholding in the share capi-tal of the listed company exceeding the 30 per cent threshold; or

• as a result of the increase of the voting rights on the shares (deriving from the continuative possession of shares for a period of at least 24 months, certified through the enrolment in a special register), more than 30 per cent of the voting rights of same company.

15 Exit strategies


Restrictions on share transfer or any other relevant disposal of share can be included in the by-laws or in the shareholders’ agreement (if any), or both. As to SpA, such restrictions are normally represented by the lock-up of the shares (which cannot last for more than five years) and tag-along provisions.

With respect to the possibility to conduct an IPO of a portfolio com-pany, unless an express restriction is included in the by-laws or in a share-holders’ agreement, no limitations are provided for by the law (except for a minimum free float ranging from 10 per cent to 35 per cent, depending on the relevant stock exchange market where the target’s shares are going to be listed).

In the context of the transfer of a portfolio company by a private equity firm, the indemnification obligations for the breach by the seller of its rep-resentations and warranties are normally subject to considerable limita-tions (eg, de minimis, threshold, cap and time limits; see also question 7). Normal safeguards in favour of the seller in this respect could be providing in the share purchase agreement that a portion of the purchase price be placed in escrow in order to guarantee the payment of the indemnification (and other) obligations of the seller under the share purchase agreement. As an alternative, the buyer could require that the seller delivers a first demand guarantee released from a bank of primary standing to guarantee the payment of such obligations. Other forms of guarantees that, however, are less used in the Italian market are pledges concerning certain partici-pations or encumbrances concerning other assets held by the seller or its shareholders or a deferred payment of a portion of the purchase price and offset of such deferred purchase price with any amount due by the seller under its indemnification obligations.



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A shareholders’ agreement can survive an IPO if the parties so agree. However, the provisions of the shareholders’ agreement shall be in line with the statutory provisions concerning listed companies. In any case, a shareholders’ agreement concerning a listed company shall be disclosed to the public. Furthermore, the parties to a shareholders’ agreement can be regarded as ‘parties acting in concert’ and, therefore, under certain circumstances (eg, if they jointly hold more than 30 per cent of the vot-ing share capital but less than 45 per cent thereof and make purchases of shares in excess of 5 per cent) they may be required to launch a tender offer on the entire share capital of the company.

In the context of an IPO, it is market practice to require reference shareholders and directors or executives, or both, to refrain from sell-ing their shares during a certain time frame following the IPO (usually between six and 12 months) through the execution of lock-up agreements, although there is no legal obligation in this respect.



The Italian economy is an industrial and manufacturing one, strongly char-acterised by a significant number of family-owned business, mainly con-sisting of private small- and medium-sized companies, with a very limited number of listed companies characterised by a high ownership concentra-tion. Accordingly, in the recent past there have been only a very limited number of public to private transactions, and, thus, there are no specific sectors or industries (except for telecoms, media and, to a certain extent, fashion) that have been particularly targeted.

Although there are no industry-specific regulatory schemes that expressly limit potential targets for private equity houses, transactions in some of the regulated sectors – which are also subject to relevant regulatory independent authorities (eg, banking, insurance, telecommunications, broadcasting, etc) – may prove difficult and the actual execution and size of these transactions may be restricted.



Some of the most peculiar issues to be considered when structuring and financing a cross-border going-private or private equity transaction are:• the reciprocity rule; and• the golden share rule.

Reciprocity is a common principle governing foreign investments in Italy. According to such principle, a foreign company is allowed to obtain the civil rights granted to Italian entities on a reciprocity basis and subject to the provisions of Italian law. In this respect, reciprocity means that the state of origin of the foreign entity would grant to Italian entities the same or similar rights as the foreign company intends to exercise in Italy. The reciprocity principle is further detailed in certain sectors, including banks and financial institutions, insurance and telecommunication companies.

The golden share is a set of special powers of the Italian government in relation to defence and national security sectors; and strategic assets in the energy, transport and communications industries. Italian law sets forth an objective investment control regime in the aforesaid protected sec-tors, imposing prior notices to the government. In particular, the golden share applies when a non-public entity would acquire a shareholding in a protected company, resulting in the possibility of compromising national security or a controlling stake. Also, the extraordinary resolutions taken by Italian companies operating in the protected sector might be subject to the golden share. However, the application of the golden share is normally limited to exceptional circumstances that may cause prejudice to the fun-damental interests of Italy.



In recent years, the number of club and group deals, although still very lim-ited, have been growing in the Italian private equity market. This is true in relation to both the small and the mid-market as well as the larger one.

Issues and topics for Italian club deals are similar to those experi-enced in the other European jurisdictions. The undertakings between club investors are usually dealt with an investment or members’ agreement to be complemented by the execution of the relevant transaction documen-tation with the sellers of the target company and with the constitutional documents of the target itself.

The issue and topics to be dealt with between members of a club deal might include bid strategy and relevant management, walk away or with-drawal mechanisms and related issues, syndication undertakings, the appointment of counsel and board member representations, the alloca-tion of costs and expenses, deadlock schemes, share transfer restrictions, dilution rights, post-deal integration, the duration of investment and lead-ership in the exit scenarios, cost-sharing and benefit-sharing and other related matters. In this respect, it is likely that the sponsor with the most significant equity commitment will maintain the leadership or a stronger right of voice in the running negotiation and the setting up of the deal structure.

There are some club and group deals consisting of strategic investors alongside private equity sponsors as well as those between international sponsors or alternative providers of capital and domestic ones.

Update and trends

The overall private equity industry acting in Italy has seen a quite interesting upturn in its activities during the past year. This is also thanks to the renewed presence of the large international players and the rise of the domestic private equity funds and the pivotal role played by the Italian public captive funds such as Fondo Italiano d’Investimento, Fondo Strategico and, although on infrastructure only, the F2I fund. In addition, an active role in equity investments is now played directly by family offices, informal club deals and limited partners either on a stand-alone basis or in co-investments with the traditional private equity houses. Although the Italian challenging economic conditions are unlikely to significantly improve in the very near future, this trend is likely to continue in 2015 with a reasonable increase in the number of investments and in executed deals.

In terms of features of the investments, the buyouts continued to be the privileged type of investment by large international sponsors while domestic private equity firms are usually very active in acquiring minority stakes, either on a primary or a secondary market.

In terms of exit, trade sale is still the most common and feasible way of divestment although, if capital markets will improve, we might expect a slight increase in IPO as way of exit or an increased recourse to the dual- track processes, or both.

In terms of financing and leverage, owing to the peculiarities of the Italian targets and the Italian overall economy, private equity transactions are performed mainly with equity with a limited recourse to leverage, at least compared to what generally is the usual standard for the US and UK markets, and this trend is likely to continue in 2015.



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When signing and closing do not take place simultaneously, certainty of closing is usually managed through closing conditions on the buyer’s side, including, inter alia:• in the case of leveraged acquisitions, receipt of finance by the buyer;• granting to the buyer the required permits and authorisations from the

public authorities involved in the deal (eg, competition, regulatory, etc);

• dismissal of assets or going concerns, or both, which are not core for the buyer or completion of actions by the seller aimed at clearing cer-tain issues which arose during the due diligence process;

• fulfilment of minimum sales or EBITDA goals by the target; and• absence of material adverse change or material adverse effect.

Conditions precedents on the seller’s side are less common but can be pro-vided depending on the bargaining power of the parties.

If any of the closing conditions are not met by the cut-off date deter-mined in the sale and purchase agreement, the party to whose advantage the condition was agreed will be under no obligation to close the deal unless it waives the right to obtain the fulfilment of such condition.

Break-up and reverse break-up fees are occasionally provided, although the parties typically agree that, in the case of abortion of the deal, the buyer and the seller will each bear its own transactional costs and waive the right to ask for damages compensation unless a breach of contract has occurred.

Marco Gubitosi [email protected] Filippo Troisi [email protected]

Via Dante, 720123 MilanItaly

Via di San Nicola da Tolentino, 6700187 RomeItaly

Aldermary House10–15 Queen StreetEC4N 1TXLondonUnited Kingdom

Tel: +39 02 89 63 071Fax: +39 02 896 307 810

Tel: +39 06 93 18 271Fax: +39 06 931 827 403

Tel: +44 20 7074 2211Fax: +44 20 7074 2233www.legance.it

Nishimura & Asahi JAPAN


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Asa Shinkawa and Masaki NodaNishimura & Asahi



In Japan, there are several types of private equity fund-related transac-tions, such as going-private transactions of public companies by private equity funds, private investment in public equity (PIPE) and investment in non-listed companies. Among them, the most popular private equity trans-actions in Japan are going-private transactions of listed companies, paired with a squeeze-out of the remaining minority shareholders with some of the management of the company participating in the transaction (MBO). In addition, as is often the case with a private equity transaction, a private equity fund usually obtains financing through leveraged buyout (LBO) non-recourse loans to make investments with sufficient leverage.

To take a listed company private, a private equity fund may commence a tender offer with the shareholders of a listed company. However, in practice it is generally difficult to satisfy delisting conditions of securities exchanges in Japan with a tender offer, and accordingly private equity funds usually proceed with making the target company a wholly owned subsidi-ary by undertaking a transaction for squeezing out minority shareholders.

There are several schemes for squeezing out the shareholders of a listed company. For example, one of the simplest ones is a cash merger. Here, the private equity fund establishes a shell company in Japan acquir-ing shares through a tender offer, the target company merges into the shell company, and the shell company pays cash to the existing shareholders of the listed company as consideration for their shares in the merger. As all of the shareholders of the target company receive cash as consideration, they are squeezed out. However, a cash merger is not a common choice for a private equity fund’s squeeze-out transaction because a cash merger forces the target company to realise capital gains and losses of its assets as of the date of the merger. Instead, the most common structure used by private equity funds for squeeze-out transactions is a combination of a tender offer and a subsequent minority squeeze-out of the remaining minority share-holders by making use of a class of shares (shares subject to call). Typical procedural steps in this type of squeeze-out are as follows:• a private equity fund establishes a shell company in Japan;• the shell company commences a tender offer to acquire shares held by

shareholders of the target company;• after the settlement of the tender offer, the private equity fund requests

that the listed company hold a shareholders’ meeting for the following purposes:• to amend the articles of incorporation so that they can change the

common shares to shares subject to call; and• to make a resolution to redeem such shares subject to call; and

• as a result of the redemption of such shares subject to call, new shares are issued to the holders of the said shares subject to call.

The ratio of such shares is intentionally set at a very high level so that all the minority shareholders receive only a fraction of a share as consideration. Such fractional shares cannot actually be issued, but instead the aggregate shares are sold to a third party or can be repurchased by the target com-pany, with court approval, and the cash consideration is proportionately distributed to the minority shareholders who were to receive those frac-tional shares, which effectively leads to a minority squeeze-out.

However, the proposed amendment of the Companies Act in Japan, which is expected to take effect on 1 May 2015, includes provisions that enable a majority shareholder holding 90 per cent or more of the shares in a target company to mandatorily acquire the minority shareholders’ shares with the approval of the board of directors of the target company rather than the approval of its shareholders. If such revisions are made and take effect, it is possible that such a procedure may be more commonly used to squeeze out minority shareholders than the above ‘shares subject to call’ scheme.



Listed companies are subject to disclosure requirements and have to file annual securities reports that disclose company information such as finan-cial information, governance-related information and business-related information. Listed companies are also required to disclose relevant infor-mation by filing semi-annual securities reports, quarterly securities reports and extraordinary reports in certain instances. If a target company satisfies some requirements after going private, such disclosure requirements are suspended and the company is not required to file such reports. If a target company remains a listed company after a private equity fund purchases some of its shares, then the target company will continue to be subject to the above disclosure requirements. In addition, the major shareholder of the listed company also has an obligation to disclose some information, including financial information.



As explained in question 1, a going-private transaction often includes a ten-der offer. Under the tender offer rules in Japan, in the event that a tender offer is launched, the board of directors of the target company would be required to express its opinion with respect to the tender offer. Directors of the target company must satisfy their fiduciary duties in considering the proposed tender offer and any other transaction related thereto, which is explained by a bidder in its registration statement of the tender offer.

Similarly, when a going-private transaction using a merger or any other corporate reorganisation structure is proposed to the target com-pany, directors of the target company must satisfy their fiduciary duty in determining whether or not to proceed with the proposed transaction.

JAPAN Nishimura & Asahi


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There is an issue of whether the directors of a target company would be subject to a duty to negotiate as high a price as possible or a duty to nego-tiate an increase in the price with a potential purchaser. So far, the major-ity view is that directors would not be subject to the aforementioned duty, although unless a proposed price is fair and reasonable, it is difficult for directors to support the proposed acquisition of shares.

It is quite common in Japan for the management of target compa-nies to participate in private equity fund transactions to purchase all the shares of a listed company. In such a management buyout-type transac-tion, the directors who participate in the transaction with the private equity fund will face a conflict-of-interest issue. In the case of such a transac-tion, directors of the target company are at least subject to a duty to take appropriate measures to protect the interests of public shareholders. Under the Companies Act, directors who have special interests with respect to a transaction subject to a board resolution are prohibited from participating in the discussion and resolution at the board of directors meeting. Since the scope of ‘special interest’ in the statute is construed relatively nar-rowly, it is often the case in practice that directors who may not have ‘spe-cial interests’ but have personal economic interests aligned with the buyer abstain from deliberation and resolution at such a meeting. In addition, to protect the interests of public shareholders and ensure the fairness of the process, it is common practice to form a special independent committee to verify, among other things, whether negotiations between the buyer and the management of the company were properly conducted, and whether the agreed price is fair and reasonable. However, the members of such special independent committees in Japan are not necessarily independ-ent directors of the company, because many listed companies do not have a sufficient number of independent directors to compose a special com-mittee entirely of independent directors. Therefore, it is common to cre-ate an independent special committee which also includes one or more independent statutory auditors or independent experts such as attorneys, accountants or academics.

The role of a special committee in management buyout transactions in Japan varies from transaction to transaction. Some committees work as leaders of the transactions on behalf of the company itself and negotiate with the prospective purchaser themselves. Other committees work only as examiners and check if, among other things, the price and other terms and negotiations by the management are appropriate or not.

4 Disclosure issues


The level of disclosure required for going-private transactions is not dif-ferent from that required for other tender offer transactions. In the tender offer documents, the offeror has to disclose a great deal of information, including its reasons for the offered price, the purpose of the tender offer, the cap and threshold of the number of shares to be purchased, and fund-ing information for the transaction. However, in the event of a manage-ment buyout transaction, disclosure of additional information is required. For example, in the event that the offeror obtained a valuation report or a fairness opinion with respect to the offer price, then such report or opinion is required to be attached to the tender offer registration statement and is disclosed to the public. However, obtaining such reports is not mandatory.

The tender offer rules also require that in the case of management buyout, the offeror must state:• what measures have been taken for ensuring the fairness of a tender

offer price, as well as details of the process discussing and deciding to launch a tender offer; and

• specific measures taken by the company for avoiding a conflict of interest.

Accordingly, it is common in practice to explain in detail, among other things, how the target company sets up a special committee, how the negotiations regarding the price have been developed, what discussions occurred at the special committee about the price and other terms of the proposed transactions, and why the special committee concluded that the proposed transaction is appropriate.



It usually takes approximately four or five months from the launch of a ten-der offer until the completion of the squeeze-out of the remaining minor-ity shareholders. In addition, it quite commonly takes a few months for a private equity fund and the target company or its major shareholders to negotiate and reach an agreement before the launch of the tender offer, which means that it usually takes more than six months from the begin-ning of negotiations until the completion of the transaction. As for a short breakdown of the above schedules, the tender offer rules require the provi-sion of at least 20 business days as a tender offer period, and it usually takes five business days from the end of the tender offer period until settlement, which means that a typical tender offer takes more than a month from the launch of the tender offer until settlement. After settlement, the company must set a record date for the subsequent shareholders’ meeting, and call for a shareholders’ meeting to squeeze out minority shareholders. It typi-cally takes approximately two months before a shareholders’ meeting is held, because there are several procedures required for convening a share-holders’ meeting, such as setting a record date, fixing the shareholders who have voting rights at the shareholders’ meeting, and sending a notice for the shareholders’ meeting. If the private equity fund squeezes out minority shareholders by way of the structure described in question 1 (ie, employing shares subject to call), then the private equity fund cannot dispense with the shareholders’ meeting, even if the tender offeror succeeded in purchas-ing most of the shares in the target company (eg, 90 per cent or more).

When a private equity fund determines the timing of launching a ten-der offer, there are two points to note. First, in the event that a potential buyer comes into possession of non-public material information of the tar-get company, unless the target company discloses such information to the public pursuant to a certain determined manner, the potential buyer can-not commence a tender offer under the insider trading rules. It is often the case that after the end of the fiscal year, during the course of accounting closing procedures, some facts will become apparent that will constitute non-public material information, however these facts are not sufficiently clear for the company to be able to make a public announcement in respect of them, in which case the buyer would need to wait until the time when the company is able to make a public announcement with respect to relevant material information. Accordingly, the initiation of tender offers immedi-ately after the end of a fiscal year is usually avoided.

Second, private equity funds usually avoid initiating tender offers between the record date of an annual shareholders’ meeting (ie, the final date of a fiscal year for most Japanese companies) and the annual share-holders’ meeting, and usually avoid scheduling a tender offer period to include the date of an annual shareholders’ meeting. Shareholders hold-ing voting rights at shareholders’ meeting may propose an increase of the amount of dividends if the company proposes an agenda of distribution of dividends for the annual shareholders’ meeting. Even in the event that shareholders approve such an increase in dividends, under the tender offer rules in Japan, an offeror is not generally allowed to decrease a tender offer price due to an increase in dividends after the launch of the tender offer. Therefore, some buyers do not want to initiate a tender offer from the record date of the shareholders’ meeting until the date of the sharehold-ers’ meeting.



As explained in question 1, it is quite common for an acquirer to launch a tender offer and, after the successful completion of the tender offer, to obtain a super majority shareholders’ approval of the targeted listed com-pany to squeeze out minority shareholders.

It is quite uncommon in Japan for dissenting shareholders to seek for an injunctive order to suspend a tender offer, as it is practically very dif-ficult to satisfy the requirements applicable to such an action.



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Other possible methods for dissenting shareholders to challenge going-private transactions are to bring a damages claim against directors of the targeted listed company; to bring an action to challenge the validity of the shareholders’ resolution to enter into a squeeze-out transaction; or to exercise a shareholder’s appraisal right and challenge the squeeze-out price.

In the event that shareholders suffer economic loss as a result of a going-private transaction of a listed company, those shareholders may initiate litigation against the directors of the target listed company who assented to the going-private transaction to recover damages for loss aris-ing from any breach of the directors’ fiduciary duties. However, directors in general are protected by a business judgment rule in Japan and it is not easy for shareholders to prevail in such litigation against directors. For example, there is a case holding in connection with a management buyout transac-tion where directors faced an allegation of conflict of interest. The court found that the directors had breached their fiduciary duty, however, the plaintiff had failed to demonstrate causation between the breach and the alleged economic loss, therefore the plaintiff was not entitled to recover damages. This clearly shows that it is not easy for shareholders to recover damages by claiming directors have breached their fiduciary duties.

The most commonly used avenue by dissenting shareholders in going-private transactions in Japan is the exercise of a shareholder appraisal right. For example, the Companies Act provides appraisal rights to a shareholder who opposes a squeeze-out using a ‘shares subject to call’ (see question 1). By exercising appraisal rights, dissenting shareholders may require an issu-ing company to repurchase its shares at a fair value. The law also requires the issuing company to pay interest on the appraisal value of shares at a rate equal to 6 per cent per annum, payable on the period from the date of closing of the going-private transaction to the date of payment for the relevant shares. Dissenting shareholders who exercise appraisal rights may negotiate the price of the shares to be repurchased by the company, how-ever, if dissenting shareholders and the issuing company fail to reach an agreement, such dissenting shareholders may make a petition to a court to decide the price for the shares to be purchased by the company.

As the said appraisal rights are the most commonly used remedy for dissenting shareholders, an acquirer’s protection from dissenting shareholders mainly relates to how they can prove the price the acquirer proposed is fair. As a practical step, it is commonly said that without con-vincing, legitimate grounds, management should avoid amending finan-cial results and forecasts at a time close to the announcement of a tender offer in a management buyout transaction so that management can avoid the appearance of manipulating the market price to make their tender offer more attractive.



If there is a shareholder (or shareholders) with a large stake in the target company, it is common that the buyer will enter into a purchase agreement with such shareholder or shareholders. The provisions of such purchase agreements are similar to those used in other agreements for acquiring investment interests. However, in the case where shares are acquired through a tender offer, in light of restrictions under the tender offer rules, various unique features are observed in tender offer purchase agreements. Firstly, unlike in the United States and other jurisdictions around the world where offerors are permitted to condition their obligations to settle a ten-der offer on their receipt of expected financing proceeds, in Japan the ten-der offer rules restrict the withdrawal of a tender offer to cases permitted under the law, and the tender offer rules have been widely interpreted as prohibiting a financing-out of tender offers. Accordingly, a tender offeror cannot withdraw a tender offer even if it fails to borrow money from banks for the tender offer. Secondly, the tender offer rules in Japan limit the rem-edies for breach of representation and warranties made by a shareholder. For example, a tender offeror may not walk away from a tender offer even if the offeror discovers a breach of representations and warranties, unless such a breach falls within a category of events of withdrawal that the ten-der offer rules specifically provide for. In addition, some argue that the ten-der offer rules do not allow indemnification by a shareholder of the target

company, even if the shareholder gives representations and warranties in an agreement and then breaches them.

In transactions by a private equity fund for an acquisition of shares of a listed company without a tender offer, purchase agreements do not gen-erally differ from purchase agreements used in transactions for the acqui-sition of investment interests in non-listed target companies, although in such cases sellers tend to refuse wide-ranging representations and warran-ties, because the target company operates independently from sellers.



It is quite common for a private equity fund to provide some of the man-agement of the target company and key employees with an opportunity to enter into an equity-based incentive plan, such as an opportunity to acquire a minority stake or stock options or to participate in an employee stock ownership plan in the target company after the closing. However, such equity-based incentive plans should be carefully structured as it is possible for the target company to become inelegible for release from its obligation to file a securities report. In addition, if a private equity fund commits in advance to providing the management of the target company with an opportunity to participate in such an equity-based incentive plan after the closing of the transaction, it means that such management will have the above-mentioned conflict of interest due to their future interest in the company. For this reason, it is often the case that private equity funds make a commitment to provide an incentive plan after minority sharehold-ers are squeezed out.

9 Tax issues


One of the major tax issues in relation to minority squeeze-out transac-tions is a possible capital gain tax on the assets of the target company. As stated in question 1, depending upon the structure of the squeeze-out, it is possible to realise a capital gain on assets held by the target company. However, it is possible to avoid such tax if one utilises the ‘shares subject to call’ structure explained above, or the new mechanism to be provided in the amendment of the Companies Act described in question 1.

As to the deductibility of interest, interest is deductible even if such interest is for subordinated loans; however, a company issuing preferred stock cannot deduct the amount of preferred dividends even if the pre-ferred stock is very close in nature to a subordinated loan.

With respect to tax issues related to executive compensation, golden parachutes are not common in Japan and therefore there is no special tax treatment for such a payment, but if the retirement allowance amount is excessive, then the Tax Code does not allow a company to include such excessive amount in its general expenses. Tax treatment for stock options depends on if the issued stock options are tax-qualified or not. If the stock option is tax-qualified, a tax is imposed only when the shares obtained by exercising the stock options are sold. However, if the stock options are not tax-qualified, the holders of such stock options may be taxed:• when such options are issued;• when the holder exercises such stock options; and• when the shares obtained by exercising the stock options are sold.

As for the last question, in general, share acquisitions cannot be classified as asset acquisitions under the Japanese Tax Code.



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In private equity transactions, the most commonly used types of debt in Japan are LBO loans as syndicated loans, and they are usually made with revolving credit and term loans. The terms and conditions of the existing debt should be carefully checked to see if a transaction made by a private equity fund triggers any provision, such as early redemption in the case of a change of ownership. There is no specific financial assistance rule in con-nection with a target company’s support for others to purchase the shares of the company. However, if a shell company established by a private equity fund holds shares in a target company, until the completion of the squeeze-out of minority shareholders, the target company would be prohibited from providing financial benefits to such shareholder in connection with an exercise of shareholders’ rights. In addition if, after the settlement of a tender offer, the offeror holds a majority of the shares in the target com-pany, the granting of any security interest on the assets held by the target company for the LBO lenders is not normally done until after the squeeze-out of minority shareholders, because of the fiduciary duty of the target company directors to the shareholders, including minority shareholders.



For debt financing such as LBO loans, the following are commonly-pro-vided terms:• mandatory repayment in the event that the target company earns a

profit;• early redemption in the event of default; and• financial and performance covenants in connection with the business

activities of the target company.

In the event that a private equity fund finances through mezzanines such as a preferred stock, the payment structure would be one of the most impor-tant terms, and an agreement between creditors and the holders of the pre-ferred stock would also be made.

Where a tender offeror plans to raise funds from a third-party funds provider in the form of a loan or an equity capital contribution, a commit-ment letter, certifying that the funds provider is prepared to provide an agreed amount of money to the tender offeror, must be executed by the funds provider and attached to the tender offer registration statement unless the funds provider has or will have already injected the relevant cash into the offeror’s account before the launch of the tender offer (in which case, the offeror can attach a bank account balance statement). It is common for a private equity fund to negotiate with the loan provider in respect of detailed terms of the definitive loan agreement during the ten-der offer period and enter into a definitive loan agreement after the tender offer period before the settlement of the tender offer.



If a shell company established by a private equity fund sources most of the funds used to purchase a target company through a loan and subsequently merges with the target company, then it is possible that such a merger may be detrimental to the existing creditors of the target company. Existing creditors may state their objection to the merger and receive payment or reasonable security if there is a risk of harm to existing creditors due to such merger. However, even if the target company gets into financial trou-ble following the merger because of the high leverage, it would be hard for creditors to the pre-merger target company to invalidate the merger.



The key provisions in shareholders’ agreements for private equity trans-actions are not substantially different from those for other transactions. Namely, it is quite common to place transfer restrictions on the shares in the shareholders’ agreements, including rights of first offer or refusal, tag-along rights and drag-along rights, a right to appoint directors, and veto rights.

As statutory legal protection for minority shareholders, the Companies Act requires votes by two-thirds of the voting rights present at the share-holders’ meeting in connection with fundamental matters such as mergers, demergers, transfers of a significant part of business and amendments of articles of incorporation, which means that a minority shareholder holding more than one-third of issued shares has a veto right under the Companies Act.



When a private equity fund purchases shares of a listed company, it must comply with the Japanese tender offer rules. The rules are quite compli-cated and we cannot provide a full description of the tender offer rules here due to space limitations. However, we recommend consultation with Japanese counsel regarding this point prior to initiating a transaction.

One of the key points to be aware of is that a mandatory tender offer is triggered upon acquisition of more than one-third of the voting shares in the listed target company. An acquirer cannot purchase more than one-third of the voting shares of a listed target company through a method other than a tender offer or purchase on the market. As a result, even if a major shareholder holding more than one third of the voting shares would like to sell its shares to a private equity fund, the private equity fund has to commence a tender offer and provide other shareholders with the oppor-tunity to tender for the shares.

Another major point to be aware of is the regulation under the tender offer rules for setting a cap. An acquirer may generally set a cap on a ten-der offer, and if the number of shares tendered in the offer exceeds the cap provided by the offeror, then the tender offeror must purchase the applied shares on a pro rata basis. However, an acquirer cannot set a cap if the acquisition through the tender offer could result in the offeror’s sharehold-ing exceeding two-thirds of the voting shares. Even if an acquirer would like to set the cap at, for example, 70 per cent or 80 per cent, such a cap is not allowed, and the acquirer is required to purchase all shares tendered if it sets a cap above the threshold.

15 Exit strategies


In the event that a private equity fund pursues an IPO exit of portfolio com-panies purchased through a management buy-out transaction, Tokyo Stock Exchange states in its booklet that more detailed scrutiny of such compa-nies should be made than that of other non-management buy-out compa-nies. In such cases, the stock exchange will additionally check whether the price offered at the time of the management buy-out was fair, whether the purpose of the management buy-out was rational and the extent to which the business plan made for the management buy-out was achieved.



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If the target company is not listed and is wholly owned by a private equity fund (and its related parties), there would be little restriction on a private equity firm’s ability to sell its stake in the target company to a third party, except for the lock-up stated in question 16 and restrictions under the Articles of Incorporation of the target company or a shareholders’ agreement, if any.

Private equity funds generally resist providing a long-term post-clos-ing indemnification for breach of representations and warranties or cov-enants and negotiate hard to limit the period for such an indemnification. There are cases where private equity funds agreed to set up an escrow hold-ing part of a purchase price for a limited period (eg, six months) as a sole recourse that the buyer may have after the closing, but such an arrange-ment has not yet developed to become ‘market practice’. In Japan, it is rare to use transaction insurance, which allows a buyer to recover its damages due to a breach of representations and warranties by a seller.



During the review process made by a stock exchange in Japan, the stock exchange generally requests that an agreement between a shareholder and the target company be terminated at the time of filing an application for listing, because listing rules require a newly listed company to treat every shareholder equally. Accordingly, a major shareholder of a portfolio com-pany, including a private equity fund itself, cannot hold special rights such as board appointment rights or veto rights after the IPO.

Japanese law does not have a concept of registration rights as used in the United States, because in the event that a company completes an IPO and applies for listing of its shares, it is required that the company list all shares in the class subject to the listing as well as any new shares in such class when issued. There are cases where a target company will provide a shareholder with a right to file a registration statement upon the request of the shareholder, but such an agreement would need to be terminated at the time of filing an IPO application as explained above.

As to lock-up restrictions, under the listing rules of the Tokyo Stock Exchange, any existing shareholders who were allotted shares within a one-year period prior to the effective date of an IPO must hold (ie, must not transfer or dispose of ) such shares until six months after the effective date of the IPO or one year after the effective date of such allotment of shares, whichever comes later. More importantly, from the perspective of private equity funds, it is common practice in Japan for underwriters of the IPO to require major shareholders of the company to abstain from selling the remaining shares of the company for 180 days after the date of the IPO, when they believe such restriction is necessary in light of market circum-stances. After these lock-up periods, shareholders are allowed to sell their shares in the market.

Subject to the abovementioned lock-up restrictions, following an IPO, all shareholders, not limited to private equity sponsors, may sell their shares in the market. Of course, such sales are subject to market conditions. Shareholders may also choose to sell their shares pursuant to a secondary distribution of securities after the securities registration statement filed by the portfolio company comes into effect. In some cases, major sharehold-ers negotiate with and sell their shares to a purchaser who intends to buy a large portion of the shares; however, please note that in Japan such a trans-fer may be subject to the tender offer rule, as explained in question 14.



Previously, it was sometimes said that private equity funds tended to choose companies in industries with relatively stable cash flows, such as the food or beverage industry, because it is relatively easy to agree with loan providers if the target company expects stable cash inflow. However, for recent going-private transactions, the industries are fairly diverse, and we cannot say that there are many going-private transactions focused on a specific industry. There are not many industry-specific regulations which block private equity fund transactions; however, there are some industry-related laws, such as the Broadcast Act, which may restrict private equity transactions.



Investments by foreign companies in Japanese companies which partici-pate in restricted industries, such as power generation, broadcasting, agri-culture, natural resources, nuclear-related industries and transportation, require advanced approval under the Foreign Exchange and Foreign Trade Act. Whether an acquisition of a company by a foreign entity is allowed depends upon various factors such as the nature of business of the target company, what percentage of the shares the purchaser intends to purchase, and the purchaser’s plans after the acquisition. There are not many cases publicly discussed regarding whether a foreign entity’s specific purchase of shares in a restricted industry will be approved or not. One example of a public case, however, is the Children’s Investment Fund’s plan to purchase more than 10 per cent of shares in Electric Power Development Co, Ltd, which was not approved by the relevant governmental authority.



In club or group deals, shareholders have to provide for many matters, such as governance structure, board appointment rights, veto rights, dividend policy, pre-emptive rights and restrictions on the sale of shares, including transfer restrictions, rights of first refusal, tag-along rights and drag-along rights. However, these issues do not depend upon whether one or all of the shareholders are a private equity fund or not, and there are no specific con-siderations for a club or group deal where a private equity fund participates.

Update and trends

As explained in question 1, the amendment to the Japanese Companies Act is expected to take effect on 1 May 2015. Under the new Companies Act, with the approval of the board of directors of the target company, a shareholder holding 90 per cent or more of the shares in a target company will be allowed to squeeze out the remaining minority shareholders. The advantage of this new squeezing out method, compared with the currently common method of using shares subject to call, is that the new procedure is much simpler, and the time period necessary for the squeeze-out can be shortened, as it can take place without an approval of shareholders. It is possible that this new method may become a common scheme for squeezing out minority shareholders.



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In private equity fund buyer transactions without a tender offer, conditions precedent for closing are likely to be negotiated extensively by the rel-evant parties. However, sellers and a private equity fund purchaser do not

usually negotiate so hard on conditions precedent in transactions where a private equity fund plans to acquire shares through a tender offer because, as mentioned in question 7, the Japanese tender offer rules essentially do not allow the setting of conditions on withdrawing a tender offer which is not provided for by law. There are other mechanisms to assure a closing, such as a termination fee arrangement; however, such an arrangement is not common in Japanese private equity transactions.

Nishimura & AsahiAsa Shinkawa [email protected] Masaki Noda [email protected]

Ark Mori Building1-12-32 Akasaka, Minato-kuTokyo 107-6029Japan

Tel: +81 3 5562 8500Fax: +81 3 5561 [email protected]/en/

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Do Young Kim and Jong Hyun ParkKim & Chang



Both private equity funds (PEFs) established in Korea (Korean PEFs) and PEFs established outside of Korea (foreign PEFs) are active in making pri-vate equity investments and acquisitions in Korea. The Korean PEFs are registered with the Korean Financial Services Commission, and are sub-ject to certain regulatory restrictions and requirements under the Financial Investment Services and Capital Market Act (FSCMA). Among others, the most common forms of Korean PEFs are permitted only to acquire 10 per cent or more of the voting shares of a target or otherwise acquire a de facto control of the target, and accordingly, at least at this juncture, cannot make mezzanine investments composed solely of equity or debt securities, or both, without voting rights. Given such regulatory restriction, Korean PEFs typically engage in buy-outs, change-of-control investments or minor-ity investments, in which they acquire at least 10 per cent of the voting shares of the target and obtain certain management or governance rights through a shareholders’ agreement with the controlling shareholders or other major shareholder, or both, of such target. In terms of structuring for Korean PEFs, they usually establish a special purpose company (SPC) for their investments into the targets. With respect to debt financing for each such investment, as the FSCMA prohibits Korean PEFs from directly incur-ring indebtedness to engage in leveraged investments, an SPC is used to raise debt financing when making leveraged investments. Other less prev-alent forms of Korean PEFs include venture capital funds and corporate financial stability PEFs focusing on investments in bonds or other securi-ties issued by insolvent targets undergoing restructuring.

Foreign PEFs are neither registered with the Korean Financial Services Commission nor subject to the regulatory restrictions and requirements under the FSCMA. As such, they generally have more latitude in designing their investment structure and strategies from the Korean PEF regulatory perspective as compared to Korean PEFs, while they, as foreign investors, are subject to certain other non-PEF statutory and regulatory restrictions, such as foreign exchange regulations and investment restrictions applica-ble to certain industries (eg, defence, telecommunications, etc). As such, foreign PEFs have been more open in using different types of investment structures, including buy-outs and making mezzanine, venture capital or distressed assets investments. However, in order to take advantage of cer-tain benefits provided to foreign investors under the Foreign Investment Promotion Law, most foreign PEF investments involve an acquisition of either 10 per cent or more of the voting shares of a target or the right to appoint at least one director on its board of directors.



Where a PEF invests into a target in Korea to become its shareholder, the general corporate governance rules under the Korean Commercial Code and, in case of a listed target, certain additional corporate governance

rules that are applicable thereto, apply, while there is no special corporate governance rule specifically for PEFs. As certain additional corporate gov-ernance rules are applicable to public companies, including the mandatory appointment of outside directors and stronger minority protection rights, together with certain public disclosure obligations under relevant securi-ties regulations, PEFs are sometimes incentivised to take private its portfo-lio companies that are public companies. Sometimes, where a PEF acquires a private target, the PEF is incentivised to have such target go public in order to maximise its exit opportunities, despite the application of such additional corporate governance rules. In this connection, while there have been certain ‘go public’ transactions of listed companies in Korea where a PEF is a minority shareholder, we are not aware of any such transaction where a PEF is the controlling shareholder.

In relation to PEFs utilising leveraged buy-outs (LBOs) for merg-ers and acquisitions transactions in Korea, direct LBOs are prohibited in Korea, and a violation of such restriction may have potential civil and crim-inal liability implications. LBOs are permitted in some jurisdictions where PEFs may use such deal structure to maximise their return on investment and minimise financing costs.

The typical scenarios for prohibited LBOs would be where the target’s assets are used to collateralise the acquisition financing by the PEF or its SPC or where the target takes on the repayment obligation in relation to such acquisition financing, such as by providing a guarantee. Instead, PEFs engage in indirect LBOs in Korea; for example, PEFs fund the repayment of the acquisition financing by receiving cash from the target in the form of dividends or a capital reduction, and such indirect forms of LBOs are considered to be generally permissible under Korean law. As an alterna-tive form of indirect LBO, a PEF may also set up an SPC and subsequently merge the SPC with the target, but the permissibility of such merger needs to be considered, taking into account the totality of the circumstances. This is especially true, for example, in cases where the SPC does not have any assets or operations other than the ownership of the shares in the target and has not fully repaid the indebtedness from its acquisition financing; the permissibility under Korean law of the subsequent merger would need to be carefully examined based on the specific facts and circumstances at issue.



Unlike public companies in other jurisdictions, for example, Delaware cor-porations, Korean public companies typically have controlling sharehold-ers, and their board of directors, while mandated to consider and resolve important management decisions, usually does not exercise management rights to protect existing minority shareholders’ interests. In most cases, controlling shareholders, not the board of directors, retain control over evaluating and proceeding with change-of-control transactions, squeeze-outs and going-private transactions. Accordingly, Korean public compa-nies usually do not form a special committee of independent directors or

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obtain fairness opinions and have little role in the decision-making pro-cess. While minority shareholders do not have much control, they have cer-tain appraisal and other statutory (and, possibly, contractual) rights which they may exercise in relation to such transactions.

4 Disclosure issues


For a Korean public company to go private, given that there would be not insignificant shares held by public investors, the controlling shareholder would be required to first purchase additional shares through a public tender offer so that such controlling shareholder, together with specially related persons, has a sufficient shareholding to initiate the delisting pro-cess of the target. For the public tender offer, the offeror must submit an application to the Korean Financial Services Commission and the Korea Exchange containing certain information regarding the identity of the offeror and the target, the purpose of the tender offer, the types and num-ber of shares to be purchased through the tender offer, key terms of the tender offer (eg, duration, price, execution date, etc), and funding plan for payment. Under the FSCMA, the offeror is to deposit with a bank an amount sufficient to pay the total purchase price payable if the maximum number of shares the offeror offered to purchase in the tender offer is ten-dered. Such deposit is to be completed before launch of the tender offer, and the bank keeping such deposit is required to issue a certificate confirm-ing the deposit of a sufficient amount to pay the total purchase price. Once the offeror, together with its specially-related persons, acquires 95 per cent or more of the shares in the aggregate through the public tender offer, it may engage in a squeeze-out to purchase the remaining shares and, subject to the approval of the Korea Exchange, to delist the target.



As explained in question 4, going-private transactions involve a delisting process where shares are purchased through a public tender offer. The pub-lic tender offer process takes at least one month, and the entire delisting process may take six months or longer.

There exists no statutory restriction on the transaction timeline for other forms of investments such as a share purchase. As in other jurisdic-tions, such transactions involve determination of transaction structure, due diligence, execution of definitive agreements, obtaining regulatory approvals (including a pre-closing merger filing with the Korea Fair Trade Commission) and closing, and the entire process takes anywhere between several days to more than a year depending on the size and nature of the transaction, the target and the involved parties.



Dissenting minority shareholders may choose not to sell their shares in a public tender offer, and, where a sufficient number of shareholders so choose, it may become practically difficult to consummate the going- private transaction.

If a PEF acquires 95 per cent or more of the target’s shares through a public tender offer, the remaining shareholders may request the PEF to purchase their shares at a fair price, and, if the parties fail to agree on the purchase price, such shareholders may exercise their appraisal right to request the court to determine the appropriate price. The target could be delisted even without the controlling shareholder, together with its specially-related persons, acquiring 100 per cent of the shares in the tar-get, but the controlling shareholder would be required to commit to pur-chase the shares held by the minority shareholders during a certain period after the delisting if so requested by the minority shareholders during such period. The purchase price for the shares held by the minority sharehold-ers after delisting will need to be discussed with the Korea Exchange, and, typically, the purchase price is based on the tender offer price if a tender offer has been conducted immediately prior to the delisting.



In cases of share purchase transactions with a PEF purchaser, although the definitive agreement may be executed by the PEF, the closing would be effected by an SPC established by the PEF, and accordingly the PEF would assign the definitive agreement to the SPC prior to closing. As such, the definitive agreement would typically include an assignment provision where an assignment to the PEF’s affiliates is permissible without the prior written consent of the seller. Furthermore, PEFs investing in Korea tend to push for robust seller representations, warranties and indemnities, and, in order to minimise exposure arising from closing uncertainty, to negotiate hard to avoid or minimise earnest money deposits or break-up fees, or both. PEFs also sometimes try to include a financing-out in definitive agree-ments, but such proposition is seldom accepted by the sellers, and, rather, PEFs in many cases provide representations and warranties regarding their financing capability to consummate the contemplated transactions.

In cases of share purchase transactions with a PEF seller, the provision that deals with the PEF seller’s post-closing liability exposure is typically one of the most negotiated parts of the definitive agreement. In this con-nection, an escrow arrangement has been one of the most popular arrange-ments to address the PEF seller’s post-closing liability issues, but there have been precedents using different mechanisms, for example, a post-closing performance guarantee by the general partner entity, or indemni-fication insurance.



There are no special statutory restrictions that are applicable specifically to executive compensation, although there are certain disclosure obliga-tions in relation to executive compensation for listed companies. As such, the compensation strategies for incentivising the target management to support and participate in a going-private transaction may vary on a case-by-case basis, including offering of short-term or long-term incentives, or both. For example, cash bonuses may be offered for a successful closing of the going-private transaction as a short-term incentive, while additional cash or equity-based bonuses, or both, on an annual basis or otherwise may be offered as a long-term incentive in return for achieving certain manage-ment targets (eg, net profit, EBITDA, employee turnover, etc).

In terms of timing for when a PEF sponsor should discuss manage-ment participation, once the PEF sponsor has determined that the target management’s participation in the contemplated going-private transaction is required, the target management would generally expect to be informed of the roles staff are expected to play in such transaction as early as possible.

9 Tax issues


Capital gains taxIn the case of foreign PEFs, they are generally considered to be non-resi-dents for Korean tax purposes, and capital gains realised by a non-resident on a sale of securities in a Korean target are generally subject to withhold-ing taxes in Korea at the rate of the lesser of 11 per cent of the gross sale proceeds and 22 per cent of the net capital gains, unless any exemption is applicable under Korean tax laws or an applicable tax treaty.

Securities transaction taxIn addition to the capital gains tax noted above, such sale of securities issued in a Korean target would be subject to the securities transaction tax at the rate of 0.5 per cent of the gross sale proceeds (or 0.3 per cent in case of on-exchange transactions).

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Deemed acquisition taxUnder Korean tax law, acquisition taxes are payable in respect of acqui-sition of certain kinds of assets, including, for example, real property, vehicles and golf club memberships. In the event where a PEF or its SPC acquires the shares in a private Korean target to become its majority share-holder, such PEF or SPC is deemed to have purchased such assets owned by the target and would be subject to deemed acquisition taxes in respect of such assets.

Dividends and interestAfter a target acquisition, the most typical transactions between a PEF or its SPC, on the one hand, and the target, on the other hand, would be divi-dend and interest payouts. Such dividends or interest paid by the target to a non-resident foreign PEF or its foreign SPC as an equity holder (or creditor or bondholder, respectively), are subject to withholding taxes in Korea at the rate of 22 per cent (except for bonds issued by the target, to which the rate of 15.4 per cent is applicable), unless the rate is reduced under an appli-cable tax treaty or such taxes are exempt under Korean tax laws.

With respect to the deductibility of such payouts from the Korean tar-get’s perspective, interest payouts are generally deemed to be deductible expenses, while dividend payouts are not.

Taxation on Korean PEFA Korean PEF is generally taxable as an entity separate from its inves-tors. However, the Korean PEF may elect to be treated as a partnership for Korean corporate income tax purposes, in which case the partners, rather than the Korean PEF itself, will be subject to Korean income taxes on their proportionate share of earnings made by, and allocated from, the Korean PEF. In general, such earnings allocated to the Korean PEF’s limited part-ners are characterised as dividend income to such limited partners.

Executive compensationThe remuneration to the target’s executives is generally subject to Korean income taxes for such executives, and the target is allowed to deduct such compensation-related expenses from its taxable income to a reasonable extent. The granting of stock options is generally not a taxable or deduct-ible event in Korea, but, if such stock option scheme is to be settled in cash, such cash settlement would be subject to Korean income taxes and the tar-get is generally allowed to deduct such cash settlement amount from its taxable income.



PEFs that are investing in Korea typically finance their acquisitions through loans from domestic financial institutions.

Where a PEF is investing in a target and is raising capital through debt financing, a lender or a syndicate of lenders for such debt financing, would consider the target’s EBITDA, financial debt and other conditions in mak-ing its loan decision. The amount of debt financing which the PEF may pro-cure for its acquisition of the target would differ depending on the target’s financial and operational conditions, including its leverage ratio. Where the target has existing indebtedness prior to closing from other financial institutions, the acquiring PEF would often choose to also refinance such indebtedness from the financial institutions financing the acquisition.

Separately, as discussed in question 2, a direct LBO, whether it involves a Korean PEF or a foreign PEF, is prohibited under Korean law, while an indirect LBO is generally perceived to be permissible. Moreover, as dis-cussed in question 1, Korean PEFs may not themselves borrow money, and may only do so through their SPCs, which are allowed to borrow up to 300 per cent of their equity capital.



As briefly discussed in question 4, purchases of 5 per cent or more of the shares of a publicly listed company in Korea from ten or more persons out-side of the stock exchange within a six-month period triggers a mandatory public tender offer obligation, and a going-private transaction would gen-erally require such tender offer due to the need to acquire publicly float-ing shares. For such going-private tender-offer transactions, there have only been a few cases where debt financing was utilised, that is the PEFs involved would typically utilise their equity capital through a capital call. We understand that such lack of use of debt financing is due to, among other factors, the fact that contacting third-party financing sources for debt financing may lead to information leakage even though confidentiality regarding the preparation and timing of a tender offer is typically of utmost importance in such tender offer situation. In cases where debt financing was made for such going-private tender-offer transactions, lenders have often required a covenant to merge the acquiring SPC with the target after acquisition, or for the acquiring SPC to fund repayment of its loan through receipt of dividend payments or capital reduction proceeds from the target, and a breach of such covenant may lead to an event of default or a step-up in the interest rate.



The issue of fraudulent conveyance does not usually arise in going-private transactions in Korea. Such issue may be raised in relation to the acquisi-tion of a financially distressed target, but, when acquiring such target, its assets or shares, or both, are typically subject to a lien or other claims of its creditors, and therefore such acquisition would require the creditors’ con-sent in any event. Furthermore, if the target is involved in an insolvency proceeding, the bankruptcy court would be managing the sales process, and, if the acquisition is duly made through such process, the risk of any third party claiming fraudulent conveyance is low.



For minority investments by PEFs, exit-related provisions in a sharehold-ers’ agreement are of key importance. Such provisions typically include share transfer restrictions, put or call options (or both), drag-along or tag-along rights (or both), rights of first offer or first refusal (or both) and IPO rights. With respect to Korean PEFs, as there are certain regulatory restric-tions on their having put or call options in relation to their portfolio invest-ments, such restrictions would need to be taken into account in preparing such exit-related provisions. Other provisions of interest to PEFs include corporate governance rights, such as director, observer and officer nomi-nation rights and veto rights, and post-acquisition information and access rights.

In addition to what parties may contractually agree to, the Korean Commercial Code, from the perspective of minority shareholder protec-tion, sets forth certain corporate matters that require a special sharehold-ers’ resolution which includes amendments to the articles of incorporation, transfers of all or a substantial part of business, mergers, capital reduc-tions, removal of directors and granting of stock options. A special share-holders’ resolution requires the affirmative vote of at least one-third of the issued and outstanding shares and two-thirds of such shares represented at a shareholders’ meeting. Furthermore, minority shareholders are afforded certain other rights depending on their respective shareholding, such as the right to access the company’s accounts, to request and hold an extraor-dinary shareholders’ meeting, to make a shareholder proposal or to bring a derivative action against directors of the company.

KOREA Kim & Chang


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Tender offersAs discussed in questions 4 and 11, a mandatory tender offer must be made if 5 per cent or more of the shares of a publicly listed company are to be acquired outside of the stock exchange from ten or more persons within a six-month period.

Acquisitions of targets in certain industriesThe acquisition of Korean financial institutions is subject to various regula-tory requirements and sometimes requires an approval from the financial regulators. For example, in case of the acquisition of a commercial bank in Korea by a PEF, depending on whether the PEF is deemed to be engaged in the operation of financial business, the PEF may be limited in acquiring a substantial shareholding of such commercial bank and would be subject to certain filing or approval requirements, or both. Further, in practice, the acquisition of financial institutions by foreign investors tends to be subject to a stricter scrutiny than those by domestic investors.

Separately, foreign PEFs, as with any other foreign investors, would be subject to investment restrictions applicable to certain industries (eg, defence, telecommunications, etc), where the shareholding in a target within such industries by foreign investors is subject to a certain threshold or other limitations, or both.

Antitrust clearanceFor the acquisition of 20 per cent (or 15 per cent, if the target is listed on the Korean stock exchange) or more of the total voting shares of the target, the acquiring PEF, or its SPC, is required to make an antitrust filing with the Korea Fair Trade Commission. Depending on the size of assets or sales of the acquirer and the target, a pre-closing filing, and clearance thereof, would be required.

15 Exit strategies


In general, there are no special legal limitations on the exit of PEF invest-ments. Having said that, publicly listing a private portfolio company of which a PEF is the majority shareholder as an exit strategy has traditionally been very difficult, and, to our understanding, no PEF has thus far exited such type of portfolio investment through an IPO in Korea. Although an IPO of such PEF-controlling portfolio company has recently become more achievable in light of recent initiatives by the government to deregulate PEF investment activities, such IPO nonetheless involves potential issues to exiting PEFs, such as the inability to receive a control premium, and has yet to be widely utilised as an effective exit mechanism in Korea.

In terms of addressing any post-closing recourse for the benefit of a buyer, escrowing a portion of the purchase price has been the most

prominent means, while there have been cases where the existing PEF’s general partner has offered a post-closing performance guarantee. In addi-tion, the use of mergers and acquisitions indemnification insurance has been increasing in Korea, albeit utilised in only a small number of transac-tions so far. The issues are generally similar in a sale by a PEF to another PEF.



In the case of an IPO of a Korean target, the existing shareholders’ agree-ment, if any, is typically amended to address the issues relating to the transition to, and operation as, a listed company. Transfer restrictions and other provisions granting certain rights to the minority shareholders in the existing shareholders’ agreement would generally survive an IPO, but the Korean stock exchange is likely to object to the inclusion of certain provi-sions (eg, provisions granting certain veto rights to the minority sharehold-ers) that it believes may improperly affect the post-listing management rights.

In terms of a lock-up, majority shareholders are typically subject to a lock-up period of six months or one year. For PEF minority shareholders, they would sell at least a certain portion of their shares through the IPO, and then, following the lock-up period, they would usually sell all or part of their remaining shares through secondary offerings.



There have been no industries typically targeted for PEF-involved, going-private transactions. However, companies with a stable cash inflow but fac-ing low growth prospects (and thus not requiring additional capital raising) have regularly become targets of going-private transactions in Korea. As discussed in question 14, acquisitions of financial institutions in Korea by PEFs, and acquisitions by foreign PEFs of targets in the defence and other specified industries are subject to regulatory restrictions.



Although there remain certain restrictions on foreign investment in certain industries, as discussed in question 14, investments in Korea by foreign PEFs are generally not restricted. While filings are required under foreign exchange or investment regulations, or both, most are typically fairly sim-ple and straightforward and the filings are routinely accepted upon submis-sion of appropriate documentation.

Update and trends

In foreign PEF exit transactions, there typically is much discussion and negotiation between the foreign PEF and the Korean tax authority regarding whether the foreign PEF’s capital gains and dividend income qualifies for a double-taxation exemption based on a tax treaty that Korea has entered into with the country where its holding company is incorporated. This arises due to a recent Korean Supreme Court ruling that recognised the limited partner of a fund established in a tax haven as the beneficial owner of the capital gains realised by the fund from the sale of shares of a Korean target. Controversially, the Korean tax authority recently began to impose capital gains taxes at the domestic corporate income tax rate on foreign PEFs which exited their investments prior to such Supreme Court ruling and had already paid such tax at the blended tax rate based on the tax residencies of

their respective limited partners. Furthermore, the Korean tax authority introduced the so-called Overseas Investment Vehicle (OIV) regime for Korean source income subject to reduced withholding tax rates under a relevant tax treaty (eg, dividends or interest) as of 1 July 2012 and for Korean source income subject to tax exemption under a relevant tax treaty (eg, capital gains) as of 1 January 2014 (an OIV is a foreign entity that raises funds through an investment offering, manages investment assets, derives value from such investments and distributes such derived value to its investors). Under the OIV regime, when Korean source income is paid to OIVs, OIVs would be examined and the ultimate beneficial owners would be subject to the applicable Korean taxes. These recent developments are currently being discussed and debated in Korea.

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In cases where the size of the acquisition is significant, we have often seen a club or group deal that is arranged by a lead PEF which would invite co-investors. Certain share transfer restrictions and rights, IPO rights and other exit-related rights, together with certain management rights that reflect such co-investor structure, are typical considerations in such deals. Further, depending on how such club or group deal is structured, there may be certain public disclosure and other regulatory implications, depending on whether the co-investors are deemed to be ‘acting-in-concert’.



In an acquisition transaction where a PEF is the buyer, the financing capa-bility of such PEF is usually the foremost consideration in terms of closing certainty. Especially in case of auctions, the seller typically imposes strict requirements (eg, the submission of a letter of commitment issued by a reputable financial institution or institutional investor, such as a pension fund) on PEF bidders, and financing concerns are closely examined prior to execution of the definitive agreements, which typically do not allow for a financing-out. Concern over failure by a PEF purchaser to fund the purchase price is sometimes resolved through termination fees but PEFs strongly resist such obligation. Where the parties agree to such termina-tion-fee arrangement, the bid or earnest money deposit (usually 5 to 10 per cent of the purchase price) typically serves as the liquidated damage for a breach of the purchaser’s obligation to consummate the contemplated transaction.

Do Young Kim [email protected] Jong Hyun Park [email protected]

39 Sajik-ro 8-gilJongno-guSeoul 110-720Korea

Tel: +82 2 3703 1114Fax: +82 2 737 9091/9092www.kimchang.com

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MexicoCarlos del Río, Carlos Zamarrón and Andrea RodriguezCreel, García-Cuéllar, Aíza y Enríquez, SC



The full array of private equity transactions have been structured and final-ised in Mexico in recent years. Most international private equity investors with a presence in Mexico tend to favour majority or control acquisitions, while local investors tend to be more flexible and open to acquiring minor-ity stakes. Transactions involving convertible debt and hybrid instruments are less prevalent.

Funds, and most specifically structured equity security (CKD) funds (which are publicly offered in order to be able to receive funds from Mexican pension funds), are formed as Mexican trusts established with a Mexican trustee. In turn, the funds are managed by a fund manager, typically as an SA or SRL. Trusts are also commonly used to raise funds from other domestic investors (ie, not pension funds). Foreign funds are typically channelled through foreign pass-through entities established and domiciled in jurisdictions with which Mexico has entered into a treaty to avoid double taxation (eg, the United States, Canada, the Netherlands, Belgium and Spain).

As far as investments are concerned, during the last 8 years the pref-erence was to have target companies incorporated as SAPIs, considering that the Securities Market Law (SML) exempted SAPIs from the applica-tion of certain restrictive provisions of the General Law of Commercial Companies (GLCC). With the most recent amendments to the GLCC, as of June 2014, the exemption allowing shareholders to execute sharehold-ers’ agreements wherein they freely negotiate investment and governance arrangements that were otherwise prohibited or limited under the GLCC (eg, voting restrictions, punitive dilution remedies, transfer restrictions, and liquidity and exit provisions) are now expressly provided for in the GLCC which amendments in these respect mirrored the SML. However, key differences between the SAPI and the SA remain, so careful thought should still be given to the vehicle of choice to be used as a portfolio com-pany that will best serve the interests and need of the investor. The most relevant differences are statutory minority shareholders’ rights given in each investment vehicle, the fact that SAPI is allowed to purchase its own shares and the shareholders’ right in the SAPI to limit or extend distribu-tion and other financial rights of any series of shares.

Notwithstanding the foregoing, US investors often insist on having target companies incorporated as SRLs, which the US Internal Revenue Service considers eligible for pass-through treatment in the US. However, in private equity transactions the SAPI gives the investor greater certainty in terms of the enforcement of minority rights and transfer restrictions, and ultimately its exit strategy through an initial public offering (IPO) or otherwise. SRLs cannot be listed on a stock market, hence precluding an IPO exit unless the SRL transforms into an SA.



Private equity transactions are subject to normal commercial law and fund managers are subject to normal performance requirements provided in commercial law for managers of any commercial company.

A company listed in the Mexican Stock Exchange that goes private would be released from all the statutory and regulatory requirements applicable to listed companies, such as corporate governance, reporting requirements and limitations on transactions entered into with insiders.

The corporate governance of a public company in Mexico remains unaffected after giving effect to a private equity transaction. However, there are many features of a typical private equity deal that cannot be implemented in Mexican publicly traded companies and that are incom-patible with the laws governing such companies. Under Mexican law, it is extremely complex to give effect to investor veto rights, supermajority protections, board appointment rights and transfer restrictions (eg, rights of first offer).



Generally speaking, for a public company in Mexico to go private, 95 per cent of their voting and non-voting shareholders would have to approve the delisting, and a public tender offer for the shares held by investors (ie, other than the controlling shareholders) must be launched at a price equal to the greater of:• the adjusted book value of the shares as of the latest reported quarter;

and• the weighted average of the share price (as quoted by the Mexican

Stock Exchange) during the previous 30 trading days within a maxi-mum period of six months.

The board of directors, within the 10 business days following the date on which the tender offer is launched, and after having heard the company’s corporate practices committee, must prepare and disclose a statement with respect to the price of the tender offer. Any director with a conflict of inter-est must abstain from issuing a vote with respect to the tender offer and all directors’ senior officers must disclose whether they are participating or not in the tender offer. The board’s statement may be delivered together with a fairness opinion issued by an independent expert retained by the board of directors at the request of the company’s corporate practices com-mittee or its audit committee.

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Likewise, if any person or group of persons (including a private equity fund) intends to acquire, directly or indirectly, through one or more simul-taneous or successive transactions, 30 per cent or more of a public com-pany, such person must carry out a public tender offer to purchase the corresponding shares for specific percentages up to 100 per cent, if such person intends to acquire control of the public company, which may be waived by the Mexican Banking and Securities Commission (CNBV) and if, among other things, the board of directors of the target, with the prior opinion of the corporate practices committee, so agrees. Once such a ten-der offer is launched and until the corresponding expiration date, the public company, its directors and officers must refrain from entering into transac-tions affecting minority stockholders. Similarly to a going-private tender offer, the board of directors must, after having heard the company’s corpo-rate practices committee, prepare and disclose a statement with respect to the price of the tender offer, which may be coupled with a fairness opinion issued by an independent expert retained by the board of directors at the request of the audit committee. Additionally, the directors and senior offic-ers must disclose whether they are participating or not in the tender offer.

Since one of the main safe harbours relating to the compliance of fidu-ciary duties by directors of a public company is a reliance on the opinion of independent experts, it is common to see such opinions being requested by the board.

Any transaction between the public company and a ‘related person’, such as senior management, members of the board or significant share-holders, must be cleared by the board of directors (with no participation from directors having a conflict of interest in connection therewith) with the prior opinion of the company’s corporate practices committee.

4 Disclosure issues


There are no specific disclosure issues in connection with going-private transactions or other private equity transactions involving a public com-pany; however, the general rules relating to non-public material infor-mation (ie, no one in possession of non-public material information may trade on the related securities, transfer such information or tip anyone off in connection therewith) is particularly relevant when the public company itself is acting as purchaser or seller of its own shares, such that the public company must disclose to the public all price-sensitive information before entering into any going-private transaction or any other private equity transaction.



Depending on the nature of the assets held or of the industry or sector in which a company carries on its business activities, that company requires certain regulatory approvals to carry out the transaction. In addition, the thresholds set forth under Mexican antitrust laws should be reviewed to determine whether or not the contemplated transaction requires approval from the antitrust authority.

For a going-private and private equity transaction involving a public company that requires the launch of a tender offer, the prior authorisation of the CNBV is also required. Typically, the authorisation process takes between four and six weeks. Once authorised, the tender offer must last for no fewer than 20 business days.



Shareholders of public companies have the right to dissent or object to a going-private transaction. As explained in question 3, voting and non-voting shareholders representing at least 95 per cent of the capital stock of a public company must approve the delisting thereof. Accordingly, vot-ing and non-voting shareholders representing more than 5 per cent of the capital stock of a public company have the right to veto a going-private transaction.

Generally speaking, dissenting shareholders representing more than 5 per cent of the capital stock of a public company may oppose a going-private transaction either by not approving the delisting of the company at the rel-evant shareholders meeting, or not attending such meeting. Additionally, holders of 20 per cent of the outstanding shares may judicially oppose reso-lutions that were passed by a shareholders’ meeting and file a petition for a court order to suspend the resolution, which would include opposing the resolution to delist the company when adopted in violation of the by-laws or the Mexican Securities Market Law. Such judicial opposition must be filed within 15 days following the adjournment of the meeting at which the action was taken, expressing the article or section of the Mexican law or the company’s by-laws being violated, and the opposing stockholders must either not attend the meeting or vote against the challenged resolution.

Typically, the effectiveness of a tender offer intended to take a com-pany private is subject to the condition that shareholders representing at least 95 per cent of the capital stock of the target tender their shares, or any other lower percentage that ensures that the offeror will be able to approve, along with other shareholders, the delisting of the company.



Generally speaking, Mexico has followed the US and other foreign private equity markets in connection with the typical provisions found in purchase agreements of private equity transactions which include the execution of shareholders’ agreements and the amendment of the target’s by-laws to implement corporate governance and other private equity provisions (please see question 13).

As mentioned above, purchase agreements will generally also include a provision of conditions for closing of the transaction, addressing, among others, the possible need to obtain the approval of Mexico’s antitrust authority as well any other third party consents that may be required.

Purchase price adjustments, holdbacks, earn-outs, carve-outs, cash-outs and escrow arrangements are all provisions commonly used in Mexican practice to adjust the purchase price and reassure the purchaser that it will be indemnified from any losses or purchase price adjustments or reassure the seller that sufficient funds to pay the purchase price exist.

As far as governing law is concerned, foreign private equity investors increasingly allow Mexican law to govern the purchase agreement as well as the shareholders’ agreement. However, US private equity investors often insist on New York law as the governing law of the transaction agree-ments (including the escrow agreement) but, when they accept Mexican law, disputes are almost invariably submitted to commercial arbitration outside of Mexico.



Other than what was discussed in question 3 (regarding disclosure require-ments from senior officers and directors of the public company), the SML does not impose restrictions on the participation of managers of the target company in going-private transactions.

9 Tax issues


From a due diligence perspective, investors place great emphasis on tax compliance, tax inspections, tax contingencies and the tax liabilities of the target company, and often negotiate special indemnities dealing with any such liabilities that have the sponsors indemnifying the investor from any and all pre-closing tax liabilities during the applicable statute of limitations.

As far as structuring the investment is concerned, significant attention is placed on ensuring that the amounts invested are recognised as a basis



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for the purposes of calculating capital gains at the time of exiting invest-ments. Foreign investors devote a lot of time to structuring the appropri-ate investment vehicles, and taking advantage of favourable tax treaties to which Mexico is a signatory, potentially exempting sale transactions from taxes in Mexico, but always supporting the structuring with real and con-crete business reasons. As of January 2014, dividends are subject to with-holding taxes in Mexico at a rate of 10 per cent.

In the event of transactions involving shareholder loans, thin capitali-sation rules must be complied with to ensure the deductibility of interest payments, and investors should be mindful of withholding taxes on inter-est, which may range from 4.9 per cent to 40 per cent, and Mexican law does contain strict back-to-back loan provisions that may characterise an interest payment as a non-deductible dividend distribution.

Generally speaking, golden parachutes and stock options granted to certain officers of the Mexican entity, either by the parent company or by such Mexican entity, are treated as salary for Mexican tax purposes. It is common practice for Mexican entities to grant certain additional retire-ment schemes and compensation plans to those established in the Mexican Labour Law. Such plans are generally structured through trusts for the ben-efit of the officers and employees. Also be mindful that the Mexican law contains a mandatory profit distribution of 10 per cent to the employees of the company.

From a Mexican legal and tax perspective, in general terms, a share acquisition cannot be classified as an asset acquisition; however, purchas-ers should be mindful that the opposite may occur if, in an asset deal, the acquisition involves all of the assets of the relevant business of the seller (the asset acquisition is considered as an acquisition of the going concern), in which case the tax liabilities and claims follow the assets and the buyer may be statutorily jointly liable with the sellers for any unpaid taxes of pre-vious fiscal years.



Funding of private equity investments is relatively straightforward. Most transactions are funded through direct capital contributions pursuant to capital increase resolutions adopted by the shareholders’ meeting of the target company. Where investors require distributions on their invest-ment on a ‘current basis’ and don’t merely rely on annual dividends, then, subject to applicable thin-capitalisation and transfer pricing rules, some investments provide for a combination of direct capital contributions in exchange for shares or interest in the target company and shareholder loans. In the case of buy-outs, transactions are typically structured as stock purchases or redemption transactions.

With respect to leveraged buyouts (LBOs) in Mexico, the main consid-eration in structuring such transactions depends on the ability of the target companies to pay dividends and make distributions to its shareholders on a current basis to service acquisition loans. Hence, when structuring LBOs in Mexico, it is paramount to incur the acquisition financing at the level of the operating target companies, or to somehow restructure the debt after the closing so that the operating entities can actually service the debt without having to deal with the tax and other timing restrictions applicable to divi-dends under Mexican law. Also, in pricing acquisition financing, investors have to consider applicable withholding taxes on interest payments made to foreign lenders, and the potential incremental cost they represent in terms of gross-up provisions.



The source of funds used to finance a going-private transaction must be disclosed in the tender offer documentation.

As far as specific provisions are concerned, one of the most contro-versial sections of the loan documents for any private equity deal, includ-ing going private transactions, is the conditions to drawdown section and specifically the material adverse effect (MAE) or material adverse change

(MAC) condition that directly affects the certainty of funds. It is hardly ever the case that the definition of MAE or MAC in the purchase agree-ments matches the definition in the loan documents and therefore the ‘gap’ is generally a risk that the private equity investor is asked to assume. In the context of a cross-border deal, the definition of MAE or MAC becomes even more complex when negotiating political or national risk language within the agreement. Having said that, we see that private equity investors are generally more comfortable with the legal and related risks involved in private equity transactions. Increasingly, investors focus on returns and less on country risk.



Private equity transactions involving leverage may raise the same ‘fraudu-lent conveyance’ issues under the Mexican Insolvency Law as any other form of acquisition or investment, if:• the terms and conditions of the transaction are clearly or materially

below market;• the transaction is completed within 270 calendar days (may be

extended) before the date of the insolvency judgement;• after the transaction, the target complies with the following insolvency

standards:• the target defaults in its payment obligations with two or more

creditors; and• on the filing date of the insolvency request, 35 per cent or more of

the company’s liabilities have been delinquent for more than 30 days; and

• the target does not have sufficient liquid assets to pay at least 80 per cent of its due and payable liabilities on the date of filing of the insol-vency request.

The risk of fraudulent conveyance is mitigated through due diligence, rep-resentations, warranties and ultimately indemnities.



Private equity transactions typically contemplate the establishment of specific governance rights for the applicable minority, such as the right to appoint a specific number of board members and members to applicable committees, the right to approve a negotiated list of ‘major decisions’ at the board or the shareholders’ meeting, and the right to receive periodical financial information.

Shareholders’ agreements also include provisions dealing with spe-cific rights of different classes of shares held by the private equity investor with respect to:• pre-emptive rights to subscribe and pay capital increases;• board, committee member and surveillance appointments;• available exit strategies (ie, registration rights in the Mexican Stock

Exchange and the possibility of an offering outside of Mexico, includ-ing Rule 144A/Regulation S offerings, are common together with pig-gyback rights);

• shareholder non-competes;• dividend policy; and• transfer restrictions (ie, ROFO, ROFR, lock-up periods, drag- and tag-

along rights).

These rights are in addition to certain statutory minority rights, which include the right to appoint board members based on a certain percentage of shares held (eg, 10 per cent in the case of a SAPI or SAB and 25 per cent in case of an SA), and the need to obtain a supermajority vote in the case of certain decisions (eg, admission of new partners to an SRL, the transfer of equity interests issued by a SRL or the approval of any amendments to the target’s by-laws).

Finally, when considering a minority interest investment in Mexican companies, private equity investors in closed corporations should note

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that the GLCC imposes very limited obligations on a company in terms of preparing and delivering financial and operating information to the share-holders. Therefore, investors need to specifically outline the nature of the information that the investment vehicle should produce and deliver, but also the process that must be followed by the parties in order to inspect books and records and to access the company’s facilities and management, so as to ensure that it will have full access to the company’s information.



Yes. Mexican securities law allows public companies to include anti-take-over devices in their by-laws. A typical anti-takeover device would require that any acquisition of shares resulting in beneficial ownership of shares representing more than a certain percentage (typically 5 per cent) of the outstanding shares of a public company to be approved by the board of directors; whose approval or rejection must be announced within three months. Normally, shares acquired in violation of an anti-takeover pro-vision would have no voting rights. In addition if, upon granting of the approval, any potential purchaser would acquire shares resulting in ben-eficial ownership of 30 per cent or more of our shares, a tender offer would have to be launched, as discussed in question 3.

15 Exit strategies


Mexico has seen the full spectrum of exit transactions for private equity investors. The type of exit depends on the prevailing economic cycle in Mexico and globally, as well as the industry and target company in ques-tion and the size of the stake. There are many examples of exits through the capital markets as part of a global primary and secondary offerings, most often through a public offering in Mexico and a placement outside of Mexico pursuant to Regulation S and Rule 144A of the US Securities Act 1933. In the case of IPO exits, the most important hurdle faced by private equity sellers, is ensuring due and timely execution of the IPO process by the company (normally addressed through Registration Rights Agreement) and agreeing on the governance of the company post-IPO (eg, poison pills). Likewise, there exist many and varied examples of private equity investors exiting through buy-outs, in some cases by another private equity investor and more commonly by a strategic buyer. As to the post-closing recourses for the benefit of buyers, private equity firms commonly require indem-nification covenants that are usually guaranteed by escrow agreements with respect of a portion of the purchase price paid by the buyer. When the selling party is also a private equity fund, escrow arrangements are quite standard, and aggregate liability is typically capped at the escrow amount without any further recourse other than in the case of fraud.



Once the company is public, the statutory principle is that all shareholders, including the public, must be treated equally to the extent they hold the same securities. Hence, when the issuer has a single class of shares, most shareholder rights would not survive, only offered pro rata to all sharehold-ers, including public shareholders. In practical terms, this means that veto rights and board appointment rights given to a specific shareholder can-not survive an IPO. Transfer restrictions, such as rights of first offer and tag-along rights can only survive to the as among specific shareholders

signing a properly disclosed shareholders agreement. Such sharehold-ers agreements are not binding on the company. Generally underwriters impose 180 day lock-up on shareholders of a company launching an IPO. The method to dispose of residual shares depends largely on the size of the stake, but they include follow-on secondary public offerings, private place-ments, block trade and periodic sales through the open market exchange. In all cases, such sale efforts must be mindful of insider trading regulations relating to the use of material non-public information.



Real estate, consumer products and infrastructure are popular industries for private equity funds. A significant number of CKD funds are expressly focused on real estate and infrastructure. However, funds have increas-ingly focused on diverse sectors including education, health care and hos-pitality. Other than the foreign investment restrictions (please see question 18), which are relevant for foreign private equity funds, there are no regu-latory restrictions that specifically limit targets for private equity transac-tions. However, it is important to consider that some sectors are subject to specific regulatory oversight and approval requirements from the fed-eral government. Such sectors include telecommunications, transporta-tion, electricity, gas, oil and petrochemical sectors, and financial services, among others. Each approval process is specific to the industry, although a common feature is that the approval is not subject to a deemed approval, and must be issued in writing by the competent authority.

The vast majority of going-private transactions in recent years in the Mexican market have been made by the existing controlling shareholders rather than as a result of an acquisition by a third party, and have included all sorts of industries.

From 2014 onwards we expect to see an increase in strategic mergers and acquisition activity by local and foreign companies seeking alterna-tives within Mexico to increase their market share, which may prove to be another exit possibility for private equity investors.



In addition to customary due diligence items that apply to all mergers and acquisition transactions (whether stock or asset acquisitions), private equity investors need to take special care with respect to the possible tax effects of the transaction (see question 9), third-party consents and regula-tory approvals required to consummate the transaction, including antitrust approval (see question 20) and foreign investment restrictions as well as other closing conditions.

In connection with foreign investment restrictions, the Mexican economy is largely open to foreign investment and very few sectors remain subject to specific restrictions. Among the structural reforms that have recently been enacted, the labor, amparo (constitutional appeal), telecom, antitrust, energy and tax reforms are of special relevance to foreign private equity investors. Further changes to the Foreign Investment Law and its regulations are expected this year, as a result of the most recent amend-ments to the Mexican Constitution carried out through 2013, including the financial, telecom, antitrust and energy reforms.

In general, under the Foreign Investment Law and its regulations, for-eign investors may invest in both listed and unlisted Mexican companies, subject to a limited number of restrictions on investment in certain eco-nomic sectors which are, under the law, specifically reserved for Mexican nationals or the Mexican government. Up to 100 per cent foreign invest-ment is accepted in companies and activities, except for the specific for-eign ownership limitations in sectors that are specifically set forth in the law and for which different investment thresholds apply (eg, 10 per cent, 25 per cent or up to 49 per cent). Thus, foreign private equity investors need to take foreign investment laws and its regulations into account during the initial phase of any project in order to ascertain that the investment in any given sector is viable. Other than such specific limitations on foreign investment participation, the Foreign Investment Commission also needs to approve any proposed investment by foreigners in a company whose



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assets are worth in excess of the Mexican pesos equivalent of approxi-mately US$200 million.



For club or group deals, the most important issue is how decisions are made within the investor group, which rights are conferred individually to each investor and which rights must be exercised by the group unani-mously or by a specific majority of investors (eg, drag-along rights, demand registration rights). In addition, special consideration must be made where investors require specific forms of reporting by the portfolio company (eg, financial information pursuant to more than one set of accounting stand-ard). Where the investors agree to act as a block relative to the other share-holders of the portfolio company, they may forego certain capital gains exemptions at the time of exit.



The most important issues as to the certainty of closing are related to the transaction’s authorisation by the Mexican antitrust authority (which may be required if the transaction reaches any of the pre-merger filing mon-etary thresholds provided in Mexican Competition Law) and other gov-ernmental authorisations that may be required for investments in foreign

investment-restricted sectors or sectors subject to specific regulatory oversight (eg, telecommunications, transportation, electricity, gas, oil and petrochemical sectors, and financial services). These issues are usually resolved by closing conditions and termination rights if such authorisa-tions are not obtained within a certain period.

Additionally, closing is usually conditioned to obtain the relevant corporate authorisations from both parties and the targets’ shareholders’ meeting (if required), to obtain third party consents required under mate-rial agreements for the target’s business, and to the absence of a material adverse effect. As mentioned in question 11, the negotiation of the MAE or MAC definition is somewhat difficult, because of the allocation of risk it entails to the parties.

If problems or contingencies were identified during the diligence pro-cess, corrective measures may sometimes need to be taken before closing the investment. Accordingly, provisions can be carefully drafted in the agreement to establish obligations to correct any problems so that, at the time of making the investment, such problems are solved or the correc-tion measure is waived by the private equity investor. Special care should be taken when drafting such conditions in order for them to be valid and enforceable under Mexican law; for example, counsel should keep in mind that the fulfilment or compliance of such conditions does not unilaterally depend on one of the parties, to avoid any risk of such condition being ren-dered null and void.

Finally, it should be noted by counsel that termination fees and break-up fees are not common in Mexico; however, the parties tend to agree on setting forth on a right by either party to receive a reimburse-ment of expenses incurred upon termination by the other party in certain circumstances.

Carlos del Río [email protected] Carlos Zamarrón [email protected] Andrea Rodriguez [email protected]

Paseo de los Tamarindos 60, Piso 3Col Bosques de las Lomas05120 Mexico CityMexico


Streamsowers & Köhn NIGERIA


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Tamuno Atekebo, Eberechi Okoh, Omolayo Longe and Adebisi SandaStreamsowers & Köhn



Private equity (PE) transactions in Nigeria can generally be classified into venture capital, growth capital and buyouts (including management buy-outs). Available structures commonly used for private equity investments are equity investments and quasi-equity investments, which would include taking preferred stock by the private equity fund entity.

Limited liability companies and limited partnerships are most typi-cally used as investment vehicles for PE investments.



Unlike public companies, there is no statutorily imposed code of corpo-rate governance applicable to private companies in Nigeria irrespective of whether such a private company has private equity participation or not. Corporate governance issues in private equity-backed private companies or indeed any other private company in Nigeria are generally addressed by contractual agreements, memorandum and articles of association subject to the Companies and Allied Matters Act (CAMA) and any code of corpo-rate governance rules adopted by the company.

With respect to public companies, there is a mandatory Code of Corporate Governance applicable to all public companies and compa-nies seeking to raise funds from the capital market. The Securities and Exchange Commission (SEC) rules and regulations are applicable to public companies and these rules make substantial provisions for disclosure and reporting requirements. In addition, there are regulatory and disclosure requirements if the public company is listed as such companies are also subject to the Listing Requirements of the Nigerian Stock Exchange (NSE).

There are obvious advantages when a public or listed company goes private as this means less regulation and reporting. However, it should be noted that it is not a common practice to have companies going private as a result of private equity investments whether in a leveraged buyout or any other transaction.

Where a target company with private equity participation remains or becomes a public company, such company will be required to adhere to the Code of Corporate Governance for public companies in Nigeria. These rules are made by the SEC to facilitate sound corporate practices and behaviour. Although the Code of Corporate Governance states that it is not a set of rigid rules, it mandates public companies to indicate their level of compliance with the Code of Corporate Governance in their annual reports.



One major issue that may be faced by the board of directors of a public company entering into a PE transaction is that of ensuring that each of the directors of the company carry out the fiduciary duties as prescribed by CAMA. Some of the fiduciary duties of the directors include a duty to act in good faith, exercise independent judgement, act in the best interest of the company as a whole – so as to protect its assets and promote its business – and avoid conflict of interest, thus mandating that directors declare any interest in any proposed transaction or arrangement.

Conflict of interest may arise where a director has a personal interest in the private equity transaction and such director is obligated to disclose any such conflict or potential conflict of interest. In addition to the require-ments of CAMA on disclosure of conflicts of interest by directors, compa-nies generally have provisions in their articles of association or another document dealing with issues of conflict of interests regarding the board, management and other personnel of the company. This situation needs to be handled properly by the board to avoid the exploitation of any infor-mation or opportunity of the company. A special committee of the board, which may consist of independent non-conflicted directors, may be consti-tuted for this purpose. The special committee will be charged to objectively oversee, review and authorise the private equity transaction on behalf of the company.

4 Disclosure issues


There are no rules or regulations mandating disclosures specific to private equity transactions. However, in a going-private transaction, the provi-sions of the Listing Requirements of the NSE require that the company make certain disclosures with respect to such transactions to its sharehold-ers and to the NSE.

A company to which a takeover bid has been made is required to pro-vide sufficient time and information to all its shareholders to enable them to reach a properly informed decision in respect thereof. Such disclosures are required to be prepared with the highest standard of care and accu-racy and must contain all information relevant to the transaction. Further, listed companies are required to ensure that investors and the public are kept fully informed of all factors that might affect their interest and to make immediate disclosures of any information that may have material effect on market activity in, and the prices or value of, listed securities as well as details of any major changes in the business or other circumstances of the company to shareholders and the NSE. The NSE requires all listed companies to maintain publicly assessable websites whereon companies are required to display conspicuously, information submitted to the NSE.

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The Listing Requirements of the NSE stipulate, among other things, that in order for a public company to voluntarily delist its securities from the NSE, the prior approval of the shareholders must have been obtained by way of a special resolution passed at a duly convened meeting of the company. The company must have given its shareholders at least three months’ notice of the proposed withdrawal of the listing including the details of how to transfer the securities. The public company going private must also give the shareholders who so elect, an exit opportunity before the shares are delisted.

SEC Rules mandate a public company seeking to delist to notify the SEC of its intention to delist. The NSE is also required to consider and dispose of the application within 10 days and notify the SEC when it is approved.



As with all transactions, the time within which the parties involved in a transaction wish to conclude the transaction is one of the primary con-siderations for private equity transactions. Secondary to this are consid-erations of the time within which proper due diligence exercises can be concluded and the length of time required for the formation or structuring of the vehicle to be used for the execution of the transaction. Sector regula-tory approvals and sector-specific regulations also form part of key timing considerations of private equity transactions.

With respect to going-private transactions, a company seeking to vol-untarily delist from the NSE is required by the Listing Requirements to have been listed on the NSE for a minimum of three years prior to when it seeks to delist. Consequently, private equity investors seeking to go into a private equity transaction with a public company that has been listed on the NSE for less than three years will have to factor in this timing require-ment with respect to voluntary delisting. The SEC Rules require the NSE to consider and dispose of applications to delist within 10 days.

Where a private equity transaction involves a takeover, the offeror is required by the Investments and Securities Act (ISA) and the SEC Rules to seek the approval of the SEC as well as register the proposed bid with the SEC prior to making a takeover bid. Where the approval is granted, the offeror is required to make the approved bid within a period of three months following the date of approval. The offeror may thereafter apply for an extension of this period before the expiration of the three-month period. Where a takeover bid is made for all the shares of a class in an offeree company, the offeror is proscribed from taking up shares deposited pursuant to the bid until 10 days after the date of the takeover bid. Where the bid is made for less than all the shares in a class of the offeree com-pany, the offeror is proscribed from taking up shares deposited pursuant to the bid until 21 days after the date of the takeover bid. A takeover bid is required when the shares being acquired are not less than 30 per cent of the shares of the company.

Further, delays caused by issues such as the rights of dissenting shareholders may form part of the timing considerations in private equity transactions.



Shareholders who do not accept the terms of a going-private transaction may vote against it at the general meeting of the company at which the issue is considered or may choose not to accept a takeover offer. However, where a takeover offer is accepted by the shareholders of a company hold-ing not less than 90 per cent of the shares of the company or the class of shares in respect of which the bid is made, the dissenting minority share-holders’ shares may be bought by the offeror at the same price as the other shares or at fair market value after notifying the dissenting shareholders of its intention to do so.

Shareholders, personal representatives of deceased shareholders and persons to whom shares have been transferred or transmitted by operation of law who dissent or wish to object to a going-private transaction can make an application to court to restrain the company from going private on the

ground that such an act would affect the individual right of the shareholder as a member.

Further, shareholders, personal representatives of deceased share-holders, persons to whom shares have been transferred or transmitted by operation of law, directors, officers, former directors, former officers and creditors of the company, as well as the CAC, are also empowered to apply to court to object to a going-private transaction. Such an application may be sustained only where it can be shown that proceeding with the transac-tion is:• illegal, oppressive, unfairly prejudicial or in disregard of interests of

a member or members in the case of an application by a shareholder, personal representative of a deceased shareholder and persons to whom shares have been transferred or transmitted by operation of law;

• oppressive, unfairly prejudicial or discriminatory to such director, officer, former director, former officer or creditor of the company; or

• oppressive, unfairly prejudicial or discriminatory against a member or members in a manner that is in disregard of public interest in the case of an application by the CAC.

To deal with any issues that may arise from shareholders dissent to going-private transactions, acquirers are careful to comply with the relevant pro-visions of the law and regulations so as not to create possible grounds upon which the transaction may be challenged.



As with other transactions, the provisions of purchase agreements will depend on negotiations between the parties. Provisions on issues such as warranties, default, anti-dilution, redemption or conversion of preferred equity, composition and powers of the board and management of the com-pany, matters exclusively reserved for a shareholders’ decision, finance and accounting regime, non-compete, confidentiality and disclosures, tag-along and drag-along rights, exit options and corporate governance obli-gations are often prominently featured in purchase agreements for private equity transactions.



One of the concerns of private equity investors includes ensuring that the interests of management align with the interests of the investors with a view to the growth of the company. To this end, management of the offeree company may be required to execute employment agreements with non-compete and confidentiality provisions. Further, the terms of employ-ment of management may constitute part of the pre-closing covenants in a going-private transaction such that management participation and com-pensation issues are dealt with prior to the completion of the transaction.

Timing considerations for the participation of management in a going-private transaction are often a product of the provisions of the purchase agreement entered in respect of the transaction.

9 Tax issues


The tax issues involved in a PE transaction depend on the structure of the transaction. Where a PE vehicle is registered as a partnership, the indi-vidual partners will be liable to pay tax on their income. Limited liability companies, on the other hand, bear the tax as an entity while the individual investors (which could be corporate or individual) are liable to tax on their investment income. Income such as dividends, interest and management fees are subject to withholding tax. For non-resident investors, such taxes



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withheld are treated as their final tax obligation. Other tax liabilities attach-ing to investors will depend on the exit model the PE transaction adopts. For instance, management fees will incur withholding tax, carried interest will incur capital gains tax, institutional investors will be liable to corpo-rate taxes and individual investors will be liable to personal income tax. Note that interest on foreign loans that have a repayment period (including moratorium) of two years and above enjoy tax exemption. The rate of the exemption ranges from 40 per cent to 100 per cent and is subject to the grace period allowed.

Following an amendment to the Capital Gains Tax Act, capital earned from the sale of stocks or shares is not subject to capital gains tax. Prior to the amendment, distributions made following a sale of shares were consid-ered as flowing from a sale of assets and were subject to capital gains tax at a rate of 10 per cent. Currently, such capital earnings (following a sale of shares) will thus be taxed under the relevant income tax laws.

Targets that are incorporated as companies are taxed under the Companies Income Tax Act. For companies that record losses and compa-nies operating in specified sectors (with the exception of small companies), company profits will usually be taxed at the rate of 30 per cent. In Nigeria, interest payment on sums borrowed and employed as capital in acquir-ing profits is tax deductible. Consequently, some businesses prefer debt financing to equity financing to enable them to benefit first from the loan and subsequently from the tax deductibility of interest payments. Equity financing, whether in the form of preferred or ordinary stocks, will enti-tle the shareholders to dividends that will be subject to a 10 per cent with-holding tax. Upon deduction of the withholding tax, such dividend will be treated as franked investment income.

It is noteworthy that the Personal Income Tax Act treats compensa-tion for loss of employment as non-taxable income; however, it will be tax-able under the Capital Gains Tax Act if it qualifies as ‘a capital sum derived by way of compensation for loss of employment’. Deferred compensation plans can be structured to enjoy tax-exempt status. Generally, plans pat-terned as pension payments will not be subject to tax.



Depending on the structure of a private equity transaction, loans may be sought to finance a PE transaction and such loans may be senior or sub-ordinated though most likely senior debt. Foreign loans are subject to the relevant foreign exchange regulations and may be brought in through approved channels to enable repatriation of repayments.

Existing indebtedness of a potential target would play a role to the extent of the priority ranking of such debts and whether or not such debts are being serviced at the time of the proposed private equity transaction. As part of the structure, it may be decided to either keep or repay the existing indebtedness depending on how such repayment may affect the cash flow of the target company. The consent of the provider of the exist-ing indebtedness would usually be required before the any new financing would be taken by the company.

There are restrictions under CAMA on the provision of financial assis-tance by a company whether by way of loan, guarantee, security, indem-nity or any form or credit in relation to the acquisition of its own shares. There are also restrictions on margin loans.



The financing provisions will depend on whether the structure is pure equity, debt, quasi-debt or leveraged or a combination. As such it could range from fairly straightforward to very complex documentation. In practice, banks have traditional provisions that govern the various facili-ties they offer. However, it is not unusual to have debt and equity finance raised from institutional investors who are not banks. Such provisions will, however, be subject to public policy and governmental regulations where applicable. It is also important that the financier or investor ensures that

the target has complied with all CAC requirements and filings for a going-private approval.

In a debt and equity financing arrangement, provisions creating con-ditions precedent to the investment are very usual, following the outcome of due diligence on the target entity. Further, provisions on redemption of shares, pre-emptive rights, restrictions on indebtedness, tenor, interest rate, reporting requirements, obligation of parties, tag-along rights, drag-along clauses, share transfers, anti-dilution and closing or exit, among others, are typical. The documentation may include investment or loan agreement, share sale and subscription agreement, sale and purchase agreement and shareholders agreement.



Some transactions made prior to an insolvency may be avoided under cer-tain circumstances, for example conveyances, mortgages, payments or other acts relating to property that amount to a fraudulent preference of creditors. Also, any conveyance or assignment of all of a company’s prop-erty to trustees for the benefit of all its creditors shall be void.

These concerns are often mitigated with representations and warran-ties by the target company that there are no ongoing, threatened or immi-nent winding-up or liquidation proceedings and that a receiver or manager has not been appointed with a provision for indemnity upon breach. The scope of the warranties would further be determined by the outcome of the due diligence on the target company.



To protect the interest of minorities, a shareholders’ agreement may pro-vide that certain decisions may be taken only if approved by a supermajor-ity or qualified majority of the body or organ of the company making the decision. The voting threshold would therefore typically include an affirm-ative vote from a part of the minority. Such matters may include decisions as to the issuance of new shares, increase in share capital, acquisitions, dis-posals, mergers, borrowing and giving guarantees or security, related party transactions, approval of budgets, change of business plan and alteration of the constitution. The agreement may also make provision for breaking deadlocks.

There is also some statutory protection under CAMA. CAMA requires a special resolution (a resolution passed by not less than three-quarters of the votes cast) of shareholders to take the following decisions:• a change of name of the company;• an alteration of the articles of association;• a change of the objects of the company;• variation of class rights;• rendering the liability of the directors unlimited; and• an arrangement or reconstruction on sale of the assets of a company.



A take-over bid is required where a person intends to acquire 30 per cent or more of the voting rights in a public company irrespective of whether it was acquired in a single transaction or a series of transactions over time. A takeover bid can be made only if the SEC grants authority to proceed to that effect. In deciding whether or not to grant authority to make a takeover bid, the SEC would consider the likely effect of the proposed takeover bid on the economy of Nigeria and on any policy of the federal government with respect to manpower and development. A takeover bid shall not be made to fewer than 20 shareholders representing 60 per cent of the mem-bers of the target company, but it can be made to such a number of share-holders holding in the aggregate a total of 51 per cent of the issued and paid

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up capital of the target company. There is no need for a takeover bid where the shares to be acquired are shares in a private company.

In a private company, any requirements for the acquisition of control will be governed by the provisions of the articles of association of the com-pany and any shareholders agreement entered into by the shareholders of the company.

15 Exit strategies


Contractual limitations on the ability of a private equity firm to sell its stake in a portfolio company or conduct an IPO of a portfolio company may include provisions such as pre-emption rights, tag-along rights, restrictions on drag-along rights and put options. These rights are usually embedded in shareholders’ agreements.

Also, listing requirements may limit the ability of a private equity firm to sell its stake in a portfolio company or conduct an IPO of a portfolio company. To list on the Main Board or on the Alternative Securities Market (ASeM) of the NSE, promoters are required to retain 50 per cent of shares held at IPO for the first 12 months from the date of listing.

Further, with respect to the Main Board, the company to be listed must have a cumulative pre-tax profit of at least 300 million naira for the last three fiscal years with a pre-tax profit of at least 100 million naira in two of these years and a market capitalisation of not less than 4 billion naira at the time of listing, calculated using the listing price and shareholders’ equity. Listing on ASeM does not have these requirements.

With respect to listing on the Main Board, a minimum of 20 per cent of share capital must be offered to the public and held by at least 300 share-holders. In listing on AseM, a minimum of 15 per cent of share capital must be offered to the public and held by at least 51 shareholders.

Contractual time limitations may be agreed with respect to represen-tations or warranties, or both, given by a private equity firm to a buyer. A private equity firm investing in a portfolio company would usually require warranties from sellers and from the management team of the target com-pany. The said warranties may relate to compliance with applicable laws, the power to contract, title to shares and to assets.



The holdings of the existing shareholders may be restructured for purposes of the IPO and some of the governing rights of the shareholders will sur-vive the IPO such as representation on the board and non-compete rights. However, the company will now be subject to more regulations including the ISA, SEC Rules and Regulations, Listing Requirements and Code of Corporate Governance among others.

In respect of lock-up restrictions, the Listing Requirements provide that the issuer in respect of an IPO to the Main Board of the Exchange shall ensure that the promoters and directors will hold a minimum of 50 per cent of their shares in the company for a minimum period of 12 months from the date of listing and will not directly or indirectly sell or offer to sell such securities during that period.

Subject to the lock-up restrictions, private equity sponsors or investors may dispose of their stock through a buyout, which may be by another PE entity, institutional investor or the management.



There are not many going-private transactions in Nigeria as there are few instances of public companies that have gone private, although foreign investors who want to strengthen their control of, and investments in, the companies tend to want to go private.

Transactions involving companies in some sectors such as telecom-munications, electricity, insurance, financial services and the petroleum industry will be subject to further industry-specific regulation. It is yet to be verified that industry-specific regulations have limited the potential tar-gets of private equity firms, even though such regulations make the process more elaborate.



There are very few financing concerns that are unique to cross-border pri-vate equity transactions. These include tax considerations and importation of capital. Where capital is to be imported in a PE transaction, the inves-tors require a certificate of capital importation that is issued by the bank within 24 hours after the entry of the capital into the country. There are no foreign investment restrictions on cross-border private equity transactions in Nigeria except for certain industries in which private investment, both local and foreign, is prohibited except with a licence from the federal gov-ernment (for example, defence).



There are no restrictions preventing multiple private equity firms, or a private equity firm and its strategic partner, from participating in a club or group deal.

The concerns, however, depend on the relative size and interests of the parties to the transaction. In a takeover context, a key consideration for parties to such transactions is that they will likely be scrutinised for the pur-poses of assessing whether the obligation to make a mandatory takeover offer is triggered. The threshold for triggering this obligation is an aggre-gate holding of 30 per cent of the voting shares.

Update and trends

In recent times, Nigeria has experienced a significant increase in the number of private equity firms as well as transactions in various sectors. Substantial progress has also been made on several fronts to encourage private investments, including foreign investment, in Nigeria. In the area of corporate governance, progress has been made to reduce the multiplicity of corporate governance codes. The Financial Reporting Council under the Minister of Industry, Trade and Investment is currently working on implementing a National Code of Corporate Governance to replace the multiple codes applicable to various industries. Also, accounting and local securities regulations have seen significant improvements.

There have also been several initiatives by the SEC and the NSE to facilitate the listing of companies as well as trading in unlisted securities of public companies.



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Several issues may arise during the closing of a PE transaction. Such issues may include failure to obtain mandatory clearances or regulatory approvals

and failure to satisfy financing closing conditions such as the provision of a comfort letter issued to the buyer by its lender. Where these closing issues arise, the non-defaulting party can grant an extension of time, with or without a provision for costs, to enable the resolution of the issues, or it can terminate the agreement in accordance with its terms. In the latter instance, the inclusion of a reverse termination fee clause in the agreement will be prudent.

Tamuno Atekebo [email protected] Eberechi Okoh [email protected] Omolayo Longe [email protected] Adebisi Sanda [email protected]

16D Akin Olugbade StreetVictoria IslandLagosNigeria

Tel: +234 1 271 2276, 271 3846, 461 1820, 461 3582Fax: +234 1 271 2277www.sskohn.com

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PeruRoberto MacLean and Nathalie ParedesMiranda & Amado Abogados



There is no regulation concerning private equity investments in Peru. The Peruvian market has had a combination of transaction types. Very fre-quently, private equity funds buy controlling interests from family-owned companies and maintain the owner as minority shareholder for a certain amount of time to assure a smooth transition, after which acquisition of 100 per cent is completed. In some other cases, private equity funds have invested capital into companies that required it in order to spur growth and eventually exit. Some mezzanine capital transactions are beginning to appear, particularly in the infrastructure sector, but these are not devel-oped forms of investment yet. Going-private transactions are rare. Venture capital transactions are not yet a developed investment type.

Mostly, funds tend to be limited partnerships which use holding com-panies to acquire an asset and obtain financing for the acquisition. In some cases, special purpose companies created offshore (for example, Spanish ETVEs or corporations from Caribbean jurisdictions) are used as vehicles to make the acquisition.



As must be the case in most jurisdictions, acquiring a company that has its shares registered and listed on a stock exchange is different to acquiring a company that is owned privately. Listed companies are subject to various rules, including corporate governance requirements, to which non-listed companies are not, making the acquisition of listed companies a more complex process. For these reasons, the financing of an acquisition of a listed company is much more complex. And, although in essence the role of management does not change between one and the other, in the case of the acquisition of a listed company it must make sure all the formali-ties corresponding to the mechanisms for protection of the shareholders’ interests are complied with, as evidence that it has complied with its duties. Additionally, if a controlling shareholder is involved as a party to the trans-action, management has the duty to leave evidence that the transaction meets market standards.

First of all, Peruvian law allows for two ways to purchase controlling interests in public companies. A potential purchaser of an interest higher than 25 per cent in a public company must:• launch a tender offer for the acquisition of control, namely a prior ten-

der offer; or• perform a two-step process comprising a private transaction for a con-

trolling interest and, subsequently, a public tender offer to the remain-ing shareholders for a certain amount of shares, namely a subsequent tender offer.

In this latter case, the number of shares to be offered for acquisition and the price per share are determined according to mechanisms provided by law, including a valuation performed by an entity approved by the securities regulator. If a listed company’s shareholding is concentrated in one con-trolling shareholder for example, the secondary tender offer mechanism allows a more simple and transparent transaction.

If a majority of the shareholders of a company decides to delist the shares of the company and become private, the company must launch first a tender offer, namely a public purchase offer (OPC), in order to allow those shareholders who do not wish to remain shareholders in the private company to leave the company.

On the financing side, the Peruvian Corporate law establishes that a company may not provide financing or any guarantees in support of a financing to an acquirer of its shares. This entails a limitation for the assets of an acquired company to serve as security for the financing of its acquisi-tion. This prohibition is based on two theoretical bases:• the provision of financing to a shareholder for the acquisition of shares

could lead, upon a default, to a de facto amortisation of capital, which under Peruvian law can occur only if creditors do not oppose such amortisation after a 30-day period granted for that purpose; and

• a conflict of interest arises when a controlling shareholder makes use of a company’s assets for its own benefit. A portion of the legal com-munity believes this limitation is absolute and may not be overcome at all. A larger portion believes that when consent is obtained from minority shareholders and creditors then the fundamental obstacles for the transaction are overcome.

Following this reasoning, a frequent approach in leveraged acquisitions will be to first, complete the acquisition through a holding company that receives the financing, and then, after obtaining consent from minority shareholders and creditors, merge the holding company with the target.

Notwithstanding the above, achieving this in a publicly listed company is more complicated if not impossible, principally for two reasons. On the one hand, it may be impractical to negotiate with all minority sharehold-ers. On the other, the standard of liability for directors varies, for one they have to leave stronger evidence of their decisions, and, most importantly, when evaluating transactions where a controlling shareholder (or a party related to it) participates, it is upon the directors to prove that the transac-tion meets market standards or they could be personally liable to the com-pany for any damages caused by the transaction. Consequently, in the case of a listed company, financing an acquisition with the assets of the acquired company involves too many risks. In order to be able to do so, the purchaser would need to acquire control of the listed company (using either the prior tender offer or subsequent tender offer mechanisms), then make the com-pany delist its shares and launch the OPC. Once the shares of the company are delisted, negotiations with the remaining shareholders and creditors may begin in order to be able to achieve this goal.

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There is not much experience with listed companies in Peru. Most tend to be heavily controlled by the majority shareholder or controlling group. There is not much shareholder activism, and equity markets are not very liquid.

In an acquisition process involving a prior tender offer or subsequent tender offer, the board must act independently and must remain protec-tive of shareholder rights. In the case of an OPC (which is an offer made by the company itself – as opposed to the pricing in a subsequent tender offer, which is made by the acquirer), management has a duty to make sure the valuation of the company is correct. Any manager with a conflict of interest cannot participate in the decision process.

4 Disclosure issues


Private equity transactions are not subject to disclosure regulations, other than the duty to negotiate in good faith that the parties have with each other. In the case of listed companies, heightened disclosure requirements apply to tender offers in addition to the regular disclosure requirements applicable to listed companies. OPC regulations emphasise the disclosure of the method used by the valuation entity to determine the value of the company.



When acquiring a listed company, the expected timeline should reflect whether the acquirer plans to acquire shares of the target company in the open market and then prepare and launch a prior tender offer or whether it plans to negotiate and acquire a controlling interest first and then launch a subsequent tender offer. Once this process is complete, the acquirer must negotiate with the other shareholders to obtain a majority necessary to agree to the delisting of the shares and, after such agreement is reached, launch an OPC.

When acquiring a non-listed company, the acquisition may be com-pleted as soon as the parties agree. However, when purchasing a privately held company, there may be a period before closing where the company needs to divest assets not wanted by the purchaser.



Under Peruvian law, a decision to delist the shares of a company must be adopted by the shareholders of the company. This means that, once adopted, a decision by the shareholders to delist may be challenged mainly on formal grounds. In this scenario, the OPC (explained in question 3) is the mechanism for dissenting shareholders to exit the company if they do not wish to remain as shareholders of the company after its shares are del-isted. Shareholders may also challenge the value given to the shares in the OPC.



The answer may vary depending on whether:• the acquisition is for a non- controlling interest, a controlling interest,

or 100 per cent (or almost 100 per cent) of the target;• there is one or many sellers; or• the fund will subscribe new shares as opposed to buying a shareholder

out.

Another important factor is how much the sellers, on a personal basis, are responsible for the revenue generation of the company. The combination of these factors will let a private equity buyer determine how much to focus on the purchase agreement or on regulating the fund’s relationship with the company or the remaining shareholders.

For the purchase of a non-controlling interest, the purchase agree-ment will not be as important for defining the structure of the transaction and the future relationship with other shareholders and the company. On the one hand, the seller of a non-controlling interest usually has not been in a position to provide many representations regarding the target. On the other, the purchase of a non-controlling interest will not usually put the acquirer in a position to use the purchased shares as security for a financ-ing, much less the assets of the target (see question 2).



During an acquisition process, a question arises as to the appropriate time for an acquirer of a controlling interest to engage in conversations with management – assuming as in most that the selling shareholder is not the head of management. In a non-listed company, this process may be con-trolled by the remaining shareholders or, if the acquisition is for 100 per cent interest, by the selling shareholders themselves, which may allow pur-chaser to negotiate the retention of management after closing. In the case of shareholder-managers, the use of earn-out mechanisms is common, by which the seller maintains a minor interest in the company for a certain period after which it is bought by purchaser at an updated value.

In a listed company, if the acquirer purchases the controlling interest first, the launch of a subsequent tender offer and OPC provide the space for management to get involved in the process for the purpose of safeguarding the interests of the other shareholders. Otherwise, if the controlling inter-est is purchased through a previous tender offer, the role of management is to review and opine on the tender offer made by the potential acquirer, but management may not take part in the preparation of the offer itself.

9 Tax issues


When estimating the return on a private equity transaction, an investor must take into account the following taxes:• capital gains tax on the sale of shares issued by companies incorpo-

rated in Peru: The tax basis for this tax is the purchase or subscription price for the shares. Evidence of the tax basis is obtained, in the case of a foreign investor, through a certificate granted by the tax regulator before the sale is agreed. For this certificate to be obtained, the funds must have been transferred through the Peruvian financial system. The tax is 30 per cent for foreign investors and 5 per cent for Peruvian resident individuals. If the shares are traded on the Lima Stock exchange, the capital gains tax is 5 per cent generally, and the tax basis is the price of the acquisition trade (with no need for the abovemen-tioned certificate);

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• dividend tax withholding: For resident individuals and foreign inves-tors this withholding will be 6.8 per cent until 2016, 8 per cent for 2017–2018 and 9.3 per cent from 2019 onwards;

• corporate tax: For all resident companies, at 28 per cent until 2016, 27 per cent for 2017–2018, and 26 per cent 2019 from onwards;

• if the purchase of shares is made through a local holding company, such local holding company may deduct interest on the financing of the acquisition of shares under certain conditions; and

• value added tax: transfers of assets are subject to VAT, which is added to the purchase price. The local purchaser may use such VAT credit.



As described in question 2, financing structures are marked by restrictions imposed by Peruvian law on financial assistance. Before using the assets of the target company as security for an acquisition, consent must be obtained by shareholders and creditors.



Because of the existing regulations limiting financial assistance (see ques-tion 2), the financing of acquisitions is made usually first as a corporate financing, secured by the acquired shares and either by existing assets of the acquirer or some form of financial guarantee, but not the assets of the target. In this context, before taking security interests over the assets of the purchased company, the lenders will seek assurance that no claims will arise on the part of other shareholders or creditors of the target company.



According to many commentators, including some who participated in the drafting of the Peruvian corporate law, the main reason behind the prohi-bition of financial assistance is that it could constitute a capital reduction in disguise, made without creditor consent. Under Peruvian corporate law, when the capital of a company is reduced, and as a result the shareholders of the company receive cash in amortisation of their shares, the creditors of the company must be given notice and a 30-day period to oppose to such capital reduction.

Another issue behind the limitation on financial assistance is the exist-ence of a conflict of interest when the majority shareholder of a company uses its voting power to make the company provide the financial support for its acquisition, in prejudice of the other shareholders and creditors.

Both of these issues have to be dealt with by the purchaser to the lend-er’s satisfaction before it approves the financing.



In a non-listed company, the shareholders may enter into agreements, and the company may be made to take part in the agreement for the purpose of taking notice and enforcing some of its provisions. By contrast, a listed company will not form part of a private relationship between its sharehold-ers, and when it is given notice of an agreement between shareholders, it is mostly due to disclosure requirements.

Provisions typical in shareholder agreements will contain:• restrictions on transfers to third parties, which under Peruvian law

may last only specific amounts of time up to ten years;• rights of first refusal, giving existing shareholders the first option

to purchase the interest of the shareholder that wishes to exit the company;

• rights for the appointment and removal of directors and managers;• tag-along rights, put options and call options;• information rights, in the case of non-listed companies when share-

holders negotiate the right to receive certain information from man-agement as opposed to having the right to request it;

• a list of fundamental matters, where a shareholder can negotiate the right to veto certain decisions it would not otherwise have the power to under corporate law;

• registration rights: the right to make the company list its shares in a stock exchange;

• drag-along rights: the right to find a purchaser for 100 per cent of the company and force the other shareholders to sell their shares to such purchaser under certain conditions; and

• a deadlock clause, where the parties agree to dissolve the partnership under certain circumstances.



As described in question 3, the acquisition of a controlling interest in a listed company may be made directly as long as a subsequent tender offer is then made by the acquirer. This method of acquisition of control for listed companies was incorporated into Peruvian corporate law because the shares of most listed companies on the Lima Stock exchange are heav-ily concentrated with the controlling shareholders. This requires the execu-tion of a tender offer, which, according to Peruvian law may be made in one of two moments (see question 3).

15 Exit strategies


One of the limitations that the Peruvian market presents is that the securi-ties market does not have much liquidity. In this context, an IPO will not necessarily be an available option. In the last five years, there has been only one example of a private equity fund making an exit via an IPO in which both the fund and the original shareholder made partial exits through the IPO. The direct sale of a controlling position is more feasible at this time, since the markets currently have many operators trying to increase market share and other private equity funds are still entering what they believe to be a still growing market.



The existence of a shareholders’ agreement that will survive an IPO, as well as its main provisions, must be disclosed in the offering prospectus, and as long as the by-laws do not incorporate any limitations to the transfer of shares or special majority requirements for certain decisions in preju-dice of minority shareholders, the content of the agreement is not revised, leaving potential investors to decide whether the existence of the agree-ment affects their appetite for the shares or not.

Indirect sales of companies incorporated in Peru are also subject to capital gains tax. Consequently, if a private equity fund wishes to sell its

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stake at the level of a portfolio company that is the shareholder of a com-pany incorporated in Peru, it should consult a Peruvian lawyer for potential tax consequences in Peru. Depending on the percentages of ownership being sold, Peruvian taxes may or may not apply.



Private equity firms have focused on many sectors of the economy, mostly involving retail businesses selling to the growing middle class. Cinema chains, restaurants and fast food chains, home improvement stores and drugstores, among others, have been the object of transactions for private equity funds. Certain industries, which cater to these types of businesses have also been targeted (manufacturers of packages, food ingredients, etc). Most of these companies are privately held or, if they do list their shares on the stock exchange, only a small portion of the shares are not controlled by the controlling shareholder. There has been only one recent example of a going-private transaction, in the heavy industrial sector, but the target was strongly controlled by the selling shareholder and only a small portion of shares was under the control of third parties. In this case, the purchaser was an industrial conglomerate rather than a private equity fund.

It is anticipated that a new trend for private equity funds will be to invest in more energy and infrastructure projects and operating companies.



Peru is an open economy and there is no control on the flow of funds into or out of the country. When a private equity fund makes an investment in Peru, the two main issues in structuring the acquisition are the interaction between the tax laws of the countries involved in the transaction and the interaction of Peruvian law with the other laws chosen governing the dif-ferent documents.

For example, when the parties to a shareholder agreement executed under a law other than Peruvian law wish that its provisions have some kind of force under Peruvian law, or when the shareholders of a holding company want to make sure that their positions in the holding company be reflected in the operating company in Peru, the by-laws of the operating company have to be properly adjusted, and the operating company must – most likely – be made a party to the shareholder agreement. The by-laws and documentation governed by Peruvian law have to be adapted so that they afford the foreign investor the protection it believes it is being given by the law chosen to govern the other transaction documents.

In addition, Peru has a system of stability agreements for the protec-tion of investments. Under these agreements, in exchange for investing a minimum amount of US dollars, a foreign investor can obtain a com-mitment by the Peruvian government for a 10-year stability period in the

then-applicable tax regime, the capacity to repatriate capital and pay divi-dends, and the availability of foreign currency to do so. In turn, if the acqui-sition is for more than 50 per cent of the target, stability is also granted to the target with respect to the income tax laws and labour law regime appli-cable to the company. This means that any changes to these laws within the 10 years following the date of the agreement will not be applicable to such investor.



Basically, no. See the second paragraph of the answer to question 18.



Closings are normally pending the completion of certain conditions, mainly:• the securing of financing for the acquisition;• obtaining regulatory approval;• clearing tax liabilities identified in the due diligence; and• divesting the target company of unwanted assets.

Tax contingencies can pass to the purchaser in an asset transfer transaction for a period of two years, so an asset transfer is not a way to eliminate tax contingencies identified in due diligence. This issue must be resolved by both parties agreeing on what responsibilities are assumed by seller and for how long. But in this matter there must always be a level of sacrifice by the seller with respect to the price it expects to receive.

The first two conditions depend largely on third parties, and, in these cases, the seller may ask for a drop-dead date for the transaction and pay-ment of indemnities.

Update and trends

In the next few years, we expect private equity funds to grow in number and in size. It is expected that the pension funds will increase the use of private equity funds to invest in more specialised sectors of the economy and in smaller companies, and private equity funds have the means to channel those investments appropriately. Also, as more Peruvian family groups sell their companies, they themselves look for new investment vehicles. Lastly, infrastructure investments are beginning to present a double opportunity; for private investment funds they represent an investment opportunity, and for the project sponsors, an opportunity to obtain capital and share the benefits with regional investors.

Roberto MacLean [email protected] Nathalie Paredes [email protected]

Av. Larco 1301, 20th floorTorre Parque Mar, MirafloresLima 18Peru

Tel: +51 1 610 4747Fax: +51 1 610 4748www.mafirma.pe

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SingaporeNg Wai King and Jason ChuaWongPartnership LLP



The growth of the Singapore private equity market mirrors the develop-ment of private equity in more sophisticated markets. The presence of global private equity houses in Asia such as Blackstone, KKR and TPG has helped to stimulate the private equity market as various funds look to put their money to work in Asia. In this regard, Singapore continues to be one of the few markets in the Asia-Pacific region where transactions can be executed efficiently and successfully in a manner that provides comfort and familiarity to private equity sponsors. Leveraged financing and secu-rity arrangements are available to support many of the leveraged transac-tions that are favoured by such investors. There is also a preference for techniques and structures that have been tried and tested in the United States and Europe – for example, the use of covenant-lite financing struc-tures for Asian deals was quite prevalent in 2007 before the credit crisis.

Take-private transactions are commonly done using one of the follow-ing structures:• scheme of arrangement under section 210 of the Companies Act

(Chapter 50 of Singapore) (Companies Act);• general offer pursuant to the Singapore Code on Takeovers and

Mergers (the Takeover Code), coupled with compulsory acquisition under section 215 of the Companies Act; and

• voluntary delisting pursuant to Chapter 13 of the Listing Manual of the Singapore Exchange Securities Trading Limited (SGX) (which also requires an exit offer governed by the Takeover Code), coupled with compulsory acquisition under section 215 of the Companies Act.

Other forms of transactions that are typical in this market include start-up investments and venture capital-type activities, as well as management buyouts (MBOs), management buy-ins or buy-in management buyouts with management roll-over arrangements.



Various initiatives introduced by the relevant regulatory authorities in the last few years demonstrate the ongoing efforts to enhance corporate gov-ernance of companies listed on the SGX, some of which may be relevant in the context of private equity transactions involving listed target compa-nies, including those outlined below:• In 2008, the Audit Committee Guidance Committee (ACGC), which

was formed by the Monetary Authority of Singapore (MAS), the Accounting and Corporate Regulatory Authority (ACRA) and the SGX to strengthen corporate governance practices, issued a Guidebook for Audit Committees in Singapore (AC Guidebook). The AC Guidebook identifies the key regulatory responsibilities and best practices of audit committees and addresses practical issues of concern to audit committee members, including the implications of the requirements

under the Companies Act, the SGX listing rules as well as the princi-ples and guidelines of the Code of Corporate Governance.

• Following a public consultation exercise concluded in January 2010, the SGX listing rules were subsequently amended in September 2011 to enhance corporate governance practices and foster greater disclo-sure to safeguard shareholders’ interests. The SGX listing rules now require, inter alia, listed companies to obtain the SGX’s approval prior to the appointment of directors, chief executive officers and chief financial officers under certain circumstances; and directors and key executive officers are to inform the SGX of any irregularities in the listed company in relation to the cessation of service of any director or key executive officer and to disclose when an independent direc-tor of the listed company is appointed to or has ceased to be on the board of the listed company’s principal subsidiaries based outside of Singapore. Other key amendments made include a requirement for disclosure of loan covenants linked to controlling shareholders, as well as a requirement for the listed company to obtain undertakings from its controlling shareholders to notify it of share pledging arrange-ments entered into by such shareholders, and to disclose such share pledging arrangements where enforcement over these arrangements may result in a possible change in control in the listed company or may cause the listed company to breach its loan covenants. Since 1 January 2014, all listed companies (whether incorporated in Singapore or else-where) with a primary listing in Singapore are required to hold their general meetings in Singapore to promote more active participation and engagement of shareholders. Where there are legal constraints preventing them from holding their general meetings in Singapore, alternative modes of engagement such as webcast and information meetings should be provided so that public shareholders have access to the board and senior management.

• In February 2010, the Corporate Governance Council (CGC) was established to undertake a review of the Code of Corporate Governance, which was introduced in 2001 (and subsequently revised in 2005) to encourage listed companies to enhance shareholder value through good corporate governance. The CGC acts as an adviser to the MAS, ACRA and SGX regarding corporate governance issues and rules that apply to listed companies in Singapore. Following a complete review, the CGC released its final recommendations on the proposed revisions to the Code of Corporate Governance, and subse-quently, the MAS issued the revised Code of Corporate Governance (the 2012 Code) on 2 May 2012. Save for certain provisions relating to the composition of the board of directors in specified circumstances, the 2012 Code applies to annual reports relating to financial years commencing from 1 November 2012. However, the requirement for independent directors to make up at least half of the board of direc-tors in certain specified circumstances will only take effect at annual general meetings following the end of financial years commencing on or after 1 May 2016. In general, a key amendment under the 2012 Code is to require the board of directors of a listed company to meet more stringent independence requirements. For example, the definition of ‘independent director’ has been refined to mean a director who does not have any relationship with the company, its related corporations, its 10 per cent shareholders or its officers that could interfere or be perceived to interfere with his or her independent business judgment. This is a notable change from the previous position where a director could be considered independent even if there is a relationship with

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the shareholders. In addition, under the 2012 Code, the independence of any director who has served beyond nine years from his or her first appointment will be subject to particularly rigorous review. Another significant amendment is the introduction of new guidelines requir-ing directors of a listed company to give an opinion on the adequacy and effectiveness of the internal controls within the company. There is now also a similar requirement under the SGX listing rules for such an opinion to be disclosed in the annual report of the listed company.

The corporate governance and law reforms and framework discussed above apply to all companies listed on the SGX. Accordingly, they will only cease to apply when the company is taken private. Likewise, the SGX list-ing rules will only cease to apply to a company that has been privatised and delisted from the official list of the SGX. In light of this, one key benefit of a going-private transaction is the cost-savings associated with the reduced regulatory, audit and compliance costs. For the private equity sponsor that took the company private, there is the added advantage of limited public disclosure requirements and greater flexibility in appointing directors to the board of the target company.



The directors of a Singapore public listed company owe fiduciary duties to act in the best interests of the company, including in the context of a going-private transaction. Similar fiduciary duties apply to directors of a Singapore private company that is involved in a private equity transaction.

The critical issue that directors need to grapple with in a going-private transaction is to determine whether there are conflicts of interest that may affect certain members of the board by reason of their participation or shareholding in the bidding vehicle or as part of the MBO. This is impor-tant for private equity transactions as private equity investors are typi-cally concerned with ensuring management continuity and seek to do so by incentivising management to participate in the bidding vehicle. In this regard, they would need to consider what role (if any) the existing manage-ment would play in the bidding vehicle. To address the issue of a potential conflict of interests, a company that is subject to an MBO (or going-private transaction) will typically establish a special committee of directors com-prising directors who are independent for the purpose of the offer to have oversight of the transaction.

Pursuant to the Takeover Code, the special committee is expected to appoint an independent financial adviser to assist in the recommendation that has to be made by the directors on the transaction. In some recent transactions, the special committee may involve a financial adviser at an early stage in the process if a decision is made to undertake a going-pri-vate transaction by way of an auction. In such circumstances, a separate independent financial adviser will be appointed to opine on the transac-tion from a financial perspective and advise the independent directors for the purposes of the transaction. The early involvement of an independent financial adviser is also recommended where the going-private transac-tion is structured as a voluntary delisting proposal, since the SGX expects the independent financial adviser’s opinion on the reasonableness of the exit offer to be included in the delisting application submitted by the target company to the SGX and in the shareholders’ circular.

In the context of an MBO, the special committee will need to be mind-ful as to how information is disclosed to a bidding vehicle that includes members of the management team. If the disclosure process is not care-fully managed, any inadvertent disclosure to such a bidding vehicle may result in the target company being compelled under the Takeover Code to disclose the same information to a competing offeror that may subse-quently surface. The independence of a director will also affect his or her ability to make a recommendation on the transaction to the shareholders of the target company for the purpose of the Takeover Code. As a start-ing point, the Takeover Code requires all directors of the target company to make a recommendation on the transaction. Where a director wishes to be exempted from making such a recommendation, the consent of the

Securities Industry Council (SIC) must be sought. The SIC has made clear in note 1 to rule 8.3 of the Takeover Code that they will normally exempt a director who is not independent from assuming any responsibility for mak-ing a recommendation on the offer to the shareholders of the target com-pany. However, such a director will still need to assume responsibility for the accuracy of the facts stated in the announcements and documents that are despatched to the shareholders of the target company.

Finally, boards of public listed companies should bear in mind that, Takeover Code issues aside, any material price-sensitive information disclosed in the course of the transaction may also give rise to concerns of insider trading under the Securities and Futures Act (Chapter 289 of Singapore) (the Securities and Futures Act).

4 Disclosure issues


The disclosure requirements in a going-private transaction are the same whether the transaction is implemented by way of a general offer under the Takeover Code or by way of a scheme of arrangement under section 210 of the Companies Act.

The Takeover Code prescribes the relevant information that needs to be disclosed (in the context of a general offer) in an offer document issued by the bidding vehicle and the circular issued by the target company to its shareholders; and (in the context of a scheme of arrangement) in the scheme document to be issued by the target company. For example, details of any shareholdings in the target company and any dealings in such shares by parties involved in the going-private transaction and their concert par-ties during the three-month (in the case of a voluntary offer) or six-month (in the case of a mandatory offer) period prior to and during the offer period must be disclosed in the offer document and the circular issued by the tar-get company to its shareholders. For securities exchange offers, the same information relating to shares of the bidding vehicle must be disclosed.

The Takeover Code also requires prompt disclosure of securities deal-ings by parties involved in the going-private transaction and their associ-ates during the offer period, which essentially commences when a possible takeover offer is made known to the public. Depending on the nature of the dealings, a party may either be compelled to make a public disclosure or a private disclosure to the SIC.

Amendments to the Takeover Code (9 April 2012) introduced enhanced disclosure requirements which include the requirement for the bidding vehicle to disclose if the shares it holds in the target company are charged, borrowed or lent, and the requirement for disclosure of dealings in convertible securities, options, warrants and derivatives during the offer period by persons holding or controlling five per cent or more of the under-lying class of securities, where such instruments cause the holder to have a long economic exposure to the underlying securities.

The Companies Act and the Securities and Futures Act impose sepa-rate disclosure obligations on parties who become substantial shareholders of a Singapore public listed company (namely, upon acquiring 5 per cent or more of the voting rights of the company) and any subsequent percentage level changes in their substantial shareholding. Under the Securities and Futures (Disclosure of Interests) Regulations 2012, promulgated to facili-tate the new streamlined disclosure regime implemented by the MAS on 19 November 2012, a bidding vehicle is exempted from complying with disclosure obligations under the Securities and Futures Act in respect of any change in its interest in the securities of the target company during the offer period, provided that the bidding vehicle complies with the disclosure obligations under the Takeover Code.



In general, the timing of a private equity transaction in Singapore depends to some extent on the scope of due diligence and on the requirement to clear specific regulatory issues, for example, merger control issues under the Competition Act (Chapter 50B of Singapore) (Competition Act). The merger control regime in Singapore may potentially extend a transaction by three months or more in a case where the transaction is subject to review by the Competition Commission of Singapore.

A going-private transaction may be structured either as a general offer subject to the Takeover Code or a scheme of arrangement subject to both



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the Takeover Code and the Companies Act. In the case of a general offer that is subject to the Takeover Code, a specific timeline is set out in the Takeover Code which prescribes when the bidding vehicle is required to do certain acts and when a response is expected from the target company. On the other hand, a scheme of arrangement, with the consent of the SIC, is typically exempted from the timeline prescribed under the Takeover Code.

In the case of a general offer under the Takeover Code, the parties are expected to adhere strictly to the timeline in the Takeover Code once a firm intention to make an offer is announced by the bidding vehicle. This announcement will set the timeline in motion and the bidding vehicle must despatch the offer document setting out the terms and conditions of the offer as well as the acceptance procedures to the target company’s shareholders, no earlier than 14 days and no later than 21 days from the offer announcement date. The target company is then obliged to respond with a circular to its shareholders containing the advice of an independ-ent financial adviser and the recommendation of the directors of the target company. Such circular is to be despatched within 14 days of the date of posting of the offer document. The Takeover Code also imposes a timeline with respect to how long the offer can remain open and the circumstances under which the offer may be extended. Depending on whether the general offer is made subject to specific conditions that are permitted by the SIC, the offer will either lapse from a failure to satisfy such conditions or close successfully.

If at the close of the offer, the bidding vehicle acquires sufficient shares in the target company (either pursuant to valid acceptances of the offer or market purchases during the offer period) to cross the 90 per cent threshold under section 215 of the Companies Act, the bidding vehicle may proceed to ‘squeeze out’ the remaining non-accepting shareholders by invoking the compulsory acquisition procedure under the same section. This pro-cess typically extends the transaction timetable by another two months before all the remaining shares are transferred to the bidding vehicle and the target public company becomes a wholly owned subsidiary of the bid-ding vehicle. The bidding vehicle has up to four months from the making of the general offer to cross the 90 per cent threshold under the Companies Act to avail itself of the compulsory acquisition rights under section 215 of the Companies Act. It should be noted that the 90 per cent threshold only applies to Singapore-incorporated target companies. For foreign target companies listed on the SGX, the bidding vehicle would have to refer to the squeeze-out mechanism and timing considerations under the laws of incorporation of such foreign target companies.

A bidding vehicle may also effect a going-private transaction by way of a scheme of arrangement under section 210 of the Companies Act. Unlike a general offer where the bidding vehicle may find itself unable to achieve the 90 per cent requirement to ‘squeeze out’ the minority share-holders despite its success in acquiring a majority stake in the target public company, a going-private transaction undertaken by way of a scheme of arrangement guarantees an ‘all or nothing’ result. The key timing con-sideration of a scheme of arrangement relates to the preparation of the scheme document that has to be reviewed by the SGX before its despatch to shareholders. The drafting and review process may take up to eight weeks following the joint announcement by the bidding vehicle and the target company of the proposed scheme of arrangement. Once cleared by the regulators, the target company will have to apply to the High Court of Singapore for leave to convene a meeting of the shareholders to consider and vote on the proposed scheme of arrangement. Upon the granting of leave, the target company has to despatch the scheme document to its shareholders and give at least 14 days’ notice to convene the meeting. The scheme of arrangement must be approved by a majority in number repre-senting 75 per cent in value of the shareholders present and voting at that meeting. The SIC will normally require the bidding vehicle and its concert parties and the common substantial shareholders of the bidding vehicle and the target company to abstain from voting on the scheme of arrange-ment. Once approved by the requisite number of shareholders, the target company has to obtain the consent of the High Court of Singapore for the scheme. A scheme of arrangement approved by shareholders and the High Court of Singapore will bind all the shareholders in the target company and will take effect upon the lodgement of the relevant court order with the ACRA. Unless an objection is raised at the Court hearing, a going-private transaction undertaken by way of a scheme of arrangement is likely to complete within four months from the date of the initial joint announce-ment, subject to the schedule of the SGX and the High Court of Singapore.

A third structure for implementing a going-private transaction in Singapore is via a voluntary delisting proposal and exit offer. However,

this structure is more commonly adopted by a private equity sponsor who already has an existing majority stake in the target company and where the minority shareholders either do not hold significant shareholding blocks or the bidding vehicle is confident of garnering the support of significant minority shareholders. From a timing perspective, this process will still typically take longer to complete when compared to a general offer under the Takeover Code as the SGX and shareholders’ approval at a general meeting will need to be obtained. In some going-private transactions in Singapore, a voluntary delisting proposal is used as a follow-up step to take the target public company private following an initial voluntary offer that does not result in the bidding vehicle receiving sufficient acceptances to enable it to ‘squeeze out’ the minority shareholders under the compulsory acquisition provisions in the Companies Act.

Where the Takeover Code does not apply to a private equity transac-tion, there will generally be no fixed timeline that a bidding vehicle must comply with.



Depending on how the going-private transaction is structured, dissenting shareholders may exercise their voting rights to vote against the transac-tion or apply to the Singapore courts for relief.

In respect of a scheme of arrangement, a majority in number repre-senting 75 per cent in value of the shareholders present and voting at that meeting must approve the scheme, with the bidding vehicle and its concert parties and the common substantial shareholders of the bidding vehicle and the target company normally being required to abstain from voting. Given the need to satisfy the ‘majority in number’ approval requirement, a sufficient number of dissenting shareholders turning up at the meeting may still ‘block’ the scheme from being approved. In addition, notwith-standing that such approval is obtained, a dissenting shareholder still has the right to attend and raise objections at the court hearing in respect of the scheme.

In respect of a voluntary delisting, a delisting resolution must be approved by a majority of shareholders holding at least 75 per cent in value, present and voting (on poll). However, the voluntary delisting cannot pro-ceed if dissenting shareholders holding at least 10 per cent in value attend the meeting and vote against the delisting resolution.

Where the general offer or voluntary delisting is coupled with compul-sory acquisition under section 215 of the Companies Act. dissenting share-holders may apply to court within one month from the date on which the notice of compulsory acquisition is given, to object to the transaction.

As a general principle under the Takeover Code, rights of control over the target public company must be exercised in good faith and the oppres-sion of the minority is wholly unacceptable. In addition, if the going-pri-vate transaction is carried out in a manner that is oppressive to minority shareholders, the Companies Act provides minority shareholders statutory recourse to seek the intervention of the court.

Given the options available to dissenting shareholders discussed above, it is not uncommon to find potential acquirers analysing and tak-ing into account the current shareholding spread of the target company to determine the most suitable going-private structure that maximises deal certainty and, at the same time, achieves the objective of taking the tar-get company private with minimal execution risk. If there are significant minority holdings concentrated in a single or a few shareholders, potential acquirers will generally consider procuring irrevocable undertakings from these shareholders to support the going-private transaction to increase deal certainty.



While most buyers in an mergers and acquisitions transaction would typically insist on comprehensive representations and warranties in the purchase agreement, going-private transactions in Singapore that are implemented following an auction process are normally concluded with minimal representations and warranties as a consequence of the com-petitive tension between bidders. This is particularly stark in the context



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of transactions implemented by way of a scheme of arrangement, as the private equity sponsor may not even be able to obtain similar comfort from the management team or a controlling shareholder to the extent that these parties do not have any agreement with the private equity sponsor.

The private equity sponsor is expected to conduct its own due diligence to get comfortable with the risks associated with the investment – vendor due diligence reports remain fairly uncommon in Singapore mergers and acquisitions transactions although there appears to be a gradual increase in its acceptance, particularly for managed auction sale processes.

A private equity sponsor would typically prefer a financing condition to be imposed as part of the purchase agreement, such that its obligations are conditional upon the availability of debt financing. However, recent Singapore private transactions suggest that such a condition would not be acceptable to most vendors. If the transaction is subject to the Takeover Code, the SIC’s approval is required if the bidding vehicle wishes to include any conditions other than the normal conditions relating to the level of acceptances, approval of shareholders for the issue of new shares or the SGX’s approval for listing. In particular, the SIC will normally wish to be satisfied that fulfilment of the condition does not depend to an unaccepta-ble degree on the subjective judgment of the private equity sponsor as such conditions can create uncertainty. In addition, once an offer is announced under the Takeover Code, the SIC’s consent is required before the offer can be withdrawn.

In the context of going-private transactions, the bidding vehicle’s financial adviser or financier is obliged to provide a written confirmation as to the sufficiency of financial resources available to the bidding vehicle to complete the acquisition. Such a confirmation must be reflected in the announcement and the offer or scheme document to be despatched to shareholders. In a number of auction transactions, the request for financial resources confirmation is even made at the bid submission stage.

A provision of a break fee could be included in the purchase agreement of a going-private transaction. This break fee will be payable on the occur-rence of certain specified events (for example, where a superior compet-ing offer becomes or is declared unconditional as to acceptances within a specified timing or the recommendation by the board of the target public company to the shareholders to accept a superior competing offer). Under the Takeover Code, the target public company is allowed to pay a break fee of up to 1 per cent of the transaction value. The 1 per cent cap is not applicable to a private company transaction or to a break fee payable by a party other than the target public company. The directors of the target company (both public and private) must also consider their fiduciary duties in agreeing to such break fees as well as the possible breach of any financial assistance prohibition under the Companies Act.

A private equity sponsor will also be keen to have strong indemnifica-tion provisions, often with definitive monetary limits, in order to protect their capital investment and calculate their minimum return. In leveraged buyouts, there is often a need to protect cash flow against unforeseen expenses and liabilities. In this regard, there is an increasing interest in exploring warranty and indemnity insurance (W&I insurance) which may be used to provide comfort to a buyer for that part of the transaction value not covered by representations and warranties or indemnities.

Finally, a private equity sponsor will also typically look to greater commitment and support for the transaction from the management of the target company to ensure management continuity. As such, it is not uncommon to find private equity sponsors insisting on the terms of the transaction giving them the right to negotiate with or offer to the existing management of the target company the opportunity to participate with an equity stake in the bidding vehicle or enter into new service agreements.



In a Singapore going-private transaction where the management team is actively involved in the transaction or is expected to continue their role within the target company group going forward, they are generally offered the opportunity to participate (with an equity stake) in the bidding vehi-cle to align their interests with the private equity sponsor. Essentially, this would typically involve the management, who hold shares in the target

company, agreeing to swap their shares for equity in the bidding vehicle or tender their shares towards acceptance of the takeover offer, and thereaf-ter apply the proceeds towards subscription for shares in the bidding vehi-cle. As shareholders in the bidding vehicle, the management is likely to be subject to the usual restrictions that a private equity sponsor will expect to impose in terms of voting rights and transferability of shares. On some occasions, new service agreements may be executed to document the employment terms.

A key concern in putting together management incentives in a going-private transaction is whether such incentives will constitute a ‘special deal’ under rule 10 of the Takeover Code, particularly where the management team are also shareholders of the target company. In this regard, note 4 to rule 10 of the Takeover Code makes it clear that the SIC will adopt the prin-ciple that the risks as well as the rewards associated with an equity share-holding should apply to the management’s retained interest. Accordingly, an option arrangement that guarantees the original offer price as a mini-mum would normally not be acceptable. The SIC should be consulted if the management is to remain financially interested in the target company’s business after the offer. The SIC may also request an independent financial adviser to issue an opinion on whether the management incentives are fair and reasonable.

The arrangements with the management would also have to be dis-closed in the formal documentation that is issued to shareholders in rela-tion to a takeover offer.

The other concern with management incentives in a going-private transaction relates to the potential conflict of interests that the manage-ment team may face in agreeing to the terms of these incentives that are applicable post-completion while the company is still publicly listed. Good corporate governance practice dictates that certain decisions on a going-private transaction may have to be dealt with by directors (or a committee of directors) who are independent for the purpose of the offer. Further, the management team may also need to abstain from participating in some of these decision-making processes.

9 Tax issues


From a transactional perspective, most private equity bidders would be keen to ensure:• minimal tax costs associated with the implementation of the transac-

tion – for example, whether stamp duty savings are available in the context of a share transaction or if goods and services tax relief is avail-able in the context of an asset transaction. In relation to the former, subject to certain criteria being met, the transfer of shares for certain qualifying mergers and acquisitions transactions involving Singapore companies executed from 1 April 2010 to 31 March 2015 (both dates inclusive) will be eligible for stamp duty relief which is capped at S$200,000 per year;

• interest deductibility on the debt financing that is taken for the pur-pose of the acquisition – where appropriate, some form of debt ‘push-down’ may be explored to allow for debt refinancing at the operating company as opposed to the financing at the bidding vehicle level; and

• minimal tax leakage at the operating level post-completion – tax-related issues that are identified as part of the tax due diligence that is undertaken prior to the going-private transaction are likely to be addressed as part of the overall group restructuring that is imple-mented post-completion (for example, transfer pricing).

As part of any discussion on management incentives, parties would typi-cally explore how such incentives can be provided with a view to minimis-ing the likely increase in income tax exposure for the individual employee.



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Most debt financing structures in Singapore would comprise senior secured debt in multiple tranches as well as mezzanine (and subordinated) debt. Global private equity sponsors have brought with them their pre-ferred American or European debt financing structures when negotiating and implementing the financing structure for a Singapore going-private transaction.

Given the increasing demand by vendors to have bidders provide funding confirmation, private equity sponsors will now put in place a com-bination of bridge and term facilities via interim facilities agreements with their preferred banks at the point of the announcement of the going-pri-vate transaction. Refinancing may be expected within 12 months after the initial interim facilities.

While there are generally no restrictions on the use of debt financing for private equity transactions in Singapore, it is important to ensure that any debt financing structure to be implemented does not run afoul of the financial assistance provisions in section 76 of the Companies Act. On this note, it is worth noting that based on the amendments to the Companies Act set out in the Companies (Amendment) Bill, which was passed by the Singapore Parliament on 8 October 2014 and expected to come into force in 2015, the financial assistance prohibition for private companies (which are not subsidiaries of public companies) will be abolished. Additionally, although the prohibition is retained for public companies and their subsidi-aries, a new exception will be introduced to permit a public company and its subsidiary to, subject to satisfaction of certain prescribed conditions, provide financial assistance in connection with the acquisition of its own shares if such assistance does not materially prejudice the interests of the company or its shareholders, or the company’s ability to pay its creditors.



Recent going-private transactions suggest that in an auction process a pri-vate equity sponsor will need to be able to show the vendor or target com-pany the equity commitment letters and bank financing confirmation as early as the bid submission stage. This compels the private equity sponsor to line up the financiers at the outset of the transaction and have them sign up to commitment letters and interim facilities agreements to establish the requisite debt financing. The financial adviser to the private equity sponsor will need to review these documents and be satisfied that the bidding vehi-cle has sufficient financial resources to satisfy the consideration payable for the target company. This review is necessary as the financial adviser is usu-ally expected to issue a confirmation of financial resources and a request for such confirmation can be made as early as the bid submission stage. The review also addresses in part the financial adviser’s due diligence obligation under the Takeover Code on the issue of adequacy of financial resources.

Once the going-private transaction is announced, the lenders and the private equity sponsor will then move on to negotiate the formal loan docu-mentation and the security documentation. Singapore lenders have come to accept that they may not always have the security in place at the point of completion of the acquisition due to the need to complete financial assis-tance whitewash procedures. In many instances, parties agree to a time frame pursuant to which the financial assistance whitewash procedure must be undertaken and the security documentation executed thereafter.



Singapore insolvency laws allow liquidators and judicial managers of a Singapore company to exercise limited powers to have a Singapore court set aside certain transactions that may be regarded, for example, as

transactions at an undervalue or transactions where unfair preferences are given. These concepts are based on UK insolvency legislation. We would expect representations and warranties to be given to the contrary in the financing documentation.



A private equity sponsor will typically focus on provisions in sharehold-ers’ agreements that facilitate transfer of their shares via the usual exit mechanisms. To the extent that the management team rolls over its equity and participates in the bidding vehicle, the private equity sponsor can be expected to impose lock-up arrangements, as well as pre-emption rights over the shares of the management team and restrict their ability to control the decision-making process over the management of the target company. The ‘reserved matter’ list for the management team is usually kept short. The concepts of ‘good leavers’ and ‘bad leavers’ are commonly found in the shareholders’ agreement to deal with the exit price payable to a member of the management team who leaves the group. Registration rights are usu-ally incorporated for the benefit of private equity sponsors looking to exit via a public offering in the United States. Non-compete and non-solicita-tion provisions are also commonly found in the shareholders’ agreements for private equity sponsors.

With regard to the issue of statutory or other legal forms of protec-tion available to minority shareholders, the memorandum and articles of association (M&AA) provides a basic layer of protection for minority share-holders. A company cannot act in breach of its M&AA and an aggrieved minority shareholder may commence legal action to prevent a threatened breach. The Companies Act protects the minority shareholders against unbridled variations of the provisions in the M&AA by requiring a special resolution to be passed by a majority of not less than three-quarters of the shareholders of the company who are present and voting at the meeting to vary any provision in the M&AA.

Minority shareholder protection against oppression is provided for in section 216 of the Companies Act, which allows minority shareholders to seek the intervention of the court where:• the affairs of the company are being conducted or the powers of the

directors are being exercised in a manner oppressive to one or more shareholders, or in disregard of his or her or their interests as share-holders; or

• some act of the company has been carried out or is threatened, or that some resolution has been passed or is proposed which unfairly discriminates against or is otherwise prejudicial to one or more shareholders.

The Singapore courts have wide powers to remedy or put an end to the matters of complaint. The Companies Act also empowers the minority shareholders by allowing such an aggrieved shareholder to bring an action on behalf of the company against wrongdoers where a wrong is done to the company (instead of the minority shareholders directly) pursuant to the common law right of derivative action. This avoids the situation where the minority shareholders are unable to seek a judicial remedy due to the majority’s efforts in stifling any potential claims against themselves. The statutory derivative action under section 216A of the Companies Act sup-plements the common law right. However, the statutory derivative action is not available to shareholders of public listed companies.

Other statutory and legal protection accorded to minority sharehold-ers include the various requirements under the Companies Act for share-holders’ approval by special resolution for certain major corporate actions proposed to be undertaken by the company. For example, such sharehold-ers’ approval is required for capital reductions, share buybacks and wind-ing up. Shareholders are also given the basic rights to inspect the statutory registers and minute books, as well as the audited accounts of the company.



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The ability of an acquirer to acquire control of a private or public company may be subject to the usual merger control regulations and relevant regu-latory approvals being obtained in the case where the target company is operating in a tightly regulated industry, such as banking, broadcasting and newspaper publications.

With regard to public companies where the Takeover Code applies, the relevant requirements depend on the structure of the transaction contemplated.

An acquisition or consolidation of effective control of a target public company (or registered business trust, business trust and real estate invest-ment trust) will trigger an obligation under rule 14 of the Takeover Code for the bidding vehicle and its concert parties to make a mandatory general offer for the rest of the shares in the target public company. Effective con-trol of a public company is acquired if the aggregate shares acquired would result in the bidding vehicle and its concert parties holding 30 per cent or more of the voting rights of such company. If the bidding vehicle and its concert parties already hold not less than 30 per cent but not more than 50 per cent of the voting rights of a public company prior to such acquisition, any increase of one per cent of the voting rights of such company in any six-month period will trigger the obligation to make a mandatory general offer under rule 14 of the Takeover Code. Acquisition of options and derivatives in a public company which causes the bidding vehicle to have a long eco-nomic exposure to changes in the price of securities of the public company will normally be treated as an acquisition of such securities. If the bidding vehicle and its concert parties will breach the thresholds under rule 14 of the Takeover Code as a result of acquiring such options or derivatives, or acquiring securities underlying options or derivatives when already hold-ing such options or derivatives, they must consult the SIC beforehand to determine if an offer is required, and, if so, the terms of such offer.

A mandatory general offer must not be subject to any condition other than that acceptances received pursuant to the offer will result in the bid-ding vehicle and its concert parties holding more than 50 per cent of the voting rights. In addition, the offer price for a mandatory offer must be at least the highest price paid by the bidding vehicle (or any of its concert par-ties) for such shares during the offer period and within six months prior to its commencement.

A voluntary general offer, on the other hand, must be conditional upon a level of acceptance exceeding 50 per cent of the total voting rights unless the bidding vehicle and its concert parties already hold more than 50 per cent of the total voting rights, in which case the voluntary general offer can be unconditional. If the intention of the bidding vehicle is to privatise the company, it will usually make the voluntary offer subject to the receipt of acceptances of not less than 90 per cent of the relevant total number of shares within four months from the commencement of the offer, so as to entitle it to invoke the compulsory acquisition procedure under section 215 of the Companies Act to ‘squeeze out’ the remaining non-accepting shareholders after the close of the offer. In this respect, it should be noted that in calculating whether the 90 per cent threshold has been reached, shares acquired by the acquirer, its related company, or a nominee of such acquirer or its related company before the general offer cannot be counted, while shares subject to an irrevocable undertaking by the shareholders of the target company to be tendered into the general offer can be counted. The SIC does not usually allow a voluntary offer to be subject to conditions that require subjective judgments by the acquirer. The offer price must be at least the highest price paid by the acquirer (or any of its concert parties) for such shares during the offer period and within three months prior to its commencement.

Some private equity firms prefer to privatise a public company by way of a scheme of arrangement under section 210 of the Companies Act due to its assurance of a binary ‘all or nothing’ outcome. A scheme of arrange-ment that is approved by a majority in numbers of the shareholders present and voting at the statutory scheme meeting representing at least 75 per cent in value of the shares voted will, if sanctioned by the High Court of Singapore, be binding on all shareholders. However, it should also be noted that as a condition for granting exemptions from complying with certain rules of the Takeover Code, the SIC typically requires the bidding vehicle and its concert parties as well as common substantial shareholders of the

bidding vehicle and the public company to abstain from voting at the statu-tory scheme meeting.

With regard to private companies, the relevant requirements or restrictions typically arise from the M&AA of the companies or the share-holders’ arrangements between the existing shareholders. The M&AA or shareholders’ agreements relating to private companies usually confer upon the shareholders (or certain shareholders) pre-emption rights in the event of a transfer of shares by an existing shareholder to a third party. In addition, the presence of tag-along or drag-along provisions in the share-holders’ agreements may mean that a bidding vehicle may find itself hav-ing to acquire a larger than originally contemplated equity stake. One of the most common considerations in the acquisition of control of a private company is the ability to obtain the necessary consents and waivers from third party customers, suppliers, landlords or financiers where change in control provisions are found in the relevant contracts.

15 Exit strategies


Private equity exits via an IPO in 2014 have been limited. Private equity investors continue to show a preference to sell their portfolio holdings to a strategic buyer, rather than take their chances on a public offering. Private negotiations with a strategic buyer offer vendors a greater level of control. However, both exit methods carry with them different types of challenges. In the case of a trade sale, finding buyers can be difficult in view of the current climate where buyers continue to be constrained by the ability to obtain bank financing to carry out acquisitions. In addition, the ability of a private equity firm to give commercial warranties about the portfolio com-pany, its business, assets or liabilities in the purchase agreement is typically limited due to a lack of direct management involvement in the business of the company; if not due to the general reluctance of private equity players to do so in a bid to limit post-closing recourse, as will be further discussed below. A trade buyer will usually also require certain consents in respect of the proposed sale to be obtained from third party vendors of the portfolio company, and that key management personnel be retained post-sale, so as to ensure minimal disruption to the business of the portfolio company after the completion of the sale. In the case of an IPO, the main challenge, apart from pricing and book-building issues, is that the listing exercise can be a rigorous process which entails a significant diversion of management resources from the business operations of the portfolio company.

In connection with a sale of a portfolio company, private equity ven-dors typically insist that they give only minimal operational warranties about the portfolio company itself, its business, assets or liabilities, so as to limit the possibility of any post-closing recourse. Generally, buyers will reluctantly accept this condition, and where the management of the portfolio company is selling their stake as part of the trade sale, the focus inevitably falls on them. If the management sellers have a significant stake in the portfolio company, warranties from those management sellers may offer a material degree of comfort to the buyer. However, if the manage-ment sellers own a relatively small stake, such warranties given by them are unlikely to be sufficient from a buyer’s perspective as the liability expo-sure of such management personnel is unlikely to be higher than the pro-ceeds for the management stake. A compromise that is gaining popularity in Singapore is the use of W&I insurance, which, in some circumstances, is employed to give comfort to a buyer for that part of the value of the sale proceeds not covered as a result of the private equity vendors not providing operational warranties.

To the extent that private equity vendors are required by the buyer to take on the risk in the purchase agreement for specific liabilities or risks identified during due diligence, indemnity provisions tightly crafted around specific liabilities or risks are preferred over the giving of open-ended war-ranties. It is not unusual for buyers to require that a portion of the purchase consideration be set aside in an escrow account for the duration of the claim period stipulated in the purchase agreement, although this will limit the ability of the private equity vendor to distribute the purchase proceeds



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to its investors and to liquidate the special purpose vehicle that previously held the relevant equity stake. In this regard, there has been an increasing trend in recent times to explore W&I insurance to bridge impasses in deal negotiations as it offers parties a third-party alternative in the risk alloca-tion process. A sell-side W&I insurance policy for the vendor would typi-cally provide cover for the vendor’s liability in the event of a claim under an indemnity provision or arising out of a breach of a warranty, after applica-tion of the policy excess. From a liability perspective, the vendor remains liable to the buyer under the purchase agreement but the vendor will bring in the insurers in the event of a relevant claim being made by the buyer. A buy-side W&I insurance policy allows the buyer to recover losses from war-ranty and indemnity claims directly from the insurer, plugging the gap in a buyer’s inability to recover under the warranties or indemnity provisions under the purchase agreement, whether as a result of the negotiated cap on the vendor’s liability or the vendor’s inability to meet any claims.

For transactions involving a private equity buyer and private equity vendor, both parties generally acknowledge that limited operational war-ranties will be given, and they will typically be more receptive towards exploring W&I insurance as a risk allocation tool instead, although there is little practical difference otherwise for such transactions.



Typically, for a listing on the SGX, rights and restrictions set out in a share-holders’ agreement will terminate upon an IPO together with the initial shareholders’ agreement. This is particularly the case as shareholders are likely to be regarded as parties acting in concert with each other under the Takeover Code if the shareholders’ agreement continues to be in effect. Thereafter, the Code of Corporate Governance will provide guidance on the standard of corporate governance to be maintained by companies listed in Singapore. For example, principle 4 of the 2012 Code states that ‘[t]here should be a formal and transparent process for the appointment and re-appointment of directors to the Board.’ Guideline 4.1 of the 2012 Code further provides that the board should establish a nominating com-mittee (NC) to make recommendations to the board on all board appoint-ments, with written terms of reference clearly setting out its authority and duties.

Registration rights are generally not required for post-IPO sales of shares on the SGX.

In the case of SGX Mainboard companies that satisfy the profitabil-ity test, the promoters’ entire shareholdings at the time of listing will be subject to a lock-up restriction of at least six months after listing. In the case of SGX Mainboard companies that satisfy the market capitalisation test or Catalist companies, the promoters’ entire shareholdings at the time of listing will be subject to a lock-up restriction of at least six months after listing, and at least 50 per cent of the original shareholdings (adjusted for any bonus issue or subdivision) will also be subject to a lock-up restriction for the next six months. In the case of investors each with five per cent or more of the company’s post-invitation issued share capital, and who had acquired their securities and made payment for their acquisition less than 12 months prior to the date of the listing application, a certain proportion of their shareholdings will be subject to a lock-up restriction for six months after listing. On the other hand, for investors each with less than five per cent of the company’s post-invitation issued share capital and who had acquired their securities and made payment for their acquisition less than 12 months prior to the date of the listing application, there will be no lock-up restriction on the number of shares which may be sold as vendor shares at the time of the IPO. However, if these investors have shares that remain unsold at the time of the IPO, a proportion of such remaining shares will be subject to a lock-up restriction of six months after listing. In addition, sub-ject to certain exceptions, investors who are connected to the issue man-ager for the IPO of the company’s securities will also be subject to a lock-up restriction of six months after listing.

The purpose of such lock-up restrictions is to maintain the promot-ers’ commitment to the listed company and align their interest with that of public shareholders.

Following an IPO, a private equity sponsor may dispose of its remain-ing shareholdings via a block sale.



Going-private transactions involving private equity sponsors are typically focused on industries where the financiers are able to obtain appropriate security arrangements to secure the financing required for the leveraged transaction. There is typically a preference for private equity sponsors to look for companies with a strong cash flow and a strong management team that is prepared to continue post-completion. Companies with the ability to reduce expenses and with less leverage are also attractive buyout can-didates as there is greater opportunity to realise the value in the leveraged buyout.

The number of going-private transactions in Singapore involving pri-vate equity firms in 2014 was small, with no particular industry standing out as a preference. One notable deal was the acquisition of Goodpack Limited by Kohlberg Kravis Roberts & Co LP by way of a scheme of arrangement.

Other private equity deals in Singapore (apart from going-private transactions) typically involved companies in various industries as with previous years, although there was a noticeable focus on the consumer and lifestyle sector in 2014. Some of the more notable transactions include the strategic equity investment by a consortium in Global Logistic Properties Limited, the acquisitions by L Capital Asia (an investment fund associ-ated with LVMH Moet Hennessy Louis Vuitton SA) of an over 90 per cent stake in the Crystal Jade and a majority stake in the Ku Dé Ta group and the acquisition of the Learning Lab by Advent International.

Certain industries are strictly regulated and the acquisition of shares above a certain threshold in these industries requires approval from the relevant governmental agency or regulator. Examples of such restricted industries include banking, broadcasting and newspaper publications. Accordingly, private equity firms may find it more difficult to take compa-nies in these industries private. Investments in these companies may also require the cooperation of one or more co-investors.

Separately, merger control regulations could also potentially limit the ability of a private equity firm to acquire a Singapore company if that firm has an interest in another major competitor in the same industry.



Tax-related considerations tend to shape the deal structure on a cross-bor-der going-private or private equity transaction as parties seek to minimise the tax costs of the acquisition as well as tax leakages in the existing opera-tions. Specifically, the impact of withholding taxes on dividends, local taxes, distributions and interest payments and restrictions on the private equity sponsor’s ability to repatriate earnings should be taken into account when structuring such cross-border transactions.

The ability of a private equity fund to implement a leveraged transac-tion may be limited by foreign laws prohibiting companies in their respec-tive jurisdictions from providing financial assistance in the form of security arrangements or guarantees. These limitations may compel the private equity fund to procure separate bank financing at the operating company level (rather than at the bidding vehicle level) to provide the lenders with an acceptable security arrangement to support the credit assessment.



The members of a club or group deal should be mindful of changes in the shareholdings of the members of the group. While the SIC accepts that the concept of persons acting in concert recognises a group as being the equiv-alent of a single person, the membership of such groups and the sharehold-ing of the members in the target company may change at any time. As such, there will be circumstances where the acquisition of voting rights by one



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member of a group acting in concert from another member or other non-members will result in the acquirer of the voting rights triggering a manda-tory offer obligation. In situations like these, the SIC should be consulted in advance.

Participants in a club deal should also be mindful that their conduct in the club or group deal is not regarded as anti-competitive under local compe-tition regulations. Appropriate documentation should be executed between the parties to deal with decision-making procedures, sharing of informa-tion, funding commitments and obligations, termination events, exit strate-gies, confidentiality obligations and dispute resolution mechanisms.



It is common for a private equity buyer to seek to have in place closing conditions that enable it to walk away from a deal without penalty should certain prescribed events occur prior to closing or if the necessary approv-als and waivers cannot be obtained. Common conditions to closing include material adverse change clauses (MAC clauses) under which the private equity buyer will be allowed to terminate the transaction in the event of a material adverse change to the target’s overall business, assets, financial condition or results of operations.

In addition, a private equity buyer will typically insist on the inclusion of certain pre-closing covenants to exercise a certain level of control over the target prior to the private equity buyer assuming control. MAC clauses and ‘best efforts’ covenants are not new and often are the subject of long negotiations between the vendor and the private equity buyer. Certainty of closing will be compromised if such MAC clauses or ‘best efforts’ cov-enants are not drafted in precise or quantifiable terms, allowing the vendor to subsequently rely on the vagueness or subjectivity of the language to ter-minate the transaction without penalty.

To improve deal certainty, parties may try to discourage any walk-out by agreeing up-front on a break fee payable in the event the transaction is aborted due to certain specified events that have the effect of preventing the transaction from proceeding or causing it to fail (for example, where a superior competing offer becomes or is declared unconditional as to acceptances within a specified timing or the recommendation by the target board company of a higher competing offer). However, in cases where the Takeover Code applies, certain obligations and restrictions would apply to break fee arrangements, such as the requirement for any break fee to be kept minimal, usually at one per cent of the transaction value.

The private equity buyer may also impose on the vendor exclusiv-ity restrictions for a specified period in the purchase agreement with the aim of preventing the vendor from soliciting competing bids or putting an end to on-going talks with other interested bidders. However, it should be noted that the Takeover Code mandates equality of treatment of compet-ing offerors. Any information provided to one bidding vehicle must be pro-vided equally and promptly to any other bona fide offeror.

Where shareholders’ approval for the sale is required, the private equity buyer may seek irrevocable undertakings from certain existing shareholders (usually members of management or a substantial share-holder, or both) to increase its chances of obtaining sufficient votes for the approval. In the context of going-private transactions, as highlighted above, the bidding vehicle’s financial adviser is usually obliged to provide a written confirmation as to the sufficiency of financial resources available to the bidding vehicle to complete the acquisition. To minimise the risk of payment default, in some cases such confirmation is provided at the bid submission stage to provide comfort to the vendor as to the certainty of closing.

To avoid prolonged uncertainty, it is also common for purchase agree-ments to stipulate a long-stop date before which all conditions to closing must be fulfilled.

It should be noted that in a going-private transaction subject to the Takeover Code, the termination of the purchase agreement is subject to the SIC’s approval being obtained even where the condition giving rise to the termination right has been triggered.

Ng Wai King [email protected] Jason Chua [email protected]

12 Marina Boulevard, Level 28Marina Bay Financial Centre Tower 3Singapore 018982


Update and trends

As mentioned above, on the regulatory front, proposed changes to the Companies Act have been passed by the Singapore parliament and are expected to come into force in 2015. These amendments, which are set out in the Companies (Amendment) Bill 2014, will introduce wide-ranging changes to the Companies Act and are intended to reduce regulatory burden on companies and provide greater business flexibility.

Apart from the amendments to the financial assistance regime as mentioned above, other notable amendments of relevance to the private equity space include amendments to refine the existing scheme of arrangement regime. For example, under the new regime, holders of options and convertibles can now be parties to a scheme of arrangement instead of having to exercise their options or convertibles to become registered shareholders before being able to participate in a scheme of arrangement.

SLOVENIA CMS Reich Rohrwig Hainz


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SloveniaAleš Lunder and Saša SodjaCMS Reich Rohrwig Hainz



Being a very small market, Slovenia has so far witnessed only smaller pri-vate equity transactions, with one exception. Most of the transactions are leveraged acquisition of shares (leveraged buyout), typically involving the acquisition of a majority stake in a company, whereas there are some trans-actions involving the acquisition of a minority stake. The funding is usu-ally a combination of equity, provided by a private equity sponsor, and debt provided by third parties, usually banks.

The structure commonly used is a special purpose vehicle (SPV), typi-cally in form of a limited liability company owned directly or indirectly by the private equity fund. In smaller transactions, the management quite often preserves a minority shareholding in the SPV to incentivise the management.



The Slovenian Corporate Governance Code (the Code) was jointly adopted by the Ljubljana Stock Exchange, the Slovenian Directors’ Association and the Managers’ Association of Slovenia and is addressed primarily to Slovenian listed companies. Partly corporate governance rules are also incorporated in the Slovenian Companies Act (ZGD-1), thus having effect for all companies.

Generally, it can be said that delisting has advantages such as large-scale flexibility for the company form, less strict disclosure requirements and reduced maintenance costs. As there is no need to operate the com-pany as a Slovenian stock corporation (d.d.) once the number of the share-holders has fallen below 50, a conversion to a limited liability company (d.o.o.) is possible. By such change the company does not need to comply with specific legal and formal (shareholders assembly with a notary public) requirements, thus reducing the administration and maintenance costs significantly as well as enabling closer managerial control of the acquired company.



In the case of a takeover of more than 33 per cent of most Slovenian stock corporations, whether listed or not, a mandatory takeover bid pursuant to

the Slovenian Takover Act (ZPre-1) has to be submitted. Under ZPre-1, the management of the target has to remain neutral and may not take active defensive measures against the takeover.

Further, under ZPre-1, the management of the target company will have to comment on the takeover offer explicitly.

Aside from that, all directors of Slovenian companies must fulfil their fiduciary duties and guard the interest and benefit of all members of the company. Therefore, if a public company is the target of the transaction the management needs to be very careful regarding the disclosure of any kind of sensitive information. It has become a common practice in Slovenia that the management hires financial and legal advisers for the process.

If the management of the target company has specific interest in the transaction, any kind of conflict of interest needs to be disclosed.

4 Disclosure issues


There are no specific rules under Slovenian law for disclosure provisions applying to going-private transactions.

In general, the Slovenian Market in Financial Instruments Act (ZTFI) set up different thresholds for equity holdings in public companies that, when reached, exceeded or fallen below, trigger different disclosure requirements for an investor. As to the ZTFI, whoever reaches, exceeds or falls below 5, 10, 15, 20, 25, 33, 50 and 75 per cent of the voting rights in a public company is obliged to promptly notify the company.



Before going private, the private equity investor needs to obtain an equity position of at least 90 per cent of the voting rights in listed company. If he or she is not in the position to acquire this stake initially, he or she can try to achieve this through a voluntary or mandatory takeover bid, whereas the following timeframe applies:• within three days after crossing a threshold for a mandatory takeo-

ver bid, the takeover intention has to be published in a daily news-paper distributed across Slovenia, whereas prior to the publication the Slovenian Security Market Agency (ATVP), the Competition Protection Agency and the management board of the target have to be notified of the intention;

• within 10–30 days after the publishing of the intention, publishing of the takeover bid and the prospectus both being subject to prior ATVP approval;

• the acceptance period must not be shorter than 28 days or longer than 60 days from the publishing date of the takeover bid; and

• upon obtaining a majority of at least 90 per cent of all voting rights, within a period of three months after the publication of the takeover results the investor may initiate a squeeze-out proceeding, thus avoid-ing a procedure to determine the cash compensation, as the offered price in the takeover proceeding is deemed to be a just price.

CMS Reich Rohrwig Hainz SLOVENIA


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If an investor holds a majority of at least 90 per cent of a public company, he can initiate a squeeze out according to the ZGD-1, with a respective shareholders’ resolution according to the following schedule:• the minimum notification period for a shareholders’ meetings under

ZGD-1 is 30 days. However the preparation time for the required documentation, especially for the report on the adequacy of the cash compensation, can take several weeks, and in complicated cases even several months;

• if the shareholder resolution on squeeze out been passed, the minority shareholders can challenge it within one month after the sharehold-ers’ meeting. If no challenge has been filed with the competent court within this time period, the court register will register the squeeze out; and

• any dispute on the cash compensation has no influence on the effec-tiveness of the registration, as the minority shareholder may only file an action with the competent court for the determination of a just cash compensation by the court.

In practice, other time considerations need to be considered for both pri-vate and public transactions, especially in the preparatory phase, the due diligence and in the post-signing phase, the antitrust or other regulatory clearance that is required as a condition to closing.



The ZGD-1 provides a squeeze-out threshold of 90 per cent, whereas the minority shareholder may not challenge the squeeze out if the formal pro-cedure was followed correctly. If the minority shareholders do not agree with the monetary compensation, they cannot challenge the squeeze out but can only demand a court to determine a just compensation.

If the squeeze-out procedure follows immediately after a mandatory voluntary takeover bid (within a period of three months), the monetary compensation can be the same as the price paid in the takeover procedure, thus reducing the chances of the minority shareholders to challenge the monetary compensation to zero.



The purchase agreements in private equity transactions do not differ sub-stantially from provisions used in other purchase agreements. As in other jurisdictions, the terms of the purchase agreement will very much depend on the relative bargaining power of the parties.

It needs to be noted that debt push-down structures (where the debt of the acquisition was ultimately borne by the target company) or structures by which the loan financing the acquisition is secured by the target com-pany are explicitly forbidden by ZGD-1 for Slovenian stock companies and, due to capital maintenance rules, are difficult for limited liability compa-nies without adequate compensation (see question 9).

We have observed an increased use of locked-box mechanisms in recent transactions.



The participation of the existing management can be structured in vari-ous ways, including equity-based incentives, whereas stock options are not common in Slovenia and it is far more common to grant a management bonus.

In this regard, it has to be also considered if, and to what extent under their existing agreements, the managers are entitled to bonuses or sever-ance payments in case of change of control.

Any management compensation has to be adequate, with a view to the best interests of the company, not the shareholders or the management.

9 Tax issues


The main intention of investors in relation to taxes is to minimise the over-all tax burden of both the investment transaction and the subsequent deal-ings between entities involved. As interest expense on acquisition debt is, in line with the guidelines provided by the Slovenian tax authorities, not recognised for tax purposes, a classic debt push-down cannot be achieved by way of merger or, as it seems, by any other vehicle resulting in cost of debt being settled by the target. Therefore, the investors’ main focus lies in achieving the tax-optimised repatriation of profits and in potential tax-efficient exit scenarios.

Fiscal unity is not provided for by Slovenian tax legislation, and there are no special rules on taxation of holding companies. The change of own-ership in the target does not affect tax losses carried forward provided that the target continues with its business activity. The losses may be carried forward indefinitely, but are limited to 50 per cent of the tax basis in the taxable period.

Interest is tax deductible subject to three conditions. Firstly, according to the general rule, any expense incurred by the company should be neces-sary for generating taxable profit in order to be tax deductible. It is deemed that expense is not necessary for generating profit if it is not a direct con-dition for or direct consequence of performing the business activity, if it is of private nature or is not usual in business practice. The second condi-tion, applicable for related party debt, is that interest is arm’s length. The acknowledged interest rate applicable for such loans is administratively determined. Lastly, to be tax deductible, thin-capitalisation rules should be considered. As of 2014, the thin-capitalisation rules apply to direct or indirect shareholders’ loans, sister loans and loans guaranteed by the shareholder. The applicable debt–equity ratio is 4:1. Alternatively, in rela-tion to transfer pricing and thin capitalisation, the parties may otherwise prove that contractual interest is arm’s length or that the excess loan could be obtained from third parties, for example, comparable offers by third-party banks.

All intra-group transactions should be made at arm’s length and be properly documented and supported to be recognised for tax purposes. Any distribution made to a parent company without observing transfer pricing principles may be characterised as deemed dividend and taxed as such. Transfer pricing adjustments are not required for transactions between two resident parties in a positive tax position subject to corporate tax at the standard rate (17 per cent).

Withholding tax at the standard rate of 15 per cent may be reduced by application of the EU Directives or the extensive double tax treaty net-work. Withholding tax generally does not apply to transactions between tax residents.

No special exit tax applies. Sale of shares in a Slovenian company by a tax non-resident is not subject to taxation in Slovenia. If shares are sold by a resident company, the capital gain achieved is taxed as business income through the annual corporate income tax return. Pending certain condi-tions, 50 per cent of the capital gain achieved may be tax exempt. Income achieved from disposal of shares in real estate companies is sourced to Slovenia and taxable if the profit may be attributed to the permanent estab-lishment of the non-resident in Slovenia.

There are no specific rules or caps applicable for executive compen-sation. Exercising stock options is a taxable event, the difference between market price and exercise price is taxable as employment income. Capital gain achieved on sale of shares is subject to capital gains tax.

Share acquisition may not be classified as an asset deal, namely there is no revaluation of assets for tax purposes and the company continues to depreciate the assets as it has done before the change of ownership.

SLOVENIA CMS Reich Rohrwig Hainz


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Due to the current extremely bad shape of the Slovenian banking sector, Slovenian banks are very restrictive in granting any debt for private equity transactions.

So we encounter the typical financing structure provided by foreign banks and investors of senior debt, and in large transactions also subordi-nated debt; whereas due to the widespread necessity of refinancing of the existing indebtedness of the target company, senior loans are also provided to the target at closing. Loan agreements under Slovenian law typically do not contain change of control clauses (instead an information obligation) or an early-repayment fee, making the refinancing less complicated.

In large deals, the issuing of high-yield bonds is also not uncommon.When several forms of debt occur, the rights to payment and to

enforce security of each debt provider are commonly regulated in inter-creditor agreements.

As mentioned in questions 7, 9 and 11, capital maintenance rules in Slovenia are quite stringent. Any distribution, providing of guarantees or security to a shareholder potentially qualifies as violation of capital mainte-nance rules unless the transaction is commercially justified, meaning that the terms and conditions of the transaction pass an arm’s-length test (only if a prudent third party would have entered into such a transaction on the same terms).



Under ZPre-1, the bidder in a takeover procedure has to prove to the ATVP that it has sufficient funds for the acquisition of all outstanding shares in the target through a bank guarantee for the full amount. Further, under ZPre-1 the bidder has to give a statement to ATVP that the shares of the target acquired in the takeover procedure will not be used as collateral for the acquisition financing.

Therefore, bidders try to acquire as large a share package as possible to reduce the costs and to be generally able to use the shares at a later stage as collateral.

On the equity side, the private equity fund will sometimes have to give a warranty in the purchase agreement for the equity financing com-mitment, and it is not unusual to provide an equity commitment letter to backstop its obligation to fund the SPV immediately prior to closing.



There are no specific fraudulent conveyance or bankruptcy issues related to private equity transactions. However, there are major general risks asso-ciated with insolvency proceedings:• any transaction entered into within a one year period predating the

formal opening of (full) insolvency proceedings may be challenged by the insolvency administrator or a creditor of the insolvent company if there was a fraudulent conveyance applying to certain contracts, including share purchase contracts with the intention to receive an unusual or unjustified low consideration and with the intention to harm the position of other creditors;

• shareholders’ loans granted to a company in financial distress may be deemed equity replacement; and

• personal civil and criminal liability of directors if the directors approved and provided security in violation of Slovenian capital main-tenance rules and the mandatory provisions of ZGD-1 in relation to Slovenian stock companies.

Share purchase agreements and financing documents therefore regularly contain representations and warranties that the insolvency of the target

company is neither threatening nor have any kind of insolvency proceed-ings been started.



Under Slovenian law, shareholders’ agreements ensuring the necessary flexibility are extremely difficult in Slovenian stock companies but gen-erally possible in limited liability companies. As articles of association of all companies are publicly available, it is common practice to enter into separate shareholders’ agreements typically containing tag-along and drag-along rights, as well as detailed provisions on corporate governance (including veto rights, detailed information rights for minority sharehold-ers, appointment of management, deadlock provisions, list of reserved matters which may be undertaken with a prior approval of the other party), pre-emption rights and restriction on share transfer.

Under the ZGD-1, certain shareholders’ resolutions such as changing or amending of the article of association, re-registering the company to a listed company or vice versa or changing the share rights may be passed only with a majority of 75 per cent of the votes cast.



The ZPre-1 has implemented the EU Takeover Directive, and is thus gener-ally harmonised with other comparable European law. There are, however, a few important exceptions such as extending the mandatory offer to non-listed companies. Pursuant to ZPre-1, anyone who directly or indirectly acquires interests in shares carrying 33 per cent or more of the voting rights in a listed company or in a Slovenian stock company having more than 250 shareholders, or has more than €4 million of total capital (not share capital) must make a mandatory offer.

The mandatory offer has to be at the highest price the bidder has paid in the 12 months prior to the announcement of the offer.

With respect to the stock companies not falling under the above men-tioned threshold, and for limited liability companies, no statutory limita-tion on the acquisition of the controlling stake applies with the exception of relevant restrictions of Slovenian or EU anti-trust laws.

Further, some sectors like banks and insurances are falling under spe-cial supervision of relevant controlling bodies.

15 Exit strategies


Apart from respective restrictions on share transfer in articles of associa-tion or shareholders’ agreements, there is very little that could limit the ability of a private equity firm to sell its stake to a third party. In case of an IPO the portfolio company must be organised as a Slovenian stock com-pany and the listing requirements have to be observed which requires com-prehensive preparations. Therefore IPOs are not common in this context.

Private equity sellers tend to limit their continuing liability to purchas-ers, and they try not to give any business warranties or indemnities. We have noted that recently there is an interest in warranty and indemnity insurances.

CMS Reich Rohrwig Hainz SLOVENIA


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IPOs are not very common in Slovenia in connection with private equity transactions.

Any governance rights and restrictions are typically of contractual nature and binding only between the parties. Therefore, any such exist-ing rights and obligations as tag-along and drag-along rights would not be binding for shareholders investing in the company after an IPO. On the other hand, any pre-IPO restrictions and obligations will be binding for pre-IPO shareholders in the IPO process.

There are no registration rights required under Slovenian law.



Due to the small market in Slovenia, we have not seen a public-to-private transaction for a while. However, as the Slovenian govern-ment has started a real privatisation process for the first time since independence, it can be expected that there will be some going- private transactions in near future. The privatisation list is from a wide range of industry sectors. Apart from that due to the financial crisis, Slovenian financial investors and banks (having acquired them as collat-eral) will have to sell significant shareholdings in public companies.

There are no industry-specific regulatory schemes limiting potential targets, however the mandatory consent of regulators in case of change of

control in various sectors like banking, insurance, broadcasting, telecom-munications and financial services may have an impact on the time frame of the transaction.



There are no specific foreign investment restrictions with the exception of very few sectors (like broadcasting and defence), so cross-border transac-tions are very common in Slovenia and have recently increased.



Slovenian law does not contain any specific regulations on club and group deals, therefore an appropriate and detailed shareholders’ agreement is required (see question 13).

If the target is a Slovenian stock company and subject to Slovenian Takeover Act, the parties will most probably be perceived as acting in con-cert and any shares held or acquired by the members of the club or group will be aggregated. The threshold for triggering a mandatory takeover bid is holding 33 per cent of the voting rights.



Apart from the usual antitrust clearance, we have recently observed the use of a MAC clause, triggering a termination right prior to closing against pay-ment of a break-up fee due to uncertain acquisition financing.

Aleš Lunder [email protected] Saša Sodja [email protected]

Bleiweisova 301000 LjubljanaSlovenia


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SwitzerlandAndreas Rötheli, Beat Kühni, Felix Gey and Dominik KaczmarczykLenz & Staehelin



Types of transactionsAfter a robust 2013 that brought a significant uplift for private equity deals in the Swiss market compared to more moderate years for private equity after the financial and worldwide economic crisis, 2014 private equity deal numbers and volumes remained upmarket largely due to a generally favourable market environment encompassing positive growth prospects for the Swiss economy, a further recovery of the world economy largely due to the strength of the US economy, relatively high optimism among execu-tives and investors alike and historically low financing costs. The Swiss pri-vate equity market thus benefitted in 2014 from a generally good market environment and a relatively robust outlook so that all standard transac-tion strategies to invest in, grow or acquire profitable portfolio companies were executed in Switzerland in 2014. While deal numbers and volumes for seed, start-up or later-stage venture capital deals remained on relatively low levels, it is generally expected that such venture capital investments may resurge and increase in the years to come following some important new developments, including the establishment of the ‘Campus Biotech’ by the Bertarelli family and the Wyss foundation and a legislative project aiming for a significant Swiss investment fund to be established, namely the Future Fund Switzerland, which is hoped to attract new investment for innovative future trends and technological developments from pension funds. Pending this, the bulk of the Swiss private equity market still largely consists of growth capital investments (approximately 10 per cent) and buyout or buy-in investments (accounting for approximately 77 per cent in terms of amounts and number of companies), while rescue or turnaround investments (approximately 1 per cent) and replacement capital invest-ments (approximately 2 per cent) remain relatively insignificant. Of con-tinuing interest to private equity firms are buyouts by which they acquire business operations no longer deemed core assets in the context of larger corporate divestitures.

Structures commonly usedThe majority of buyout or growth investments in Switzerland are structured so that the fund incorporates a new Swiss company, which then serves as a special-purpose (acquisition) vehicle (SPV) to purchase the shares in the target portfolio company. While such SPV is typically formed with only the minimum share capital of 100,000 Swiss francs, the fund managers draw down the capital committed by the investors shortly before the transaction in order to fund the SPV with the required equity to complete the trans-action. Private equity houses focusing on venture capital investments, on the other hand, generally acquire participations in portfolio companies directly through one (or several) of their investment funds (usually domi-ciled in offshore jurisdictions) by subscribing for shares issued in a capital increase of the target company.



The main rules relating to corporate governance in Switzerland are as follows:• the Swiss Federal Code of Obligations (CO), in particular articles 620

et seq which are partly mandatory and govern any Swiss stock corpo-ration, irrespective of whether it is privately held or listed on a stock exchange;

• the Swiss Federal Act on Stock Exchanges and Securities Trading (SESTA) and its implementing ordinances, which, inter alia, contain rules regarding the disclosure of significant shareholdings and pub-lic tender offers with respect to Swiss companies listed on a stock exchange in Switzerland and non-Swiss companies with a primary list-ing on a stock exchange in Switzerland;

• the ordinance against excessive remuneration by listed companies, which applies to corporations organised under Swiss law whose shares are listed on a stock exchange in Switzerland or abroad (foreign com-panies only listed on a Swiss stock exchange or merely having tax resi-dence in Switzerland are not affected) and provides, inter alia, for the mandatory election by the shareholders of the chairman of the board, the members of the remuneration committee, the annual binding shareholder vote on the aggregate remuneration of the board and the executive committee, and the prohibition of certain forms of remu-neration for the members of the board and the executive committee (eg, severance payments, advance payments, payments related to the acquisition or disposal of businesses);

• the listing rules of the SIX Swiss Exchange (SIX Listing Rules) and its implementing directives, which, inter alia, contain periodic financial reporting and other continuing and ad hoc reporting rules applying to companies whose shares are listed on the SIX Swiss Exchange;

• the Directive on Information relating to Corporate Governance of the SIX Swiss Exchange (SIX-DCG), which requires Swiss companies listed on the SIX Swiss Exchange and non-Swiss companies with a primary listing on the SIX Swiss Exchange to disclose in their annual reports certain information on the board and the senior management, their compensation and the control mechanisms;

• the Directive on the Disclosure of Management Transactions of the SIX Swiss Exchange (SIX-MTD), which requires Swiss companies listed on the SIX Swiss Exchange and non-Swiss companies with a pri-mary listing on the SIX Swiss Exchange to disclose transactions in the company’s shares and related instruments by members of the board and the senior management; and

• the Swiss Code of Best Practice for Corporate Governance (SCBP) issued by Economiesuisse, the umbrella organisation representing the Swiss economy, which sets forth corporate governance standards in the form of non-binding recommendations primarily for listed com-panies. These recommendations are divided into four parts (share-holders, board of directors and executive management, auditing, and disclosure) and, although not binding, these rules have become stand-ard for listed companies.

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As follows from the above, the vast majority of corporate governance-related rules and regulations apply to listed companies, only with the exception of the limited governance-related provisions contained in the Swiss Federal Code of Obligations that apply to all stock corporations irre-spective of whether they are listed or private. The mandatory corporate governance rules applying to private companies are thus much lighter and limited to a few provisions of the CO. Although limited in scope, govern-ance issues can and will regularly arise if financial investors (eg, in the con-text of venture capital investments) hold minority interests in the portfolio company but have far-reaching control and veto rights through their repre-sentatives in the board of directors of the portfolio company, in which case potential conflict of interest scenarios may arise where corporate govern-ance principles will become important.

It should also be noted that special rules on corporate governance apply to banks and insurance companies and to investment companies with variable capital (SICAV) or fixed capital (SICAF). In particular, the FINMA Circular on Minimum Standards for Remuneration Schemes of Financial Institutions (Remuneration Circular) sets forth minimum stand-ards for remuneration schemes of banks, insurance companies and other financial institutions.



Going-private transactions of listed companies in Switzerland usually occur through a public tender offer pursuant to the rules of the SESTA or a merger pursuant to the Swiss Merger Act (SMA), whereas private equity transactions in general are conducted according to the common rules of the CO. Under Swiss law, the members of the board of directors are bound by fiduciary duties and by the principle of equal treatment of all sharehold-ers. In addition, the SESTA contains provisions to ensure transparency, fairness and equal treatment of shareholders in corporate takeovers.

In particular, the board’s fiduciary duties imply the duty to take meas-ures, or rather, to apply procedural safeguards in order to avoid the effects of potential conflicts of interest. The establishment of a special (ad hoc) committee is one of these procedural safeguards. The special committee shall be composed of at least two members who are not participating or do not have an interest in the transaction. Other measures include absten-tion of conflicted board members and obtaining of a fairness opinion. Should the board of directors issue a recommendation on a public tender offer, it will usually obtain a fairness opinion from an independent audit firm or investment bank. The board’s recommendations will then be based on such fairness opinion. Members of the senior management may have to abstain from decisions on a transaction in case of a conflict of interest, whereas significant shareholders generally do not directly represent the company in a transaction and may pursue their interests as set forth in the articles of association and by exercising their voting right at shareholders’ meetings.

4 Disclosure issues


According to the SIX Listing Rules, listed companies must inform the mar-ket of any price-sensitive facts that have arisen in their sphere of activity (ad hoc publicity). Price-sensitive facts are facts that are capable of trigger-ing a significant change in market prices. Based on this provision, going-private transactions might need to be disclosed at an early stage. However, the issuer may postpone the disclosure of a price-sensitive fact if the fact is based on a plan or decision of the issuer, and if its dissemination might prejudice the legitimate interests of the issuer. The issuer must ensure that the price-relevant fact remains confidential for the entire time that dis-closure is postponed. In the event of a leak, the market must be informed about the fact immediately.

Moreover, if a going-private transaction takes the form of a public tender offer, the bidder shall publish an offer prospectus, and the board

of directors of the target shall publish a report containing all necessary information in order for the shareholders to be able to assess the offer. The board’s report shall describe the effects of the offer on the target and its shareholders. It may contain a recommendation on whether to accept the offer, or may only set out the pros and cons of the offer without making any recommendation. It shall further specify the intentions of the shareholders who hold more than 3 per cent of the voting rights, any defensive measures of the target as well as any potential conflicts of interest.

Should a going-private transaction be effected by way of a merger (see question 6), the board of directors of the target will have to provide a detailed report, which, inter alia, shall explain the consequences of the merger, the merger agreement and the exchange ratio. Such report shall then be verified by an independent auditor. Furthermore, during the 30 days preceding the merger, the shareholders have the right to inspect the documentation relating to the merger (including the merger agreement, the merger report, the audit report as well as the financial statements of the companies taking part in the merger).



The following elements may, inter alia, influence the timing of a going-private transaction involving a listed company:• in the case of a going-private transaction occurring through a public

tender offer: the process starts by a pre-announcement; within six weeks of such pre-announcement, the bidder shall publish the offer prospectus; the offer can be accepted 10 trading days after publica-tion of the prospectus at the earliest (the ‘cooling-off period’); the offer shall remain open during 20 to 40 trading days; if the offer was suc-cessful the bidder must afford the shareholders an additional period of 10 trading days to accept the offer (all deadlines may be reduced or extended by the Swiss Takeover Board upon request);

• in the case of a going-private transaction occurring through a merger: the merger agreement, the board report on the merger and the audit report have to be issued 30 days prior to the shareholders resolution on the merger; in addition, the merging companies might need to observe a consultation period with the employees prior to the merger should the contemplated merger have any consequences on the employment conditions; moreover, within three months of the publication of the merger, creditors may require that their claims be secured;

• for companies whose shares are listed on the SIX Swiss Exchange, the Directive on the Delisting of Equity Securities, Derivatives and Exchange Traded Products (SIX-DD) is applicable; in principle, the SIX-DD requires that the listing must generally be maintained for at least three and a maximum of 12 months from the delisting announce-ment (continued listing period); shareholders merely have the (lim-ited) right to challenge the delisting decision with regard to the continued listing period; and

• merger control notifications and approvals, governmental consents required in regulated industries, and the obtaining of tax rulings, as applicable, may also influence the timing, as they may take a few months depending on the circumstances.

Private equity transactions not involving a listed company generally do not have different timing considerations as any other Swiss mergers and acqui-sitions transactions, except that the securing of third-party financing may require additional time.



Going-private transactions in Switzerland are typically effected through a public tender offer, which is followed by a squeeze-out of any remain-ing minority shareholders. There are basically two alternate routes for squeezing out minority shareholders of a Swiss company listed on a stock exchange in Switzerland upon completion of a public tender offer.

According to the SESTA, the bidder in a public tender offer may squeeze out the remaining minority shareholders of the target company if such bidder holds more than 98 per cent of the voting rights in the target



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company. In such a case, the bidder may apply for a court decision cancel-ling the remaining equity securities of the target. The minority sharehold-ers are entitled to receive the tender offer consideration for the cancelled shares. The request to the court must be made within three months of the end of the additional acceptance period for the public tender offer (see question 5).

Alternatively, the SMA provides for the possibility to squeeze out the minority shareholders by virtue of a squeeze-out merger if at least 90 per cent of the shareholders entitled to vote in the absorbed company’s (ie, the target’s) shareholders’ meeting agree to such a merger. The squeezed-out minority shareholders can be forced to accept cash (or other kinds of assets) in exchange for their shares in the target.

Although the aforementioned thresholds may appear high, they are frequently reached in practice if a public tender offer has been successful and the consideration that has been offered is attractive.

In case of a statutory squeeze-out pursuant to the SESTA the minor-ity shareholders have the right to adhere to the court procedure and bring forward their arguments. However, they almost never do so due to the very limited grounds that can be asserted in such procedure. Importantly, the court has no power to reconsider the tender offer consideration in a squeeze-out in accordance with the SESTA. In contrast, the minority shareholders in a squeeze-out merger pursuant to the SMA have appraisal rights and may challenge the merger resolution arguing that the considera-tion received in exchange for their shares is not adequate. The squeezed-out minority shareholders may in such circumstances bring an action within two months of the publication of the merger resolution. However, such action does not hinder the legal effectiveness of the merger. Also, due to the restrictive case law of the Swiss Federal Supreme Court, the risk of a successful challenge is rather low if the squeeze-out merger is carried out within a short period of time of a public tender offer.



Sale and purchase agreements (in buyout deals), investment agreements and shareholders agreements (in venture and growth capital deals) usu-ally contain a comprehensive catalogue of representations and warran-ties, including with regard to title, organisation, financial statements, tax, intellectual property, employees and social security, real estate, material contracts and absence of litigation. This catalogue is usually reduced in the case of MBOs, since the buyers have been involved in the management of the target or have extensive access to the management.

Sale and purchase agreements usually also contain specific indemni-ties, including full indemnities with respect to taxes or other special risks identified during the due diligence process.

In the case of staggered payment of the purchase price in the context of a buyout transaction, due to the often thin capitalisation of the purchas-ing vehicle, the seller will usually require from the purchaser a bank guar-antee or a guarantee from a parent company.



There are two types of equity-based incentives: participation of the man-agement from the outset (MBO) or stock option plans providing for a suc-cessive participation, which may be implemented at any time. The Federal Act on the Taxation of Employee Equity Incentive Plans, which became effective on 1 January 2013, and its implementing ordinance are notewor-thy in this context. While these rules do not fundamentally change the taxation rules previously developed by the practice of the cantonal tax authorities, they clarify certain issues that had given rise to varying can-tonal practices and provide for new reporting duties for Swiss employers who have employees participating in employee equity incentive plans. In view of this more recent development, it is important to review any exist-ing tax rulings and to ensure that appropriate reporting procedures are set up. Other benefits in the form of remuneration, bonuses and further com-pensation are usually granted through employment agreements.

Although there are no specific timing considerations regarding the determination of management participations, any management incen-tive is, however, susceptible to creating conflicts of interest in the con-text of a going-private transaction, since the management is bound by fiduciary duties and has a duty to act in the best interest of the company. Accordingly, in case of a public tender offer, the board report shall disclose any arrangements between the bidder and the board or management of the target company, as well as the measures that will be taken in order to avoid any adverse effects of the conflict of interest on the shareholders. In case of a merger, the merger agreement shall also disclose any advantage granted to the management.

As regards companies in the financial industry, consideration must also be given to the Remuneration Circular of FINMA that sets minimum standards for remuneration schemes in banks, insurance companies and other financial institutions (meeting certain financial thresholds), putting particular emphasis on the sustainability of remuneration practices (espe-cially regarding variable remuneration) and the prevention of incentive distortions, as well as the new ordinance against excessive remuneration (see question 2).

9 Tax issues


Taxes are levied at three different levels in Switzerland: federal, cantonal and municipal. The cantonal and municipal rates vary markedly across Switzerland, as cantons and municipalities are free to determine their tax rates. This said, the rates are generally below the average tax rates in Europe and are reviewed on a yearly basis. The ordinary effective corpo-rate income tax rates currently range between approximately 11 per cent for the lowest canton and municipality and approximately 24.5 per cent for the highest.

Privileged tax regimes, such as the auxiliary, principal and holding company regimes, are still available to date. They are, however, meant to be abolished in the near future (in all likelihood within the next five years) and replaced by a general decrease in the effective corporate income tax rate. The regimes are as follows:• the auxiliary company regime allows companies to benefit from a sig-

nificant tax exemption of foreign source income, provided that the scope of the commercial activity carried out in Switzerland is limited;

• the principal company regime is, in essence, a lump-sum exemption of the corporate income tax base granted in consideration of foreign permanent establishments; it is available to companies that assume certain key regional functions on behalf of a multinational group; and

• the holding company regime applies to holding structures and mainly consists in the exemption of corporate income tax at cantonal and municipal levels; holding companies frequently also benefit from so-called ‘participation relief ’ for income generated from dividends or capital gains from investments in other companies (subject to their participations meeting certain conditions), or both.

Tax holidays, namely full or partial exemptions from corporate income and capital taxes for newly established businesses, may typically be granted to industrial companies. The main criteria for such tax holidays to be granted are the number of new positions created and the investments made in the canton where the company has its corporate seat.

Interest on debt is deductible from taxable profits, regardless of whether the debt is subordinated. This said, there are limitations on the deductibility of interest in connection with shareholder and/or related party loans based on arm’s-length rules for interest rates and/or on thin-capitalisation rules (see question 10).

Executive compensation generally qualifies as taxable income of the relevant recipient. Incentive compensation awarded in the form of cash, shares or options is taxed at the time of award, except for unlisted or restricted options that are taxed upon exercise.

Capital gains realised by Swiss-resident individuals on privately-held assets, such as shares, are generally exempt from income tax. Exceptions apply to real properties and non-operating assets held by companies.

Share deals generally cannot be classified as asset acquisitions in Switzerland and may trigger a transfer tax of up to 0.3 per cent of the



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consideration if a securities dealer pursuant to the Swiss Federal Act on Stamp Duties is involved in the transaction. Asset deals usually involve VAT on assets or services, which is typically settled in a notification procedure.

The issuance of a company’s share capital, as well as additional con-tributions in cash or kind into a company’s equity, are subject to Swiss issuance stamp tax at the rate of 1 per cent. However, contributions not exceeding an aggregate amount of 1 million Swiss francs and contributions that qualify as business restructuring are exempt. Venture capital compa-nies benefit from a partial exemption on issuance tax.

A 35 per cent withholding tax is levied on profit distributions (including any hidden dividends and distributions of liquidation proceeds) by Swiss companies. This rate can be reduced if the dividend is paid to a Swiss-resident shareholder or if a double tax treaty applies (see question 18). By contrast, the repayment of contributions made by shareholders directly into the equity of a Swiss-resident company is not subject to Swiss with-holding tax.

Pursuant to the practice of the Swiss tax authorities, privileged tax regimes, as well as the tax consequences of significant transactions involv-ing Swiss-resident companies may be, and typically are, secured by written tax rulings.



Private equity investors usually provide financing in the form of mezza-nine debt or subordinated loans. In the context of leveraged buyouts, one will generally use senior and junior debt in the form of revolving and term credit facilities provided by financial institutions.

Customarily, banks providing the acquisition financing will require that the existing debt be refinanced and that the existing security be released and used as collateral to secure the acquisition financing.

The target can only provide security interest up to the amount of its freely disposable reserves. The target’s ability to grant upstream or cross-stream guarantees or other types of security shall be included in the cor-porate purpose clause of the target’s articles and must be approved by the shareholders (see question 12). There are no statutory margin or corporate minimum capitalisation requirements in Switzerland. However, de facto limitations result from the thin-capitalisation rules applied by Swiss tax authorities. Interest paid on amounts of debt exceeding certain thresh-olds may be requalified as a hidden dividend if paid to a shareholder or a related party of a shareholder. Consequently, such interest would not be tax deductible and would be subject to 35 per cent withholding tax. If a loan is granted by a third party but guaranteed by the parent company, the thin-capitalisation rules also apply.



In the context of a public tender offer the offer prospectus must contain information regarding the financing of the offer, as well as a statement from the independent review body that the bidder took all necessary measures so that the financing was available at closing (certainty of funds). However, the bidder is not required to summarise the financing terms and conditions or to publish any financing documents. In practice, very short statements in the prospectus have become standard (for instance, it is considered suf-ficient if the prospectus states that 100 per cent of the offer will be financed through a bank facility). This practice is justified by the fact that the review body must, in particular, assess the financing of the offer and the availabil-ity of funds before the offer is published. Where funds required for the offer are borrowed, the review body examines, in particular, the creditworthi-ness of the lender and the contractual terms which enable the lender to withhold the disbursement of the funds.



Fraudulent conveyance issues are rather exceptional in private equity transactions other than in rescue and turnaround deals. In distressed situ-ations, however, careful consideration has to be given to the structuring of the transaction and the terms of financing provided to a troubled company.

Transactions within a suspect period of up to five years before decla-ration of insolvency may be challenged if the consideration received was in manifest disproportion to the insolvent debtor’s own performance. Furthermore, it must be ensured that the injected funds are not used to replace existing unsecured financing and that there are reasonable pros-pects of a successful restructuring of the distressed target company, as oth-erwise loans granted to the target might be subordinated to the claims of other creditors in the event of insolvency. In this context the recent amend-ment of the Swiss Debt Enforcement and Bankruptcy Act (effective as of 1 January 2014) brought about some noteworthy changes with respect to the ability of third parties to challenge a transaction and introduced certain mechanisms to facilitate restructuring measures for insolvent companies.

Upstream or side-stream guarantees or other security interests granted by the target in respect of obligations of a parent or an affiliate (other than a subsidiary) are subject to various requirements and limita-tions, which call for adherence to the formalities applicable to distributions to shareholders and may limit the enforceability of such guarantee for the benefit of an affiliate. Similarly, if the target company does not receive ade-quate consideration for entering into and maintaining such guarantee, any sum received thereunder may be challenged if the target were to become insolvent.



Shareholders’ agreements customarily restrict the transferability of shares and provide for a combination of rights in respect of the sale of shares (rights of first refusal or first offer, call and put option rights, drag-along and tag-along rights), sometimes safeguarded by share escrow arrangements. Further common key provisions include voting undertakings, special quora and majorities (veto rights) for certain reserved board and share-holder matters, information rights, covenants regarding the company’s business and management, provisions regarding voluntary and manda-tory conversion of preferred shares (if applicable), and board appointment rights. In situations where it is important that no single party has control of the board, the shareholders’ agreement may provide for a certain number of independent directors. In venture capital financings, the shareholders’ agreement commonly provides for dividend and liquidation preferences and anti-dilution protections of the investor.

Occasionally, adherence to the shareholders’ agreement is safe-guarded by indemnities for breach of contract or call options exercisable against a breaching party. To the (limited) extent permissible under Swiss law, certain provisions of the shareholders’ agreement are generally also embedded in the constitutional documents of the company. The Swiss Private Equity and Corporate Finance Association (SECA) has published a model documentation, which includes templates for investment and shareholders’ agreements, articles of association and board regulations.

Pursuant to the principle of equal treatment of shareholders the board and the shareholders’ meeting must give equal treatment to all share-holders. Core statutory shareholder rights are the right to participate at shareholders’ meetings, information and inspection rights, and the right to receive a share of any dividends and liquidation proceeds. Shareholders also have a pro rata pre-emptive right (which may be restricted for certain important reasons) to any newly issued shares or bonds which are convert-ible into equity. Shareholders representing more than 33.33 per cent of the voting rights can block a number of key resolutions (for example, qualified capital increases, limitation of pre-emptive rights or corporate reorganisa-tions such as mergers).



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The SESTA provides for a mandatory offer regime. A person or group of persons acting in concert and acquiring more than 33.33 per cent of the voting rights of a Swiss company listed on a stock exchange in Switzerland (or of a foreign company if its primary listing is on a stock exchange in Switzerland) is required to make a public tender offer for all listed shares of that company, unless such company’s articles of association provide for an ‘opting-up’ (up to 49 per cent) or ‘opting-out’ of that requirement. The majority of Swiss listed companies (approximately 70 per cent) are subject neither to an opting-out nor an opting-up. Furthermore, any person that reaches, exceeds or falls below certain thresholds of voting rights (3, 5, 10, 15, 20, 25, 33.33, 50 or 66.66 per cent) must notify the company and the stock exchange.

To carry out a squeeze-out merger or a statutory squeeze-out in a going-private transaction, a bidder must hold at least 90 per cent (98 per cent in case of a statutory squeeze-out) of the share capital and voting rights of the target (see question 6). Although voluntary bids in a public tender offer can be made subject to a minimum acceptance condition, the acceptance threshold may normally not exceed two-thirds of the target’s issued shares (if the bidder does not previously hold a significant stake).

15 Exit strategies


A private equity firm’s ability to exit its investment very much depends on the terms of the investment documents and especially the sharehold-ers’ agreement. Contractual arrangements regarding transfer restrictions and exit rights are particularly decisive. While the right to coerce the other shareholders to a sale (drag-along) or to unilaterally request an IPO can facilitate the exit of the private equity investor, minimum rights of the com-mon shareholders (for example, minimum valuation thresholds) may have a limiting effect. Ultimately, the terms agreed upon are a direct reflection of the parties’ negotiation leverage and primarily hinge on the size of the investment and the relative attractiveness of the target.

For an IPO on the SIX Swiss Exchange, the target, inter alia, must have a certain minimum size. The Listing Rules require an adequate free float of the company’s securities at the time of listing (generally, at least 25 per cent of the issuer’s outstanding securities in the same category must be in public ownership and the capitalisation of those securities must amount to at least 25 million Swiss francs).

In general, private equity firms are reluctant to assume liabilities sur-viving the exit. Potential claims for indemnification of the buyer are some-times secured by holding a portion of the purchase price in escrow for a certain period of time. Private equity firms typically aim to include a cap on indemnities (around 10 to 20 per cent of the deal value is common). Further, they will seek to include a threshold or a deductible. Insurance for representations and warranties has occasionally been considered but so far has been taken out rarely in Swiss deals, although such a solution may have clear advantages under these circumstances. Sale and purchase agreements between private equity firms generally do not contain provi-sions considerably different from the aforementioned terms.



Shareholders’ agreements normally terminate upon the IPO (otherwise, disclosure in the prospectus would be required). The survival of board

appointment or veto rights is highly unusual. If the pre-IPO capital struc-ture includes various categories of shares, it is customary to simplify the share structure before the IPO. Shareholders’ agreements generally antici-pate this issue by providing for the mandatory conversion of preferred shares in the event of an IPO.

Lock-up provisions are usually subject to negotiation between the private equity firm and the incumbent shareholders. Typically, the inves-tor wants to anticipate the requirements of the underwriters and have the core shareholders agree to execute lock-up and market stand-off arrange-ments (if and as requested by the underwriters) already in the sharehold-ers’ agreement, as otherwise its right to unilaterally request an IPO could be put in question. The underwriters generally require that the core share-holders (management and founders, private equity investors) commit themselves to a lock-up of between 180 days and 18 months.

Under the SIX Listing Rules, all shares of the same class must be listed. There is no registration requirement for post-IPO sales of shares in Switzerland. Hence, private equity sponsors are generally free to dispose of their shares in a portfolio company following its IPO (subject to any lock-up or other contractual arrangements; notification duties also apply, see ques-tion 14). Strategies commonly seen are disposals pursuant to a ‘dribble-out’ trading plan, in which the shares are sold piecemeal in the secondary mar-ket over the course of days or a few weeks (depending on market condi-tions and the size of the stake), or trades in a larger block of shares (usually to a single buyer).



Traditionally, private equity firms have invested in a wide array of indus-tries in Switzerland, reflecting the well-diversified Swiss economy. In the recent past, the sector that experienced most deal activity was life sciences (including biotech), which still receives the bulk of investments (approxi-mately 45 per cent of the deals representing two-thirds of total private equity funds invested in 2013). Other industries that lately have been in the focus of private equity investors included communications, IT and con-sumer electronics, as well as the energy and environment sectors.

There are no regulatory schemes specifically targeted at private equity firms. However, there are a number of regulated industries where certain limitations must be considered. Regulatory restrictions exist, for instance, in the banking, securities trading, insurance, telecommunications and media sectors. Generally speaking, the acquisition of control or a minor-ity stake of a company holding a banking, securities dealer, insurance, radio or television broadcasting licence is subject to prior notification to or authorisation by the competent regulatory body. There are restrictions on permitted foreign ownership in a number of other regulated sectors such as aviation, nuclear power generation and other areas of public infrastructure.

The direct or indirect acquisition of real estate for residential purposes in Switzerland by ‘persons abroad’ (non-Swiss nationals and other foreign entities) is subject to certain legal restrictions and may require a special authorisation.



There are no foreign exchange control or similar laws generally restricting investments or acquisitions in Switzerland by persons or companies domi-ciled abroad. Regulatory restrictions exist with regard to certain industries (see question 17). Rules regarding public tender offers apply, irrespective of whether the bidder is a Swiss or a foreign company.

Generally speaking, any dividends and similar distributions (cash or in kind) made by a company to its shareholders are subject to a withholding tax of 35 per cent. Foreign beneficiaries of dividends may be entitled to a partial or full reduction of the withholding tax in accordance with appli-cable double taxation treaties between Switzerland and the beneficiary’s country of tax residence or the relevant EU savings tax agreement between the EU and Switzerland (to the extent applicable).

Both immigration as well as emigration mergers are admissible under Swiss law if the laws of all involved jurisdictions so permit and the merger meets certain minimum criteria. While the requirements stated in the law



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appear straightforward at face value, the actual mechanics of a cross-bor-der merger prove quite cumbersome in practice. Consequently, rather few cross-border mergers have been seen thus far (except for large companies with substantial existing operations, especially in regulated industries such as insurance).



Swiss law does not prevent or restrict the participation of two or more private equity firms in a club or a group deal. In the recent past, about 40 per cent of the private equity deals (approximately 60 per cent of the total funds invested) were syndicated.

From a practical perspective, the participating investors generally lay down the terms and conditions governing their relationship in a formal shareholders’ agreement (see question 13). This is advisable also because the group (often inadvertently) forms a ‘simple partnership’ pursuant to Swiss law, which imposes default rules regarding governance, representa-tion rights, profit allocation and other aspects of their relationship.

In respect of listed targets, an additional issue to be considered is that firms partnering in a club deal will generally be regarded as acting in con-cert under the rules of the SESTA. As a result, their consolidated stakes in the target will be relevant for the assessment as to whether notification and mandatory offer obligations are triggered (see question 14), which may make the group susceptible to the actions of any one of the partner investors.

Update and trends

While the end of the relatively calm 2013 already showed the first signs of recovery of the Swiss mergers and acquisitions and private equity markets, market activity has definitely picked up in 2014 and led to a strong overall performance. Indeed, while in 2013 some of the largest Swiss private equity houses had held successful financing rounds, they had been preparing for larger investments to take place in 2014.

Although the number of deals in the Swiss market has not increased significantly, the overall transaction value has reached a record high, due to several megadeals taking place in 2014. IPO activity, too, has seen an impressive revival in 2014 with six IPOs, with a total volume of US$1.68 billion, taking place on the Swiss stock exchange, all but one of which were highly successful.

Although the most active industry remained industrial goods and services, the life sciences industry has seen a significant increase in activity. Among the reasons for the strong Swiss market activity in 2014 was the rising confidence among investors in the economic outlook and a growing appetite for increased leverage. Evidently, the Swiss market has been benefitting from the recovery and activity in the US market as well.

Thus, 2014 ended with a steady upward trend in Swiss market activity, with no end to the bull market being in sight. While private

equity houses have liquidity available, it may be the rising valuations and increasing transaction prices that still make investors hesitate.

With stock prices at high levels, the outlook for 2015 remains bright, and the Swiss private equity market may be expected to remain steady, even though a number of uncertainties will remain. The growth of the US market will continue to be the driver for the Swiss market, and questions related to the stability of the Euro zone and the reaction of the European Central Bank are likely to have an impact on the Swiss economy in 2015. Moreover, additional geopolitical risks that arose in the Middle East and Eastern Europe in 2014 will add to these uncertainties.

Nevertheless, with a further stabilisation of the global markets, recovery of the world economy and more clarity on other factors, such as the impact of the US tax programme on the Swiss financial market, financing may become even more readily available in 2015. Thus, an unchanged favourable private equity environment can be expected for 2015, which may even turn out to be ideal for private equity houses to place assets from their portfolios up for sale on the market.

Andreas Rötheli [email protected] Beat Kühni [email protected] Felix Gey [email protected] Dominik Kaczmarczyk [email protected]

Bleicherweg 588027 ZurichSwitzerland

Route de Chêne 301211 Geneva 17Switzerland

Avenue du Tribunal-Fédéral 341005 LausanneSwitzerland






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Certainty of closing is one of the key issues in any kind of mergers and acquisitions transaction. The simultaneous signing and closing can sim-plify smaller transactions, as it eliminates the risk of unforeseen events occurring during the period between signing and closing. It may also reduce the complexity of the purchase agreement. More often, however, the circumstances of the transaction call for a separation of signing and closing (for example, to obtain governmental approvals or third-party con-sents, or to call funds under equity commitments).

If there is a need for a separation of signing and closing, the parties will require each other to fulfil certain conditions before the transaction closes.

At the same time, it is customary for the transaction agreement to provide for a ‘long stop date’ (ie, a date until which the transaction must close, fail-ing which the agreement will terminate) and pre-closing obligations, such as covenants regarding the target’s conduct of business. In view of the high costs incurred by both parties in the context of a transaction, there is an increasing use of termination fees in the form of liquidated damages to alleviate the risk that the closing may not occur.

In public tender offers, only limited conditions are permissible in the offer (for example, regulatory approvals or acceptance thresholds; see question 14). A public tender offer may not be made subject to the obtain-ing of financing. The bidder and the target can agree on a break fee, pro-vided that this does not result in coercing shareholders to accept the offer. Break fees must be disclosed in the offer documents. As a general rule, they should not substantially exceed the cost incurred by the bidder in connec-tion with the offer.

Yangming Partners TAIWAN


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Robert C Lee, Candace Chiu and Jack ChangYangming Partners



Taiwan’s regulatory framework allows a broad range of investment and acquisition structures to be used in private equity transactions. Certain structures that would not be feasible in many other jurisdictions, such as an acquisition followed by a universal succession merger between the acquir-ing vehicle and the target (that enable an investor to push the acquisition debt down to the target) is allowed in Taiwan, and minority shareholders of the target are not able to block such a merger. In practice, however, foreign investments and acquisitions are subject to prior approval from the Taiwan government, and certain structures that are legally feasible may still be rejected by the government for not being ‘beneficial’ to local economic development or to the interests of minority shareholders.

Most company acquisitions in Taiwan (of either private or listed com-panies) that have been implemented or proposed by private equity inves-tors have been majority or complete buyouts that were achieved through stock purchase structures. Asset purchases are relatively rare in Taiwan, as most of those target companies that have achieved an economic presence large enough to draw the attention of cross-border private equity investors are normally companies that are subject to special governmental franchise or licensing requirements, which would make an asset purchase unfeasible because almost all such governmental franchises or licences would be non-transferable. In addition, an asset transfer would be subject to capital gains tax, while stock transfers are currently exempt from capital gains tax and are only subject to a 0.3 per cent stock transfer tax. Minority interest acqui-sitions are usually structured as the purchase of common stock, convertible preferred stock, or convertible bonds, to be newly issued by the target.

Buyouts of listed companies that result in the acquired company going private post-acquisition are generally viewed as an unwelcome strategy by the Taiwan government, particularly if the delisting of the target from either the Taiwan Stock Exchange (TSE) market or the GreTai Securities market (Taiwan’s over-the-counter (OTC) market) would have a signifi-cantly adverse affect on the size of that market.

A leveraged buyout, which involves the merger of the target company and the acquiring vehicle immediately following acquisition, and which is preferred by domestic banks providing the acquisition financing facilities, used to be the most common type of private equity acquisition in Taiwan. For Taiwan banks, such a post-acquisition merger is viewed as the most effective mechanism for ensuring viability in terms of cash flow for the acquiring vehicle’s interest payments, as Taiwan company laws only allow year-end dividend distributions, and inter-company transactions (which are usually structured to redirect cash from the target company to the acquiring vehicle throughout the fiscal year) are highly regulated by appli-cable tax laws. However, it is now becoming more and more difficult to obtain the necessary regulatory approvals for this type of leveraged buy-out, as regulators view the strategy of having the acquisition financing debt pushed down onto the target per the post-acquisition merger as adversely affecting the financial status of that target.



The following issues specifically address private equity acquisitions in terms of corporate governance reforms:• for an acquisition involving a merger for the target, the directors of the

target company, if that company is a public company (including a TSE-listed or OTC-listed company), need to retain an independent expert to opine on the reasonableness of the share-swap ratio, the cash con-sideration, or both, to be paid to shareholders of the target company;

• the said merger would also be subject to a shareholder vote, although a board resolution would also suffice if the acquiring vehicle holds 90 per cent or more of the target company. The notification period for calling a shareholder meeting is significantly longer for public compa-nies than for private companies; and

• a leveraged buyout would normally require that the target company serve as co-borrower for, or provide guarantee of, the acquisition financing facility to be provided by the banks. A public target com-pany would need to comply with the various internal rules governing involvement in acquisition financing. Such internal rules normally set limits on the company’s ability to provide guarantees to third parties.

A public company is subject to additional corporate governance require-ments as set out by the Securities and Exchange Act (SEA). Such additional requirements include a requirement for increased numbers of board mem-bers and a requirement for the implementation of internal rules governing major business decisions. Both the TSE and the GreTai Securities Market have further set forth corporate governance requirements specifically applicable to TSE-listed or OTC-listed companies, including an independ-ent requirement for specified numbers of directors and supervisors (who act as internal auditors of the company under Taiwan company laws). The directors of a public company (including a TSE-listed or OTC-listed company) are also subject to more significant criminal liabilities for breach of fiduciary duty compared with directors of a private company. It would certainly be advisable to go private after a private equity acquisition trans-action. However, a company engaging in certain business activities, such as those subject to a special governmental franchise or licence, may be required by law to remain a public company.

TAIWAN Yangming Partners


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A private equity acquisition involving a public company would normally be structured as a tender offer, a one-step merger (between the acquiring vehicle and the public target), or a tender offer followed by a merger. In an acquisition involving a tender offer, the board of directors of the target public company needs to make a recommendation to the shareholders as to whether the shareholders should participate in such a tender offer. For a one-step merger transaction, the board of directors is required by law to present a motion to the shareholder meeting for the shareholders to ratify the merger proposal. In their review of the transaction proposal and pres-entation of the motion (or in making the recommendation) to the share-holders, the directors will need to satisfy their general fiduciary duties of care and loyalty and to always act in accordance with applicable laws, in accordance with the company’s articles of incorporation and in accordance with shareholder resolutions. Taiwan’s merger and acquisition legislation expressly requires that the board of directors works for the maximum ben-efit of all shareholders.

The fiduciary duties of care are further defined by law and by prece-dent as conducting business operations with the same degree of diligence, care and skill that a reasonably prudent person would display in similar circumstances. Precedent further states that, in order to satisfy the loyalty requirement, the director must act with the honest belief that his or her actions are in the best interests of the company. A director will be consid-ered as having satisfied his or her general fiduciary duty if he or she has acted with due care and displayed loyalty in making business decisions, even if it is later proven that such a decision caused damage to the com-pany. There is no precedent in Taiwan that specifically addresses what ele-ments are required for a director to be considered to have fulfilled his or her fiduciary duty under a going-private or other private equity acquisition, nor is there any general rule for acting with due care and taking actions in the honest belief that those actions are in the best interests of the com-pany. A reasonable interpretation, based on the general rules set forth by the courts, is that a director must have considered all the consequences of the proposed acquisition that a reasonably prudent person, facing similar circumstances, would have considered, and that the director had made a decision after taking into account such consequences and in consideration of the best interests of the company.

The directors of a target public company shall comply with all of the mandatory procedural requirements governing their actions in connection with a proposed private equity transaction. For example, for their review of, and ultimate decision on, a merger proposal, the directors must retain an independent expert to opine on the reasonableness of the share-swap ratio and the cash consideration (or both) to be paid in the merger. The expert’s opinion must be given to the shareholders for their consideration.

When the director of the target public company is the representative designated by a corporate shareholder of the target company, the interests of such corporate shareholder may conflict with the interests of the target company in a private equity transaction proposal. Should such a conflict of interest occur, the director shall act in the best interests of the target company, rather than those of the corporate shareholder that he or she represents. There is also an issue as to whether a director participating in a proposed private equity transaction (if that director is also a selling share-holder) or the corporate shareholder that he or she represents, as a partici-pating party in the proposed transaction, should be blocked from voting on board resolutions that would make recommendations or be blocked from presenting motions to shareholders at shareholder meetings. Although Taiwan company laws do restrict the voting rights of an interested director, precedent has adopted stricter criteria for enforcing such voting restric-tions. No precedent expressly rules that a participating director (or a direc-tor representing a participating shareholder) shall be blocked from voting on a recommendation or be blocked from presenting a motion related to a tender offer provided that, in practice, it is quite common for the directors

of public companies participating or having an interest in a transaction to voluntarily waive their voting rights so as to avoid any challenges. For a merger proposal, Taiwan laws expressly allow a director of the company offering to be merged with the proposing company, and who has been des-ignated by the proposing company, to vote in the affirmative for the merger proposal. The concept of a special committee working on potential con-flicts of interest in lieu of board members does not exist in Taiwan.

4 Disclosure issues


No special or additional disclosure requirement (to the general sharehold-ing disclosure requirement applicable to public companies), either under general company laws or under securities laws, applies to a going-private transaction or to other private equity transactions. If the proposed acquisi-tion transaction is structured as a tender offer (including a tender offer that is to be followed by a merger), the target public company’s shareholders must receive a tender offer prospectus containing information specified by the general securities laws (namely, the SEA and its related legislation). If the acquisition transaction is a merger proposal, the proposed merger agreement shall be disclosed to the shareholders of the target company prior to the shareholder meeting being held to approve such merger. The resolution approving the merger shall be publicly announced and the com-pany’s creditors shall be notified.

In response to the significantly higher number of cross-border private equity investors conducting activities in Taiwan over the past several years, the Taiwan government has adopted stricter criteria for its review and granting of foreign investment approvals for acquisitions of 25 per cent or more of the shares of TSE-listed or OTC-listed companies or of a company engaged in business activities that are subject to special governmental franchises or licensing, particularly if the purchasing party is a cross-bor-der private equity investor. In practice, the Taiwan government will require that the acquiring party disclose its ultimate shareholders or beneficiaries, its acquisition funding sources, a financial forecast for the post-acquisition structure, the expected debt-to-equity ratio and a post-acquisition busi-ness plan. The Taiwan government will often solicit a long-term invest-ment commitment from such investors in return for their approval.



Major time considerations for a going-private transaction or other private equity transactions include:• the time required for the target company to have the proposed trans-

action reviewed and approved by its board of directors and by share-holders at a shareholder meeting. A minimum of 46 calendar days is required for a TSE-listed or OTC-listed company to call and hold a shareholder meeting for the purpose of approving a transaction proposal;

• the time required to solicit and secure acquisition financing debt;• the time required to obtain necessary regulatory approvals, such as the

approval from the foreign investment regulator (for an offshore price equity investor), the approval from general competition authorities and approval from the SFB (for a merger proposal). It will easily take six months or more for an offshore private equity sponsor to secure foreign investment approval to acquire a Taiwan-listed company or a company engaged in a business that is subject to a special governmen-tal franchise or licensing;

• the time required to prepare the public and regulatory filings needed for the proposed transaction; and

• the time required to set up domestic acquisition and holding vehicles, if such acquisition and holding vehicles are proposed. Setting up a company in Taiwan generally takes two to four weeks.



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Shareholders dissenting to going-private merger or acquisition transac-tions may require that the company buy back their shares at a fair market value. If the dissenting shareholders and the company fail to reach agree-ment on the share purchase price, the purchase price should be determined by the courts. In addition, the directors of the going-private company who vote in favour of the going-private transactions are obliged to purchase all of the shares intended to be sold, at a purchase price not lower than the net value of those shares based on recent audited financial statements for the company.



Major issues specific to purchase agreements for private equity transac-tions include:• conditions for consummating the transaction. Objections from a seller

can usually be expected over the purchaser’s proposed conditions for securing acquisition financing and over the terms by which the pur-chaser will enter into agreements with key members of the manage-ment team;

• representations, warranties and covenants to be provided by the sellers;

• indemnity and price clawback for any breach of representations and warranties made by the sellers;

• parent company or ultimate beneficiary guarantee to be provided by the acquiring entity for its breach of the purchase agreement if the acquiring entity is a special purpose vehicle; and

• mechanism for repaying the existing debt of the target company by uti-lising the acquisition financing debt.

In the past few years, refundability and the down payment amounts required for private acquisitions implemented by offshore investors have become major issues for such investors given the significant time frames and the uncertainties surrounding such investors’ ability to ultimately secure the necessary foreign investment regulatory approvals.



The company’s management team is often retained by the private equity sponsors acquiring the company so that they can continue their service after the acquisition. It is also not unusual for the key members of the man-agement team to assume seats on the board of the target company after the acquisition, especially if there are nationality or domestic residence requirements for directors. Compensation offered to the management team is usually tied to the performance of the company. The principal management team compensation issues in a private equity acquisition transaction include the manner in which the management team is offered participation in the equity interest of the target or holding vehicle, how such equity participation and other compensation is to be dealt with con-cerning the future exit of private equity investors, time commitment cove-nants and non-competition and non-solicitation restrictions to be imposed on the management team.

There are no specific timing considerations for discussing manage-ment participation, though it is not unusual for investors to include the successful retention of selected management as a condition precedent to the closing of the transaction.

9 Tax issues


Shareholder loans, as compared to equity investments, are preferred by some private equity transaction sponsors. In addition to the fact that share-holder loans can easily be drawn back without going through the normal capital reduction procedure, the main benefit of shareholder loans is the fact that the interest paid on shareholder loans is tax-deductible.

However, interest payments made on inter-company debt that is in excess of a specified debt-to-equity ratio are ineligible for tax deduction. The current debt-to-equity ratio in effect is 3:1.

Dividends paid to preferred shares are not tax-deductible. Preferred shares are normally used to ensure privilege or priority in voting rights or dividend distribution, or both.

Another issue that an offshore private equity investor acquiring and holding a Taiwan private or public company would need to consider is the dividend tax that would be payable on any future profit repatriation made by the Taiwan-invested company. Such profit repatriation would be subject to a maximum 20 per cent dividend withholding tax (the said withhold-ing tax rate would not apply if the jurisdiction where the offshore inves-tor is located has a tax treaty with Taiwan that provides a lower tax rate). Withholding tax would also be payable on interest paid on a shareholder loan made by an offshore shareholder to a Taiwan company, as well.

Companies normally pay out cash bonuses or stock bonuses (through recapitalisation of year-end profits) to their management teams or to other employees. The recipients of such stock bonuses are liable for income tax on those bonuses as calculated based on the market value of the stock on the day it is delivered to that recipient (to the payee). Stock options are also available but are not often adopted as this concept is still relatively new in Taiwan. Income tax payable on stock options would be calculated based on the difference between the option exercise price and the market price of the underlying stock on the day that the option is ultimately exercised.

Share stock acquisitions may not be classified as asset acquisitions for tax purposes and such a classification would carry a tax disadvantage in Taiwan. Share stock transactions are currently exempt from capital gains tax (CGT) in Taiwan. Instead, such transactions are only subject to a 0.3 per cent transaction tax. An asset transaction would be subject to CGT.

For an acquisition followed by a merger transaction, any gain gener-ated from the merger by the dissolving company or by any of the compa-nies involved in the merger would be subject to CGT.



A leveraged buyout is generally financed by senior bank debt provided by commercial lending institutions in the form of a term loan. If the poten-tial target of a private equity transaction has existing indebtedness then, in practice, refinancing (simultaneous with the acquisition financing) will often be used. The target is often required to either provide a corporate guarantee or a security created over its assets for such bank debt or to serve as a co-borrower under such bank debt if the bank debt will be used partially for the target company’s repayment of its existing debt or post-acquisition operational capital purposes. Taiwan laws place no restrictions on the use of debt financing in private equity transactions. However, the Taiwan government has become concerned that a significant increase in the number of private equity transactions accomplished through leveraged buyouts might weaken the capital positions of many acquisition targets. Therefore, the Taiwan government has set forth informal restrictions on domestic bank loans (including those of Taiwan branches of international



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banks) to acquiring vehicles by setting up a debt-to-equity ratio require-ment of 50 per cent. A proposed acquisition with a (domestic) debt-to-equity ratio that exceeds 50 per cent would likely be viewed negatively by the government authority and would come under additional scrutiny.



There are no particular issues related to the form of financing (namely, debt versus equity) in the transaction documents of going-private transac-tions. Nevertheless, in a leveraged buyout transaction it is not unusual for the bank (or banks) providing the acquisition financing to require a com-mitment for a specific amount of equity investment (either through equity investment or through subordinated shareholder loans) from the sponsors, which would normally amount to between 40 per cent and 50 per cent of the total acquisition price. Such commitment would normally be included in the bank loan documents.



Taiwan laws require that the board of directors of a company file a peti-tion for bankruptcy if the aggregate market value of that company’s assets is less than the company’s total debt. In a highly leveraged private equity transaction it would need to be considered whether interest payment obli-gations created would result in the target and the acquiring vehicle, or both (in particular, acquiring special purpose vehicles) having a negative asset value. The board of directors of the selling company in a highly leveraged buyout would also need to consider insolvency exposure prior to recom-mending a transaction to shareholders.



Shareholder agreements generally include:• voting agreements;• rights to designate a certain number of directors and supervisors to the

company;• restrictions on transfer of shareholdings of the target company;• obligations to maintain a certain percentage of shareholdings in the

target company;• call rights and put rights;• mandatory redemption provisions; and• rights to approve or veto significant transactions.

Taiwan’s Merger and Acquisition Law also provides that, in a merger acquisition transaction, shareholders may reasonably regulate the follow-ing issues, among others, through written agreement: right of first refusal to purchase shares to be sold by other shareholders, drag-along rights and prior board or shareholder approval for any transfer of shares by a share-holder to a given person.

There are certain agreements between shareholders that are not enforceable under Taiwan law, even though they frequently appear in shareholder agreements governed by laws of other jurisdictions. For example, a shareholder agreement cannot set forth conditions for the constitution of a quorum at a company’s board of directors meeting or at a shareholder meeting, the board of directors meeting cannot be convened through a written resolution and a shareholder may not permanently waive his or her voting rights. The enforceability of a voting agreement among shareholders in a public company is also challengeable.

Taiwan’s Company Law provides certain protections for minority shareholders such as the right to put forward motions at annual share-holder meetings and the right to call special shareholder meetings.

Where the board of directors decides, by resolution, to commit any act that is in violation of any law, ordinance, or the company’s Articles of Incorporation, any shareholder who has continuously held the shares of that company for a period of one year or longer may request that the board of directors cease such act. A shareholder who has, or shareholders who have, continuously held 3 per cent or more of the total number of outstand-ing shares of the company for a period of one year or longer may request, in writing, that the supervisor or supervisors of the company initiate an action against a director of the company on behalf of the company.

Taiwan laws require only a simple majority vote for most of the mat-ters subject to approval at shareholder level. However, the following items require adoption by a majority of the shareholders present, where the total number of shareholders present represents two-thirds or more of the total number of outstanding shares of the company:• entering into, amending, or terminating any contract for a lease of

the company’s business in whole, or for entrusting the management of business operations to another, or for regular joint operation with others;

• transferring all or any essential part of the company’s business or assets; or

• accepting the transfer of another’s whole business or assets, which would have a significant impact on the business operations of the company.



There is no specific requirement that would affect the ability of a private equity firm to acquire control of a private company. However, where the target is a public company, any person who individually or jointly with another person intends to acquire shares accounting for 20 per cent or more of the total issued shares of that public company within a period of 50 days shall do so via a public tender offer, unless the acquisition conforms to limited exceptions set forth by the regulations, such as a share transfer between affiliates or an acquisition of shares held by the stipulated insiders of the company.

15 Exit strategies


Where the portfolio company is a public company, and where the private equity firm is a director, supervisor, manager, or a shareholder holding more than 10 per cent of the total shares of the portfolio company, the pri-vate equity firm’s share transfer shall be conducted in any one of the fol-lowing ways:• an offering to the public following approval from or an effective regis-

tration with the SFB;• to transfer, at least three days following registration with the SFB,

on the TSE or the OTC, shares that have satisfied the holding period requirement and within the daily transfer allowance ratio prescribed by the SFB. However, this requirement shall not apply to transfers totalling fewer than 10,000 shares per trading day; and

• to transfer, within three days following registration with the SFB, by means of private placement to designated persons satisfying the quali-fications prescribed by the SFB. The resale of securities within one year of their initial acquisition by the transferee who acquired said shares by this method shall be effective only if in compliance with the three methods specified as above.



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If the private equity firm had acquired the shares in a public company via private placement, the private equity firm may not resell such shares except under certain circumstances prescribed by laws, such as where a period of three full years has passed since the delivery date, or where otherwise approved by the SFB, etc.

An IPO is rarely adopted as an exit strategy for portfolio companies in Taiwan mainly because the scale of Taiwan’s stock exchanges is still rela-tively small and, thus, it can be difficult to generate a satisfactory share price in an IPO. Conducting IPOs in other jurisdictions that can generate higher share prices has recently become a more favoured option by an increasing number of private equity firms. Such IPOs are normally conducting by hav-ing the shares of an offshore holding company (as opposed to the Taiwan portfolio company itself ) listed on the offshore public exchanges.

The common local practice is for private equity sellers to not provide any post-closing recourse, which would also be applicable to private-equity-to-private-equity transactions. Nevertheless, if there are certain specific contingent liability issues involved, the seller will normally pro-vide recourse addressing such issues. Escrow is the most common type of recourse provided.



In Taiwan, governance rights and other rights (available to specific share-holders) beyond the statutory shareholders rights are generally viewed as likely to adversely impact a company’s IPO on the TSE or the OTC and, thus, very rarely do such rights survive a Taiwan IPO.

If a company applies for an IPO, all shares held by the company’s directors, supervisors, and major shareholders (namely, anyone hold-ing more than 10 per cent of the total issued shares) would be subject to a lock-up. The directors, supervisors and major shareholders should sub-mit and place all of their shares in the company with a central custodian. One half of the shares placed with the custodian may be withdrawn after six months after the first day of listing, with the remaining shares avail-able for withdrawal at least one year after the first day of listing. The sale of shares by the above persons beyond the said lock-up period is subject to prior approval or reporting requirements. Under the current practices of the TSE and the OTC, a company normally issues new shares publicly so as to meet shareholding disbursement requirements that are applicable to IPO and the private equity sponsors sell their shares via the market after the applicable lock-up period, if any.



High-tech electronics companies (such as mobile phone component man-ufacturers and semi-conductor companies) have typically been targets of going-private transactions.

As most of Taiwan’s private equity transactions are implemented by global private equity firms, foreign investment restrictions in some regu-lated industries become critical to cross-border private equity transac-tions. There are some industries that foreign nationals are prohibited from investing in (for example, wireless television, postal services, local passen-ger transportation). There are other industries that limit the shareholding of foreigners (for example, telecommunications, cable television, satellite television, air transportation, water supply). Companies in certain indus-tries are expressly required to be public companies (such as cable compa-nies) and, in such cases, a going-private transaction would not be an option.



Prior foreign investment approval from the Taiwan government is required for a foreign investor, including a global private equity fund, to invest in Taiwan. The said foreign investment is defined as a foreign company acquiring equity interests in a Taiwan company (the FIA company) or its provision of a shareholder loan to such an FIA company, where the term of that loan is to be one year or more. An FIA company’s reinvestment in another company would also be subject to a prior FIA, provided that more than one-third of the FIA company’s equity interests are owned by foreign investors. The Taiwan government has adopted stricter criteria for its review and granting of FIAs for acquisitions involving TSE-listed or OTC-listed companies or for companies that engage in businesses that are subject to special governmental licensing (such as financial institu-tions or cable television companies). In practice, the Taiwan government usually requests that global private equity funds disclose their proposed acquisition structure, their funding sources, the ultimate beneficiaries of the private equity fund, the projected debt-to-equity ratio and the post-acquisition business plan for the target company. The Taiwan government will often require that such investors commit to a long-term investment. An investment will also be subject to additional restrictions that are based on the industry that the investment is to target if it is found that the fund-ing sources of the foreign investor (or investors) originated in the People’s Republic of China.



It is not uncommon for a cross-border private equity transaction in Taiwan to be made by a consortium group of several private equity funds. There have also been transactions that were initially implemented by one private equity fund and that were then immediately followed by a partial sell down of the shareholdings of the target company to other private equity funds. Confidentiality agreements and shareholder agreements governing share-holder relationships with respect to the target company are usually signed among the private equity funds involved in such transactions.

In a proposed buyout conducted by a private equity fund via a ten-der offer, it is not unusual for shareholders of the target company (which are normally also private equity funds) to work closely together in order to force the buyer to raise its acquisition price. Possible strategies include jointly refusing to tender the shares of the target to the buyer, launching a competitive tender offer or exercising the mandatory buy-back right in the merger transaction, which would kick in after the tender offer has been made.

Update and trends

The Taiwan government has proposed significant amendments to the company laws and the merger and acquisition laws, both of which are now pending with the congress. The proposed amendments include certain provisions which would have a significant impact on acquisitions, including more strict procedural requirements for adopting going-private resolutions, requiring directors to disclose to shareholders their interests in a proposed merger or acquisition transaction, requirements for setting up a special committee tasked with evaluating a proposed transaction and reporting back to shareholders, and objection rights for creditors who do not support a proposed acquisition. It is not clear at this stage when the congress will schedule its review and vote on these proposed amendments.



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The most pivotal issue related to the certainty of closing in a private equity transaction in Taiwan is the ability to obtain all necessary regulatory approvals. This is especially true if the proposed buyer is a global private equity investor. Private equity investors are generally viewed by Taiwan’s government as being less willing to make long-term investments in the assets that they acquire. The ability of the target company to maintain

healthy operations is also a key concern of local regulators in highly lever-aged transactions implemented by the private equity investors. The regula-tory process necessary to review and grant approvals for a proposed buyout to be implemented via a global private equity investor can now generally take six months or more to run its course, and regulators will commonly imposes significant conditions (such as no additional transfers for a spe-cific period of time after the acquisition) on their approvals. It is advisable for a seller and an acquirer in a transaction to agree on automatic termina-tion of any proposed transaction if the necessary regulatory approvals can-not be secured by a specific date.

Robert C Lee [email protected] Candace Chiu [email protected] Jack Chang [email protected]

10F, No. 89, Sungjen RoadHsinYi DistrictTaipei 11073Taiwan


Esin Attorney Partnership TURKEY


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Duygu Turgut and Ali Selim DemirelEsin Attorney Partnership



Private equity transactions in Turkey usually involve buyouts. There are also a few venture capital transactions, however, these transactions are not yet attractive to investors and rarely generate satisfactory results. In prac-tice, private equity capital is primarily used by companies facing financial distress (but which are operationally viable) and unable to induce profita-ble investments due to a lack of adequate financial resources. Additionally, private equity capital is utilised in Turkey by non-distressed companies aiming to develop their existing business and by entrepreneurs wishing to exit companies they have incorporated. Following company restructuring or a term of management over a few years, investors usually remain for two to five years and then seek high returns from a sale to a strategic buyer or a public offering. In some cases, private equity investors sell the target com-pany to another private equity investment firm, as was the case in in NBK Capital Equity Partners’ sale of Yudum to Afia International and Carlyle’s sale of Medical Park to Turkven.

Commonly, private equity investments in Turkey are realised by acquiring the target company’s shareholding through either a share sub-scription or a sale of shares, or both. Share purchase agreements and share subscription agreements are the main instruments for these investments. Another significant instrument is the shareholders’ agreement to grant rights of first refusal and tag-along and drag-along rights, or alternatively, initiating a public offering for the private equity investor.

Foreign interest in Turkish companies has increased significantly since 2006. Major investments by Bancroft, Pinebridge Investments (ex-AIG Fund), Partners in Life Science UK Ltd, Citigroup Venture Capital International, KKR, NBGI, Carlyle Fund, Abraaj Capital, Bain Capital, NBK Capital, ADM Capital and Argus Capital have confirmed this trend. Since then, even larger investments have proved how dynamic the Turkish mar-ket has become. Recent private equity deals include Abraaj’s acquisition of Yorsan, NBK’s acquisition of Inci Mobilya (Yatsan), Turkven’s acquisition of Medical Park, joint acquisition of UN Ro-Ro by Actera and Esas Holding and joint acquisition of Ziylan Magazacilik by Turkven, Gozde Girisim and Bim AS. The health-care sector has become a significant area of inter-est for private equity investors. Major deals in the sector include Abraaj Capital’s acquisition of Acibadem (Abraaj succesfully exited Acıbadem by selling their shares to Integrated Healthcare Holdings Sdn.Bhd and Khazanah Nasional Bhd); NBK Capital’s acquisition of Dunya Goz (NBK exited Dunya Goz by selling their shares back to the existing shareholders after three years); Carlyle Fund’s acquisition of Medical Park (Carlyle suc-cessfully exited Medical Park by selling its shares to Turkven) and Argus Capital and QFIB’s investment in Memorial. There is also a strong interest in public entities, which has coupled Turkish companies and foreign funds. Teaming up with a local company for participation in tenders has become customary in Turkish privatisations such as the partnership of TüvSüd, Dogus and Bridgepoint in vehicle test centres or the partnership of Koc Holding, Gozde Girisim and UEM Group Berhad for the privatisation of highways and bridges (the tender for this privatisation has been , however, cancelled due to the pricing being considered low.)



One of the main problems in private equity transactions is private equity investor representation in target companies and their subsidiaries’ corpo-rate bodies. In deals involving subsidiaries, the private equity investors’ representatives often decline to join the subsidiaries’ boards. In order to overcome this, contractual obligations are imposed on the seller’s side, mandating the seller to reflect in its subsidiaries those corporate govern-ance principles applicable to the target company. Such obligations, how-ever, are not implementable under Turkish corporate governance rules. The Capital Markets Board of Turkey (CMB) issued corporate governance rules applicable only to listed companies (there are approximately 360 compa-nies listed on the Borsa Istanbul (BIST)). While the guidelines on corporate governance are not strictly binding, listed companies are required either to implement the rules and declare their compliance, or explain the reason for their noncompliance in their annual reports. Yet companies have shown a relaxed attitude to such requirements because there are no statutory obli-gations to apply these guidelines. These corporate governance guidelines mostly relate to issues such as shareholder rights, duties of public disclo-sure and transparency issues, minority rights, independent auditing and the board of directors’ duties. However, the new Communiqué (No. IV/56), dated 30 December 2011 and issued by the CMB has made several guide-lines regarding the listed companies. This Communiqué has been replaced by a new Communiqué (No. II-17.1), issued by the CMB on 3 January 2014. These Communiqués require listed companies to comply with corporate governance rules on the right of general assembly participation, board of directors structure, guarantee, pledge and hypothec resolutions, commit-tees within a board of directors, and financial rights granted to board of directors members. The criteria and the minimum number of independent directors are binding, as are all other provisions concerning independent directors. Communiqué No. II-17.1 also requires listed companies to estab-lish the following committees:(i) auditing committee;(ii) corporate governance committee;(iii) risk determination committee;(iv) nomination committee; and(v) salary committee.

However, if the committees under (iii), (iv) and (v) cannot be established due to the organisation of the board of directors, the duties of such com-mittees will be fulfilled by the corporate governance committee.

Under the New Turkish Commercial Code, effective as of July 2012 (the TCC), various clauses reflecting corporate governance rules are statu-torily binding: those concerning announcements for general assembly meetings and publishing corporate information such as shareholder struc-ture and voting rights prior to general assembly meetings.

TURKEY Esin Attorney Partnership


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The TCC also provides for new steps toward professional manage-ment, whereas several provisions concerning company boards of directors introduce new concepts and fundamental changes, while others fill gaps evident in the repealed code. These include:• allowing non-shareholders and legal entities to become board

members;• reducing the mandatory number of board members to one;• introducing online board meetings;• creating a clear distinction between a company’s management and

representation, enabling transferring the ‘authority to manage’ a com-pany to one or more board members or third parties; and

• reformulating board members’ liability – introducing the ‘business judgment’ rule to replace the former ‘prudent merchant’ criteria.



Squeeze-out was not possible in Turkey until 2010. In a 30 July 2010 deci-sion, however, the Capital Markets Board of Turkey (CMB) set out princi-ples and procedures for the voluntary delisting of public companies.

On the other hand, the new Capital Markets Law entered into force on 30 December 2012 and introduced new mechanisms, substantially chang-ing Turkish capital markets legislation. The CML also regulated the major-ity shareholder squeeze-out right, but left it to a Communiqué to explain how to exercise the right. In this respect a communique entered into force on 1 July 2014 which was then amended with the changes introduced on 12 November 2014.

Under the revised system, a shareholder acting alone or in concert with others holding 98 per cent or more of the total votes of a public com-pany can exercise the squeeze-out right to purchase the shares of minority shareholders.

Once the majority shareholder becomes eligible to squeeze-out the minority shareholders, the minority shareholders will have the right to put their shares to the majority shareholder within three months. If there are any minority shares not sold during the three-month period, the majority shareholder can call the shares.

The minority sell-out price is the highest of:• the weighted average trading price of the shares for the last 30 days

prior to the majority shareholder’s disclosure of its intent to exercise its squeeze-out right;

• the amount specified in an independent valuation determining the value of each class or group of shares;

• the share price used in transactions such as a tender offer or merger in the last year prior to the majority shareholder’s disclosure of its intent to exercise its squeeze-out right; and

• the weighted average of the weighted average trading price of the shares:• for the last 180 days;• the last year; and• the five years prior to the majority shareholder’s disclosure of its

intent to exercise its squeeze-out right.

Furthermore according to Communiqué No. 54 of the CMB, if an indi-vidual, a legal entity, or a group of individuals or legal entities acting in concert directly or indirectly acquire the management control of a public company, they must make a tender offer to acquire the remaining shares. Management control is deemed to be achieved when:• the share capital or voting rights of the acquirer directly or indirectly

reach 50 per cent or more; or• privileged rights entitling the acquirer to appoint or nominate the

majority of the directors are acquired.

4 Disclosure issues


Disclosure requirements under the Turkish securities law are determined by two Communiqués: the Communiqué on the Principles Regarding Public Disclosure of Material Events, Series VIII, No. 54 (Communiqué No. 54), applicable to listed companies; and the Communiqué on the Principles Regarding Public Disclosure of Material Events of the Corporations Whose Offered Securities are Non-Listed in a Stock Exchange, Series VIII, No. 57 (Communiqué No. 57), applicable to other public companies (ie, joint-stock companies that have over 250 shareholders but whose securities are not listed). Both Communiqués require that all events affecting the value of the capital markets instrument or the investors’ decision to buy or sell such an instrument be disclosed to the public. Communiqué No. 54 also introduces the right to postpone disclosure obligations in favour of listed companies.



There are no specific timing considerations for private equity investments in Turkey. Typical aspects of a mergers and acquisition transaction also apply to private equity transactions. In general, the due diligence, drafting, and negotiation phases take no less than two months. Under Communiqué 2010/4, the requirement for notification to the Competition Authority is triggered under two circumstances. However, the Turkish Competition Authority (TCA) issued a new Communiqué (Communiqué No. 2012/3) on 31 December 2012 revising article 7 of the current Communiqué, which regulates the threshold test. Under these new changes, companies should notify the TCA regarding their merger when:• the combined Turkish turnover of the transaction parties exceeds 100

million Turkish lira and the Turkish turnover of each of at least two of the transaction parties separately exceeds 30 million Turkish lira; or

• the Turkish turnover of the asset or the activity to be acquired in acqui-sitions and of at least one of the transaction parties in mergers exceeds 30 million Turkish lira and the worldwide turnover of at least one of the other transaction parties exceeds 500 million Turkish lira.

Therefore, if a notification threshold is met, a filing must be carried out and TCA approval must be obtained prior to the proposed transaction’s implementation.

Preparation for notification takes one to four weeks, depending on the complexity of the transaction and the volume of the required translation; the TCA typically decides within four to six weeks. Therefore, the parties should envisage a period of two months between signing and closing in which to obtain TCA approval. The notification must include the signed or current version of the transaction agreement. A transaction document indicating the agreed general structure of the deal (memorandum of understanding, letter of intent, term sheet, etc) may also be submitted, provided the clearance is obtained prior to the transaction’s signing phase.

Depending on the nature of the transaction and target, other regula-tors or types of regulators can have jurisdiction over the transaction, such as the Banking Regulation and Supervision Agency for banks and cer-tain other financial institutions; the Capital Markets Board for brokerage houses; portfolio management companies and other companies that are active in the capital markets; the Treasury for insurance and pension com-panies; the Energy Market Regulatory Authority for energy distribution and generation companies; and the Radio and Television Supreme Council for broadcasting companies.



In principle, shareholders do not have statutory consent or approval rights in straightforward mergers and acquisitions transactions. However, share-holders may have contractual consent or approval rights deriving from a shareholders’ agreement or a joint venture agreement executed between them. In these cases, if all the shareholders possessing these contractual



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rights are not cooperative regarding the mergers and acquisitions transac-tion at hand, issues and complications may arise.

Shareholders have a statutory pre-emptive right pro rata to their share-holding regarding shares issued under a capital increase. This should be considered in share subscription deals. This pre-emptive right can be restricted or revoked only based on valid grounds and by a general assem-bly resolution with an aggravated quorum. With respect to public targets, investors should be mindful of the close supervision of the CMB and law-suits that may be filed by the minority investors.

On the other hand, for going-private transactions there are a number of options for the purchasers and the shareholders as follows:

Once the majority shareholder becomes eligible to squeeze-out the minority shareholders (as explained in question 3), the minority sharehold-ers will have the right to put their shares to the majority shareholder within three months.

The minority sell-out price is the highest of:• the weighted average trading price of the shares for the last 30 days

prior to the majority shareholder’s disclosure of its intent to exercise its squeeze-out right;

• the amount specified in an independent valuation determining the value of each class or group of shares;

• the share price used in transactions such as a tender offer or merger in the last year prior to the majority shareholder’s disclosure of its intent to exercise its squeeze-out right; and

• the weighted average of the weighted average trading price of the shares:• for the last 180 days;• the last year; and• the five years prior to the majority shareholder’s disclosure of its

intent to exercise its squeeze-out right.

Furthermore according to Communiqué No. 54 of the CMB, if an indi-vidual, a legal entity, or a group of individuals or legal entities acting in concert directly or indirectly acquire the management control of a public company, they must make a tender offer to acquire the remaining shares. Management control is deemed to be achieved when:• the share capital or voting rights of the acquirer directly or indirectly



The shareholders also have a sell-out right in case of occurrence of mate-rial events listed in the relevant communiqué of the CMB.



Representations and warranties are of central importance as they deter-mine the framework of the seller’s liability to the private equity investor. Under Turkish law, a share transfer is deemed a sale of shares (rights) exclusively, and is not considered a sale and transfer of the enterprise. Therefore, the seller’s liability is limited to the respective shares and can-not be extended to the enterprise automatically. Representation and war-ranties are used to extend this liability. However, the provisions themselves do not achieve this. To protect private equity investors against any breach of representations and warranties regarding the enterprise, the legal char-acter of the representations and warranties must be carefully crafted. There are several ways to structure the legal character of representations and warranties; however in Turkish legal practice, the legal character of the representations and warranties is often not defined. In our view, the seller’s representations and warranties can be structured as the seller’s primary obligations. Although a debtor’s primary obligations depend on the debt-or’s fault under Turkish law, parties may agree otherwise. In this respect, structuring of the representations and warranties as the seller’s primary obligation is insufficient without also including the seller’s liability for its representations and warranties independent of the seller’s fault in the par-ties’ agreement. To overcome challenges arising from Turkish law provi-sions regulating the sale of goods, the seller should also guarantee against negative action by third parties, such as governmental authorities and other third parties, regarding certain matters (namely, the seller should guarantee that no tax authority will file any legal or criminal complaint

against the company and, failing this, the seller agrees to fully indemnify the company and its shareholders). To strengthen protecting the private equity investor, the parties may agree that the investor’s due diligence does not limit the seller’s liability. In practice, however, sellers often challenge this. In such cases, another approach places the due diligence documents on a DVD attached to the share purchase agreement as an addendum.

Generally, sellers are increasingly convinced of the need for material adverse change clauses (MACs), but still attempt to quantify or otherwise limit them. In secondary buyouts where the seller is also a private equity firm, indemnification provisions may involve an amount in escrow. As a private equity fund may be wound up, investors are keen to secure a portion of the seller’s potential liability with an escrow account. Typically, reach-ing agreement on this amount is a lengthy, difficult process. In most cases, total liability is limited to a percentage of the purchase price. Remaining issues, such as representations and warranties in private equity invest-ments, share the characteristics of other types of mergers and acquisitions.



A significant portion of companies listed in Turkey are managed by a founding family, and consequently, management participation may be comparatively limited. In cases where the family members play a signifi-cant role in the business or there are any key employees for the business, the investors are ready to offer attractive compensation packages, includ-ing equity-based incentives or exit bonuses to facilitate retention of family members or key employees at least for a certain transition period.

Another important development is the conditional capital increase system, a new procedure introduced by the TCC. In line with this new method, a company’s general assembly may decide, by amending the AoA (or by drafting the AoA in such manner during the incorporation), to conditionally increase company share capital to enable holders of newly issued convertible bonds and similar debt instruments (ie, company credi-tors) to exercise their exchange rights, or to enable employees to exercise their stock purchase options, giving them the right to hold shares in the company. The practical impact will be that the conditional capital increase will allow the creation of a legal structure for employee stock option plans. A stock option mechanism was much desired by investors and, with the adoption of this mechanism under the TCC, stock option plans will be easier to realise.

9 Tax issues


There are primary tax considerations. As a general rule, the gain the share-holder of the target company earns from the sale of its shares is subject to corporate income tax (CIT) at the standard rate of 20 per cent if the shareholder is a legal entity. However, if the shareholder has been holding printed share certificates representing its shares for at least two years, 75 per cent of the gain from the sale of its shares is exempt from CIT, provided certain conditions are met. These conditions are the following:• the sale price is received before the end of the second calendar year

following the year on which the sale occurred;• that portion of the gain benefiting from the exemption is maintained

in a special reserve account on the balance sheet for five years; and• the selling company’s business is not the trading of securities.

If the shareholder of the target company is a real person, then the gain derived from the sale of his or her shares will be 100 per cent exempt from income tax on the condition the real person shareholder holds the printed share certificates representing his or her shares for at least two years.



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Second, regarding stamp tax, the parties to an agreement are required to pay 0.948 per cent of the highest amount in the paper (purchase price, insurance coverage, and indemnity amounts are to be taken into consider-ation while determining the stamp tax basis) and with respect to each copy of an executed agreement. Stamp tax per copy is capped at 1,545,852.40 Turkish lira for the year 2014. For permanent taxpayers, stamp duty should be declared until the 23rd day of the following month and should be paid by the 26th day of the same month of declaration. For the non-permanent tax-payers (ie, not registered as a permanent stamp duty payer in Turkey), the stamp duty should be paid within 15 days of the signing of the document.

For the acquirer, interest payments made for financing a transaction can be deducted from the tax base. These interest payments must be in compliance with the thin capitalisation and transfer pricing regulations.

Finally, there is no regulation that would classify a share acquisition as an asset acquisition for tax purposes.



Banks prefer senior (secured) debt for leveraged buyouts. Additionally, a number of mezzanine credit facilities can be seen in the market as well.

There are no margin loan restrictions under Turkish law, and banks are usually willing to provide credit for financing a target’s acquisition. The New Commercial Code, however, imposes new restrictions on financial assistance, potentially affecting the financing of leveraged buyouts. The New Commercial Code does not allow shareholders of joint-stock com-panies to be indebted to their own companies unless the shareholder has fulfilled its capital contribution commitment in full and company profits cover the preceding year’s losses. Additionally, joint-stock companies may no longer provide an advance, loan, or security (eg, share pledge, assign-ment of receivables) for acquisition of its own shares by a third party. The former code did not recognise or restrict financial assistance, and thus, pri-vate equities could obtain loans from banks to purchase company shares and in return provide the bank collateral of the target company’s shares and assets. Under the TCC, legal transactions breaching this rule will be deemed null and void. The two exceptions are transactions concluded by banks and other financial institutions in their ordinary course of business (where the target itself is a bank or another financial institution) and trans-actions concluded by the company’s employees (eg, management buyout) or one of its subsidiaries.

How the financial assistance prohibition will apply to limited liability companies under the TCC has yet to be clarified. Provisions for joint-stock companies that apply by reference to limited liability companies are indi-cated under the TCC; however, the financial assistance prohibition is not listed. The answer remains unclear about whether choosing a limited lia-bility company will allow private equity funds to freely take share pledges from target companies. Moreover, this solution will not be possible for tar-gets operating in regulated industries, which must be organised as joint-stock companies. These sectors include banking, debit and credit cards, financial leasing, factoring, consumer finance, asset management, foreign exchange dealing, brokerage, portfolio management, investment advisory services, insurance, auditing, and agricultural and public warehousing.

Another financial assistance model may be considered as the TCC allows centralised cash management and cash pooling in intra-group com-panies. Intra-group companies can pool their excess cash under the parent company or in an intra-group financing company to be established for this purpose, provided such intra-group companies pooling their excess cash are entitled to request balancing from the parent. In that sense, the pooled cash can be used by the acquiring intra-group company requiring financial assistance.

There are no further restrictions on debt financing for private equity transactions.

In the event of a change of control in a target company, the permis-sion of the target company’s creditors (banks, financial institutions, and third parties) is often required under the agreements executed between the creditors and the target company. The parties to the transaction often require this permission as a condition precedent to the share purchase

agreements. A second issue that may arise concerns the target’s collateral and other security for existing indebtedness.

The target company often requests the buyer private equity company to share the risk of security provided by the target company. In practice, private equity investors are not willing to provide or share the risk of such security.



The regular financing documentation for a private equity buyout usually consists of a loan agreement and the security documentation. Security documentation principally involves share pledges and – depending on the complexity of the transaction – assignment of dividend receivables, com-mercial enterprise pledges, usufruct rights over the shares, deposit pledge agreements, mortgages over real estate, or pledges over the goods of the target and escrow agreements. These broad security requests are rarely accepted by international private equity firms, but are more common in acquisition finance by Turkish companies.



Theoretically, in the event of the target’s bankruptcy, the target’s directors may be accused of fraudulent conveyance where the target’s assets secure the acquirer’s financing. No precedent, however, exists in Turkey for this type of fraud. Furthermore, the TCC has significantly limited the applica-tion of leveraged buyouts under Turkish law and therefore the occurrence possibility of such issues becomes even more remote.



Standard provisions of a shareholders’ agreement such as transfer restric-tions, board representation, veto rights and option rights, are common features in Turkey. As investors stay for a short time and later exit the com-pany, exit mechanisms such as tag-along and drag-along rights, right of first offer, right of first refusal or the initiation of a public offering, which can be major ‘deal breaker’ issues, are also regulated by shareholders’ agreements.

Specific performance of certain provisions such as the transfer restrictions and drag-along rights may be too cumbersome, unavailable under conventional structures, or only achievable after long and arduous proceedings. Such provisions are set forth both in the articles of associa-tion and shareholders’ agreements. Where identical provisions appear in both the shareholders’ agreement and the articles of association, paral-lel proceedings are initiated. This is because, shareholders’ agreements and articles of associations are often subject to different laws and dispute resolution mechanisms, such as local litigation and international arbitra-tion. Parallel proceedings further complicate and prolong any resolution of a dispute. Another typical exit provision in shareholders’ agreements for private equity investments in non-public companies is the right to exit through an IPO, whereby the private equity investor has a preferential right to sell its shares. For listed companies, some actions or provisions bear the risk of being deemed unfair to small investors. With the enactment of the TCC, companies no longer have as much flexibility when entering into shareholders’ agreements granting special rights to majority shareholders.

Under the TCC, shareholders representing at least 10 per cent of a company’s share capital are deemed minority shareholders, benefiting from a number of rights. As for public companies, a five per cent share-holding is deemed a minority shareholding under the Capital Markets Law. Minority shareholders have the right to:• prevent the release of liability for board members or auditors, or both;• request appointment of a special auditor;



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• summon an extraordinary meeting and add additional items to the agenda;

• postpone discussions on the balance sheet in a general assembly meet-ing for one month;

• demand the winding up of the company;• demand the issuance of share certificates;• nominate members to the board of directors; and• demand the replacement of the independent auditor.



With respect to the private companies no requirement exists. According to Communiqué No. 54, if an individual, a legal entity, or a group of indi-viduals or legal entities acting in concert directly or indirectly acquire the management control of a public company, they must make a tender offer to acquire the remaining shares. Management control is deemed to be achieved when:• the share capital or voting rights of the acquirer directly or indirectly



In this respect, an application must be made to the CMB within six busi-ness days following the acquisition of the shares transferring management control in order to launch a mandatory tender offer. The mandatory tender offer must be initiated within 45 business days following the acquisition, and must remain open for between 10 and 20 days.

The value of the mandatory tender offer must not be less than the high-est price paid for the company’s shares by the acquirer within six months prior to the acquisition that causes the tender offer requirement; such pay-ments include the acquisition that causes the tender offer obligation. Price adjustment mechanisms, additional payment options, and other elements that increase the purchase price of the shares that cause the tender offer obligation are also taken into consideration.

15 Exit strategies


The exit options are generally regulated by means of a combination of put options, call options, tag-along rights, drag-along rights, right of first offer (ROFO) or right of first refusal (ROFR). Since the specific performance is not recognised under the Turkish law, the enforcement of these options is generally secured with conventional penalties or other security mecha-nisms such as escrow or share pledge.

Tag-along rights, drag-along rights, ROFOs and ROFRs and their pricing and mechanism are substantially similar to international market practice. With respect to put and call options, either an automatic right is granted upon the lapse of a specific period of time (eg, expiry of lock-up period) or the options are triggered with events of default (defined as ‘material breaches of contract’) listed on an item-by-item basis in the shareholders’ agreements. Put and call options triggered in the event of default mainly have cure periods and purchase prices designed in a man-ner to penalise the material default of the defaulting party (eg, lower fair market value for call options or higher fair market value for put options).

An IPO must be channelled through a joint-stock company. With the enactment of the TCC, as transfer restrictions cannot be included in the articles of associations of joint-stock companies, it is expected that most private equity investors will prefer to invest through limited liability com-panies. Therefore, private equity companies will likely establish a limited liability company that will later be reorganised into a joint-stock company before an IPO is launched.

One other issue that should be kept in mind is joint stock compa-nies’ right to to ask that the shares are not transferred to the third party purchaser that is the intended transferee, but to the target company itself,

another shareholder or a third party at a price to be determined by a court as fair value. This provision has been established under the TCC and pre-sents a significant problem for minority shareholders in Turkish joint stock companies.

Representations and warranties are designed for the benefit of the buyer, to define the target enterprise and determine the seller’s liability where the target enterprise is not as represented. Representations and war-ranties in a share purchase agreement may be structured to serve as con-tractual penalties to compensate for any shortfall in the buyer’s expected benefit from the transaction, and particularly in the event of a seller’s breach of representation and warranty or its obligations under call or put options.

An alternative mechanism, escrow, is required when part of the shares or consideration must be set aside for a certain period of time under put, call and other share purchase options or as a security for potential repre-sentation and warranty breaches. The escrow agreement should be drafted under Turkish law, whereby an escrow agent is the parties’ representative who holds these assets on their behalf. Escrow is typically not a substitute for a pledge; sometimes, however, the escrow agent’s authority is elevated to the level of a pledge.



The most common way to enable an IPO exit is through standard share-holders’ agreement provisions, such as board appointment rights, veto rights and transfer restrictions. Another useful provision imposes obliga-tions to support and vote in favour of the IPO process. With the enactment of the New Commercial Code, such provisions cannot be contained in the target’s articles of association, but rather in the shareholders’ agree-ment. Further to the New Commercial Code, the heightened protection of minority rights and shareholders’ agreements may not harm or limit minority rights in any way.

Under the Capital Markets Law, all capital market instruments that will be publicly offered or issued must be registered with the CMB. Therefore, shares cannot be offered or sold prior to registration. In the event of a viola-tion, the CMB may impose an injunction on the issued shares and sue to annul an unauthorised issuance.

A lock-up period is commonly included to prevent shareholders from trading shares for 90 to 180 days following the first day of trading after an IPO, to protect the post-IPO value of the shares. Unlike the European mar-kets, exits from portfolio companies through an IPO is not common under Turkish practice, therefore there is no established practice in this respect.



Private equity transactions have not focused on any particular industry or type of company. Investments vary from food and beverages (Yorsan, Mey Icki and Yudum), the health sector (Acibadem, Dunya Goz, Medical Park, Universal Hospital, Kent Hospital and Memorial Hospitals), retail (Ziylan, Penti, Koton, Yargıcı and Migros), transportation (UN Ro-Ro and Kamil Koc), media (Digiturk), pharmaceuticals, IT and real estate. There appears, however, to be a lack of interest or suitable targets in Turkey’s three main industries: financial services (especially banking), textiles and tourism.

There are no specific regulatory provisions preventing private equity firms from entering any sector. Investment in certain sectors, such as the financial services sector, energy, and media, however, require disclosure of the ultimate beneficial owners of the shareholders. Therefore, private equity firms may have difficulties in explaining their fund structure. There are also certain thresholds regarding foreign ownership in certain indus-tries, such as radio and television. Private equity firms have attempted to overcome these thresholds by establishing trust relationships with Turkish individuals (yet compliance with the regulations may still be an issue). This approach may not be practical under private equity firms’ charters, which



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may prevent a firm from acquiring shares exceeding the statutory limit. There are also several restrictions on foreign ownership of real estate and vessels, which complicate certain investments.



Dividend payments to certain offshore jurisdictions popular for fund man-agement, such as Jersey, are subject to a 30 per cent withholding tax in addition to the 15 per cent tax applied to all Turkish dividend payments.

Even though no specific regulatory provision prevents foreign private firms’ entry into any line of business in Turkey, disclosure to public authori-ties is required as to the ultimate (direct and indirect) beneficial owners of the shares in companies conducting certain business activities, such as financial services, telecommunications, energy, and media.

In complying with these regulations, private equity investors may have difficulty explaining their fund structures. Moreover, in some industries, such as radio and television, there are certain upper limits on foreign own-ership. These thresholds might be overcome by establishing trust relation-ships with Turkish individuals.

Foreign individuals and legal entities are also partially restricted in the direct and indirect ownership of real property. Foreign entities may purchase real property in limited circumstances under special legislative acts, primarily the Law on Promotion of Tourism, the Petroleum Law, and the Law on Organised Industrial Zones. These limitations can be avoided through the establishment of a Turkish legal entity (SPV) in Turkey, which may even have 100 per cent foreign shareholders. Using a Turkish SPV to purchase property in Turkey is usually realised in one of two ways. Under the first option, the private equity company incorporates a Turkish SPV, which acquires the real property after obtaining special permission from the regional governorship and other authorities to ensure the property is not in a military zone, special security zone or strategic zone. This proce-dure is usually completed within one to two months. Once cleared, there are no obstacles to acquiring the real property indirectly through a Turkish SPV. If property is acquired without complying with this procedure, the Ministry of Finance may request liquidation of the property. If the com-pany does not liquidate the real property within the time allowed, the min-istry will be entitled to liquidate the property itself.

As a second option, real property may be acquired by a Turkish SPV with 100 per cent domestic capital (namely, with Turkish shareholders). After the acquisition, the private equity investor acquires the shares of the Turkish SPV, and thus indirectly acquires ownership of the real property. In this case, a procedure similar to that of the first option is followed. Unlike the first option, however, the procedure commences after acquiring real property. Therefore, this procedure leads to post-acquisition approval, rather than approval as a condition precedent to the acquisition. The trans-feree company serves notice to the Treasury Undersecretariat, indicating the company’s shareholding structure has changed and a foreign person has become a shareholder. The Treasury Undersecretariat then notifies the land registry. The land registry follows the same procedure used for Turkish subsidiaries with a foreign shareholding (as explained in the first option) and confirms with the regional governorship and other authorities that the real property is not in any military zone. The restriction on acquir-ing real property by foreign entities plays an important role, especially for private equity firms investing in manufacturing and retail because of the facilities and premises held by the target companies.



Club deals are common in Turkey (the most recent ones are the acquisi-tion of Ziylan by Turkven, Gozde Girisim and BİM and the acquisition of UN Ro-Ro by Actera and Esas Holding. Although the largest acquisition in the Turkish market so far was a group deal (BC Partners, DeA Capital and Turkven’s acquisition of Migros), there are no specific regulations regard-ing private equity firm club or group deals. The terms of a club agreement should be carefully drafted to comply with local competition law. This risk increases if the target has a concession from the government or enjoys a natural monopoly. In these cases, in the absence of competition in the market, any pre-offer deals may be deemed restrictive by the Competition Authority.

Update and trends

The Venture Capital Companies Communiqué (the Communiqué), which entered into force on 9 October 2013, is a part of the initiative to make venture capital companies more attractive for international and local investors, by aligning them with international standards of private equity.

Among others, the Communiqué enables the sale of venture capital companies’ shares to qualified investors without public offering, allows venture capital companies to provide financing through a mixture of debt and capital finance (ie, mezzanine finance) and eases portfolio restrictions applicable to venture capital companies.

With this Communiqué, the venture capital companies under Turkish law become much more aligned with the international private equity model. Although there are certain restrictive provisions such as the requirement for CMB approval for transfers involving more than 10 per cent of shares of a venture capital company and strict criteria for the approval of the acquiring entities, the Communiqué is a step forward for the Turkish private equity market, and we expect an increase in the number of venture capital companies operating in the market and the use of these companies for conventional private equity investments.

Duygu Turgut [email protected] Ali Selim Demirel [email protected]

Ebulula Mardin Cad., Gül Sok. No. 2Maya Park Tower 2, Akatlar – Beşiktaş34335 IstanbulTurkey

Tel: +90 212 376 64 00Fax: +90 212 376 64 64www.esin.av.tr



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Private equity buyers tend to include vague provisions to their benefit in share purchase agreements that entitle them to easily walk away, such as a condition precedent requiring the private equity buyer obtain all internal approvals. Given the many private equity deals in the Turkish market, sell-ers are well aware that a private equity buyer may decline to close the trans-action, and sellers often seek to ensure that the share purchase agreement

includes no subjective conditions precedent solely for the private equity buyer’s benefit.

Another complication that arises in certain private equity deals is the seller’s tendency to renegotiate the financial terms before or after sign-ing. In such cases, the private equity buyer invests in the target jointly with another investor, walks away from the deal, or negotiates with the seller to reach financial terms acceptable to both parties.

To ensure a successful closing, private equity buyers include termina-tion fees in share purchase agreements, whereby the sellers must pay ter-mination fees to the private equity buyer if they fail to close the deal.

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United KingdomDavid Innes, Guy Lewin-Smith and Richard WardDebevoise & Plimpton LLP



UK private equity transactions are varied, including early-stage funding, development capital and buyouts of target businesses.

The majority by value of recent UK private equity transactions have been buyout transactions, typically involving the acquisition of a control-ling stake in a company, although there are also a substantial number of transactions where a minority stake is acquired.

Buyouts are usually leveraged transactions, with funding being a combination of equity (provided by the private equity sponsor and often by management) and debt (provided by third-party financial institutions).



The level of regulation to which a company is subject is greater for a public company than a private company and increases again if the public com-pany is listed. When acquiring a listed public company, the private equity sponsor will usually structure the transaction so that the target company ceases to be listed and converts into a private company, to benefit from reduced regulations and cost. As explained in question 10, converting a public company into a private company may be necessary to prevent the transaction contravening the UK rules on financial assistance.



All directors of a UK company must ensure that they comply with their fiduciary duties, which include a duty to promote the success of the com-pany for the benefit of its members as a whole, a duty to avoid conflicts of interest and a duty to declare any interest in a proposed transaction or arrangement.

Where some of the directors of the target company are part of the management team working with the private equity sponsor or appointed by a shareholder, they will need to make clear disclosures to the target board regarding their involvement and their potential conflicts of interest. The articles of association of the target company will then determine if the relevant directors can continue to vote and participate in board meetings on matters where they are conflicted. In any event, it would be usual (and in accordance with institutional investor expectations) for a committee of

‘independent’ non-conflicted directors to oversee the process, including the release of confidential information and ultimately to consider recom-mending the offer to target shareholders.

Those conflicted directors who have employment contracts with the target company will also need to ensure that their participation in the trans-action is not in breach of any of their contractual obligations.

4 Disclosure issues


A going-private transaction in the UK is subject to the same disclosure issues and requirements as other takeover offers involving a public listed company.

The City Code on Takeovers and Mergers (the Takeover Code) will apply to a going-private transaction with a listed UK or Channel Islands incorporated target (it can also apply in other situations such as where the target is registered in another EEA member state and its shares are listed only on a UK regulated market or is a private company the securities of which were admitted to the UK Official List within the prior 10 years). The Takeover Code sets out a framework within which any offer, governed by the Takeover Code, whether by way of takeover offer or a court-supervised scheme of arrangement, must be conducted, including detailed require-ments as to disclosure of information. The Takeover Code requires the publication of an offer document by the bidder that must include details of the bidder’s intentions regarding the target company and its employees, financial information on the bidder and the target company, details of any interests and dealings of the bidder in shares of the target company, any special arrangements between the bidder and any directors or sharehold-ers of the target company, confirmation from a third party that the bid-der has the necessary funds available to pay the offer consideration and a breakdown of the fees and expenses incurred, or expected to be incurred, by the bidder in connection with the offer.

The Takeover Code also includes a requirement that potential bidders from whom a company has received an approach or with whom it is in talks must be identified in the first public announcement of a possible offer. As explained in question 5, once identified, a potential bidder is either sub-ject to a bid timetable or must announce it will not bid and be barred from renewing its interest for six months.

Under the Disclosure and Transparency Rules, a bidder for a listed company will also need to disclose its shareholdings in the target company at various thresholds, starting at 3 per cent of the target voting shares.



If the Takeover Code does not apply to a transaction then there will be no set timetable.

If the Takeover Code does apply, it sets out a timetable, including dead-lines for making a binding offer announcement, posting an offer document and the minimum and maximum periods for which an offer can remain open. The timetable that applies to takeover offers is disapplied for court-supervised schemes of arrangement and, instead, the Takeover Code sets out a less prescriptive timetable for schemes of arrangement that allows for greater flexibility to take into account the involvement of the court.

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If the Takeover Code applies, it requires that once a bidder is publicly named it must within 28 days either make a binding announcement of an offer for the target or announce that it will not make a bid (and be bound by this for a period of six months) or seek an extension of the deadline.

Other key timing considerations for both public and private transac-tions include the extent of the initial diligence exercise it is intended to undertake and the impact of any third party, antitrust or other regulatory clearance that is required as a condition to the transaction proceeding.



Minority shareholders who do not accept the commercial terms offered in a going-private transaction may vote against it (if it is a court-super-vised scheme of arrangement) or choose not to accept the takeover offer. Depending on the number and aggregate holdings of the dissenting share-holders, they may or may not be able to prevent being squeezed out. For a scheme of arrangement, provided the relevant voting majorities are obtained (75 per cent by value and a majority in number of shareholders voting) and the court sanctions the scheme (shareholders can attend the sanction hearing but the statutory grounds for challenge are essentially procedural and the court will not examine the commercial merits), all shareholders will be bound by the scheme. In a takeover offer, the bidder needs to receive 90 per cent acceptances of the shares to which the offer relates in order to be able to exercise statutory squeeze-out rights. The UK Takeover Code, Takeover Panel practice and case law precedents strongly discourage attempts at tactical litigation by dissenting shareholders. It is also unlikely that statutory minority protection provisions (for example, fraud on the minority) will be capable of being invoked. To avoid the risk of challenge or intervention by the Takeover Panel, the bidder will need to ensure it complies with the applicable procedural and legal requirements for the relevant offer structure (scheme or offer) and its disclosure obliga-tions under the Takeover Code (see question 4).



As in other jurisdictions, the terms of the purchase agreement on a pri-vate sale will be dictated by the relative bargaining powers of the parties. Provisions particular to private equity deals relate to financing (see ques-tions 10 and 11) and also, if the seller is a UK private equity sponsor, to the level of warranties and representations. UK private equity sponsors will rarely provide business representations and warranties. In such circum-stances the purchaser will normally have to rely on its own due diligence and warranties provided by the management team of the target. Warranty and indemnity insurance is also, sometimes, used in these circumstances.



In private equity buyouts where the members of management of the tar-get company are actively involved in the transaction, they are generally offered the opportunity to purchase equity in the acquiring group. Securing a commitment from the management to the business, and incentivising the members of the management team in such a way that their interests are aligned with the success of the business and the private equity sponsor, are key considerations for the private equity sponsor.

One important concern in deals where the Takeover Code applies, and management already hold target shares, is Rule 16 of the Takeover Code. This rule provides that, other than with the consent of the Takeover Panel, a bidder may not make any arrangements with shareholders if there are favourable conditions attached which are not being extended to all share-holders. Rule 16 also provides that where the bidder has entered into, or agreed to enter into, any form of incentivisation arrangements with

members of the target company’s management who are also sharehold-ers then relevant details of such arrangements must be disclosed and the independent financial adviser to the target company must publicly state its opinion that the arrangements are fair and reasonable. In certain circum-stances such arrangements must also be approved by the target company’s shareholders.

Management’s investment typically takes the form of a subscription for a separate class of ‘sweet’ equity and, in some cases, may include a ratchet entitling management to an enhanced return on such sweet equity where the return to the private equity sponsor exceeds specified thresh-olds. Senior management may also invest in the same instruments (or ‘institutional strip’) as the private equity sponsor. The detailed structuring of the management incentive package will be dependent on the tax treat-ment of any benefits. For example, management will be keen to ensure, so far as possible, that any gains in relation to shares acquired (including any sweet equity) are taxed as capital gains rather than as income.

Management who hold shares in the company are likely to be required to sign up to a shareholders’ agreement with the private equity sponsor. This agreement, together with the constitutional documents of the com-pany, will typically contain restrictions on transferring their shares, ‘drag and tag’ rights and will also provide for compulsory transfer of some or all of a manager’s shares if his or her employment terminates. The financial terms for such a transfer will typically depend on the reason for the termi-nation of employment (‘good’ or ‘bad’ leaver provisions).

9 Tax issues


Key tax considerations that arise in the context of UK private equity port-folio company acquisitions will include the quantification of the tax costs associated with the acquisition of the target company, the management of the tax charge of the target group, planning for the fund’s investors in relation to an exit (including a partial exit) event and the provision of tax-efficient compensation to the management of the target group.

Costs of acquisitionThe acquisition vehicle will be liable to pay stamp duty on the transfer of shares in a UK target company, at 0.5 per cent of the consideration. It may be possible to avoid a charge in certain circumstances, for example if the UK target company can be indirectly acquired through a non-UK company.

Most costs relating to the acquisition of the shares in the target and the issue of equity in the acquisition structure will be non-deductible against the target’s operating income. In principle, costs of arranging the financing will, however, be deductible and can be spread over the period of the loan, in accordance with the accounting treatment.

The acquisition vehicle will also seek to maximise its recovery of VAT incurred in acquiring the target (in relation to advisory fees in particular). This is an increasingly difficult area that is likely to attract close scrutiny from the UK tax authorities (HMRC).

Target group tax managementA key consideration for the fund in financing the acquisition of the target will be the tax deductibility of its funding costs and, where the target group is multinational, the means by which such costs can be ‘pushed down’ into jurisdictions that have profitable activities without the imposition of addi-tional tax costs such as withholding taxes. Other tax minimisation tech-niques may also be considered to manage the target group’s tax charge. It is typical, for example, for part of the fund’s investment to be made in the form of loans in order to generate additional tax deductions, provided this can be structured in such a way that current tax liabilities (phantom income) are not imposed on the fund’s investors and sponsors.

Subject to certain exceptions, a UK borrower can, in general, claim a deduction for interest payments and related borrowing costs on an accru-als basis, as reflected in its accounts. Interest deductions may, however, be restricted under a wide variety of rules, notably the transfer pricing rules, which apply, in the case of UK to UK transactions as well as to cross-border transactions, to limit interest deductions on loans made between parties under common control to an arm’s-length standard.



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It is now common practice to enter into an advance agreement with HMRC in order to obtain certainty on the application of the rules, which will set out the basis (generally by reference to financial performance benchmarks) on which funding costs will be deductible. The acquisition vehicle itself is unlikely to have profits against which to offset its interest deductions. Provided, as would typically be the case, the acquisition vehicle is in the same 75 per cent group as other UK companies in the target group, it will normally be able to surrender the benefit of its interest deductions to such companies under the UK ‘group relief ’ rules.

Although, as a basic matter, there is withholding tax at 20 per cent on UK source interest, payments of interest may be made gross in certain circumstances, including where the lender is within the charge to UK cor-poration tax or qualifies for relief under a double tax treaty. The lending syndicate for any third-party funding will normally be made up of entities that fall into one of these categories, and such lenders will usually seek to be grossed-up in the event that withholding tax were to be imposed, for example, on a change of law. Any shareholder loan funding will typically be structured in a way that takes advantage of one of the exemptions from withholding.

Because no withholding tax is imposed on dividends paid by UK companies, no withholding tax is imposed on interest payments made to certain qualifying entities and dividends received by UK companies are generally exempt from tax; cash flow within the group structure is gener-ally not such an important consideration in the UK as it can be in other jurisdictions.

Exit planningIt is important that all potential exit scenarios (namely, full exit, partial exit, IPO, etc) are anticipated when formulating the acquisition structure.

The ultimate parent company in the acquisition structure will often be a non-UK resident entity. Non-UK domiciled carried interest holders are thereby enabled to benefit from the remittance basis of taxation in respect of carried interest distributions arising from any exit. It is, however, critical that any exit can be structured in a way that does not create any withhold-ing tax or other tax leakages and, where possible, that any exit proceeds can be taxed as capital gains for investors, carry holders and management. Luxembourg holding companies are often used to achieve these objectives.

Executive compensationIn addition to receiving a salary, which will be subject to income tax and national insurance contributions in the normal way, the target’s execu-tives will normally be offered the opportunity to subscribe for shares in the acquisition vehicle. Normally the shares will take the form of sweet equity, in the sense of having a low initial market value, but with the potential to appreciate significantly. This is generally achieved through the fund’s investment being split between ordinary equity and preferred equity or debt. As a general proposition, management’s shares should not be tax-able on acquisition, provided the shares are acquired for their open market value for tax purposes.

Provided certain conditions set out in memorandum of understand-ing agreed between HMRC and the BVCA in 2003, HMRC accepts that the price paid by the executives for their shares is equal to their open market value for tax purposes, and that, accordingly, no taxable income will arise to the managers under the employment income tax regime. It is common practice, therefore, for management to request that their share-based com-pensation is structured in accordance with this safe harbour.

If there is any material deviation from the terms of the safe harbour that may result in management’s shares being worth more than the price paid for them, management can elect to pay any employment income tax and national insurance contributions upfront on any undervalue, thereby avoiding any further post-acquisition income tax charges and ensuring that any future appreciation in the value of that shares is taxed at capital gains tax rates.



Going-private or private equity transactions generally involve senior debt and, particularly for larger transactions, subordinated debt. Senior bank debt is typically provided by one or more commercial lending institutions, and syndicated to other financial institutions and investors, in the form of term loans, a revolving credit facility and often a separate acquisition and capital expenditure facility, secured by the holding companies’ and target’s assets. High-yield bonds may be issued as senior-secured or senior-unse-cured debt to supplement, or substitute, senior bank debt. Subordinated debt is typically made up of either a mezzanine facility (which may also contain warrants to purchase equity), a second lien facility or second lien notes or high-yield bonds, and in some transactions more deeply subordi-nated payment-in-kind debt may be incurred in the form of subordinated loans, loan notes or bonds. Vendor financing is also sometimes used. For regulatory (see question 11) or commercial reasons, or both, to ensure certainty of funding, going-private and private equity transactions often involve bridge or interim financing under which one or more commercial lending institutions agree to provide bridge or interim loans if the required long-term debt cannot be sold or documented by closing. When several forms or tranches of debt are incurred, the rights of each debt provider to receive payment and enforce security are often regulated in an intercredi-tor agreement.

Private equity sponsors may wish either to retain or prepay any exist-ing indebtedness in the potential target. The terms of the existing indebt-edness often require repayment upon a change of control and will contain other restrictions (for example, restricting incurrence of additional lever-age) although it may be possible to structure the transaction so that the pre-payment provisions do not apply or the existing lenders may be prepared to amend the terms of the existing indebtedness, or both, allowing the indebtedness to be retained. Existing indebtedness is typically repaid and in such circumstances all parties should consider whether the terms of such indebtedness provide for additional costs or fees upon prepayment and may need to ensure that appropriate steps are taken to repay the indebtedness and release any existing security on the acquisition date or as soon as prac-ticable thereafter.

Conduct relating to provision of debt financing in going-private trans-actions is regulated by the Takeover Code and the manner in which debt is provided should comply with these rules, for example, the bidder is required to make disclosure of the debt facilities related to the transaction under Rule 26 of the Takeover Code. Financial assistance rules also apply if the transaction involves the acquisition of a public company or if a public company is providing financial assistance for the acquisition of shares in its private holding company, and restrict the provision of guarantees, security, indemnities or other financial assistance by such public companies. A pub-lic company will need to be reregistered as a private company before it or its subsidiaries can provide financial assistance, with the debt documenta-tion usually imposing a deadline by which the target must be taken private and the security and guarantees for the acquisition debt given. No margin loan requirements apply.



Credit documentation for a going-private transaction will generally need to be on a ‘certain funds’ basis to the extent that the financing is being used to fund the acquisition. Where the Takeover Code applies, on the date of the announcement of a bid, the sponsor must be satisfied (and the sponsor’s financial adviser must confirm) that the sponsor has sufficient cash available to pay the consideration for the acquisition in full. Unless a financing precondition has been permitted by the Panel on Takeovers and Mergers (which is rare), either full finance documents (documenting the facilities described in question 10) or an interim facility should be executed by this time, together with security documents and any other documentary

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conditions precedent (other than those within the sponsor’s control), to satisfy this ‘certain funds’ requirement.

The credit documentation will also regulate the way in which the bid-der may conduct the offer (or scheme if the acquisition is being carried out by way of a court-supervised scheme of arrangement), for example, by pre-scribing the level of acceptances that the bidder must obtain before going ‘unconditional as to acceptances’.

On the equity side, purchase agreements (when applicable to the trans-action) will sometimes contain warranties from the private equity sponsor regarding the equity financing commitment and the private equity spon-sor is often required to provide an equity commitment letter to backstop its obligation to fund the purchasing vehicle immediately prior to closing.



Under English insolvency law, when an English company has entered into an insolvency process, certain transactions (for example transactions at an undervalue, preferences and avoidance of floating charges) entered into by the company before the onset of insolvency may be challenged by an administrator or liquidator and set aside by a court. In leveraged transac-tions, there is a concern that the guarantees and security provided by the target and its subsidiaries for the debt financing could be set aside by a court on such grounds. Purchase agreements and the main debt finance agreements often contain representations and warranties that insolvency (or similar) proceedings have not been started or threatened.



Where a private equity sponsor has taken a minority stake in a target or there is a club deal involving more than one private equity sponsor, the shareholders’ agreement, together with the constitutional documents of the relevant company or partnership, will typically contain provisions designed to ensure that the private equity sponsor has adequate informa-tion and veto rights to protect the value of its investment, although it will usually not have day-to-day control of the business.

Provisions will include information rights, the right to appoint one or more directors, a list of reserved matters which may only be undertaken with the prior approval of the private equity sponsor, restrictions on share transfer, pre-emption rights on the issue and transfer of shares and drag-along and tag-along rights on an exit.

In addition, a private equity sponsor with a minority stake may have the ability to trigger a sale or exit or have put or call options over other shareholders’ interests either based on a return threshold or a period of time from its investment having elapsed.

Under the Companies Act 2006 certain key corporate actions such as amending the company’s articles of association, changing share rights, reregistering a company (from public to private or vice versa), or disapply-ing shareholder pre-emption rights on an issuance of new shares, can only be taken by special resolution – which requires a 75 per cent majority of the shareholders (and in some cases of the class of relevant shareholders) to vote in favour.

A member of a company may also apply to a court under the Companies Act 2006 for an order that a company’s affairs are being or have been conducted in a manner unfairly prejudicial to the interests of members generally or some part of the members. If the court agrees it can make any order it thinks fit.



In addition to any general conditions that may apply, such as regulatory or antitrust, where the Takeover Code applies, unless a ‘voluntary’ offer has been announced, it requires that a mandatory offer must be made for a

company by any party that holds, alone or together with anyone with whom it is acting in concert, interests in shares carrying 30 per cent or more of the voting rights. The mandatory offer must be in cash (or include a cash alternative) at no less than the highest price paid by the bidder during the 12 months prior to the announcement of the offer and the only condition that can be attached to the mandatory offer is an acceptance condition of 50 per cent.

In a deal governed by the Takeover Code that involves a private equity sponsor, it is important to establish at the outset and agree with the Takeover Panel which parties are deemed to be acting in concert with the private equity sponsor, as purchases made by concert parties will be aggregated.

15 Exit strategies


If a private equity sponsor is holding a majority stake in a portfolio com-pany, there will often be very little to restrict it from selling its stake in a private sale to a third party, although the articles of association and share-holders’ agreements may contain restrictions on share transfer and any dis-posal is likely to give rise to tag-along rights in favour of other shareholders.

As mentioned above, on a sale of a private company, UK private equity sellers rarely accept substantial continuing liability to purchasers. As a con-sequence, UK private equity sellers generally do not give business warran-ties or indemnities and instead often only provide warranties as to their own title and capacity. As explained in question 7, a buyer is therefore often reliant on its own due diligence, warranties from management and, some-times, warranty and indemnity insurance.

In the case of an exit by way of IPO, the portfolio company will need to satisfy the eligibility criteria set out in the rules of the applicable stock exchange. In addition, as described in question 16, it is likely that a per-centage of a private equity firm’s shareholding will be ‘locked-up’ for a period post-IPO.



In preparation for an IPO, a reorganisation of the portfolio company is typi-cally carried out to either simplify the company’s share capital structure into one class of ordinary shares, or insert a new holding company for the group. If applying for a premium listing on the London Stock Exchange, the portfolio company will need to demonstrate that it can operate inde-pendently of its major shareholders. If the private equity sponsor’s inter-est exceeds 30 per cent after the IPO, it will be regarded as a ‘controlling

Update and trends

2014 was an interesting year in terms of exit options, with the IPO markets enjoying periods of rising and falling activity, which had knock-on impacts on PE deal flow.

The continued rise of secondary deals was also a notable aspect of the market in 2014, as commercial and regulatory drivers continued to attract people to increasingly complex secondary transactions. We would anticipate continued interest in secondary deals in 2015. Another feature of the market was the demand for co-investment opportunities, which again we would expect to continue in 2015.

There were also interesting trends in the financing of deals, with UK and other European sponsors broadening their horizons and looking increasingly further afield for finance, with particular interest in the US capital markets.



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shareholder’ for the purposes of the Listing Rules, and a relationship agree-ment containing certain prescribed undertakings (designed to ensure the independence of the listed company) will be required,

There is no requirement for registration rights in respect of post-IPO sales of shares listed on a UK market.

On an IPO, the underwriter will often expect part of the private equity sponsor’s holding to be locked up for a period of six to 12 months. The proportion of the private equity sponsor’s holding and the duration of the lock-up period will be negotiated between the private equity sponsor and the lead underwriter. The prohibition on sale of shares during the lock-up period is usually widely drafted to catch all transactions that have a similar economic consequence for the owner of the shares such as hedging or simi-lar derivative transactions.



The number of public-to-private transactions in 2014 was small. Such transactions typically involve companies from a wide range of industry sectors.

Transactions involving a change of control of targets from certain industry sectors in the UK such as banking, insurance, financial services, consumer credit, oil and gas, electricity, telecommunications and broad-casting may be subject to additional regulatory scrutiny or consent, or both, which can mean a longer transaction time frame.



There are no structuring or financing concerns that are unique to cross-border private equity transactions, although tax considerations will be key. Save for certain industries (for example, broadcasting and defence) there are no foreign investment restrictions so cross-border private equity trans-actions are common in the UK.



UK law does not contain any restrictions that prevent or restrict multiple private equity firms, or a private equity firm and a strategic partner from participating in a club or group deal. However, depending upon the relative size and interests of the parties to the transaction, the antitrust position on club deals will need to be carefully considered.

In a public company takeover context, the key consideration for par-ties to such deals is that they will likely be viewed as ‘concert parties’ for the purposes of the Takeover Code and therefore any shares held or acquired in a target company by any member of the group will be aggregated for the purposes of assessing whether the obligation to make a mandatory takeover offer is triggered. The threshold for triggering this obligation is an aggregate holding of 30 per cent of the voting shares.



Although it is always deal-specific, UK sellers have generally continued to resist conditions to closing other than in relation to antitrust clearance or other required regulatory consents and approvals.

As mentioned above, financing conditions are not common in UK pri-vate equity buyouts. ‘Material adverse change’ conditions are sometimes contained in UK purchase agreements, particularly if required to mirror provisions contained in financing documents, but they are not as common as in some jurisdictions, for example, the United States.

David Innes [email protected] Guy Lewin-Smith [email protected] Richard Ward [email protected]

65 Gresham StreetLondon EC2V 7NQUnited Kingdom

Tel: +44 20 7786 9000Fax: +44 20 7588 4180www.debevoise.com

Simpson Thacher & Bartlett LLP UNITED STATES


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Bill Curbow, Kathryn King Sudol and Atif AzherSimpson Thacher & Bartlett LLP



US private equity transactions may involve the acquisition by a private equity sponsor of a controlling stake in a private or public company, which is typically structured as a stock purchase, asset purchase, merger, ten-der offer or leveraged recapitalisation. Private equity sponsors may also make minority investments in public or private companies, which typi-cally involve the purchase of common stock, preferred stock, convertible debt or equity securities, warrants or a combination of such securities. Private equity transactions involving the acquisition of a private or public company are generally structured as leveraged buyouts (LBOs) in which a significant amount of the purchase price is paid with the proceeds of new debt; this debt is usually secured by assets of the target and serviced from the cash flows of the target. In acquisitions of a public company, a private equity sponsor may engage in a going-private transaction, which typically involves a one-step transaction via a merger or a two-step trans-action involving a tender offer followed by a merger. As discussed in ques-tion 4, going-private transactions subject to rule 13e-3 of the US Securities Exchange Act of 1934 generally require significantly greater disclosure than other types of private equity transactions.

Private equity funds typically create a special purpose shell acquisi-tion vehicle to effect an investment or acquisition, and commit to fund a specified amount of equity capital to the acquisition vehicle at the closing. Various considerations dictate the type and jurisdiction of organisation of the acquisition vehicle, including, among others, tax structuring issues, desired governance structure, number of equity holders, equity holders’ (and the private equity sponsor’s) exposure to liability by use of the appli-cable vehicle, general ease of administration and any required regulatory requirements.



The Sarbanes-Oxley Act of 2002 and related Securities and Exchange Commission (SEC) and stock exchange rules raise a variety of issues rel-evant to private equity transactions, including those outlined below:• if the target in a private equity transaction continues to have listed

common equity, a majority of the target’s board of directors, audit committee, nominating or corporate governance committee and compensation committee must meet stringent independence requirements;

• the New York Stock Exchange and Nasdaq Stock Market do not require ‘controlled companies’ (namely, companies in which more than 50 per cent of the voting power is held by an individual, group or another com-pany) to maintain a majority of independent directors on the board or have a nominating or compensation committee comprised of inde-pendent directors; however, controlled companies are still required to maintain an audit committee comprised entirely of independent

directors, and following implementation of reforms pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, a compensation committee is required to meet enhanced independence standards, which have been adopted by the New York Stock Exchange and the Nasdaq Stock Market;

• in conducting due diligence on a public target, private equity sponsors must carefully review the target’s internal financial controls, foreign corrupt practices and anti-bribery law compliance and prior public disclosures to evaluate any potential liability for past non-compliance and to avoid stepping into a situation in which significant remedial or preventive measures are required;

• if a private equity sponsor requires management of a public target to purchase equity of the target or a new entity formed in connection with the transaction, the sponsor should be aware that a public target is generally not permitted to make loans or arrange for the extension of credit to any directors or officers of the target to fund such purchases;

• if a sponsor intends to finance a transaction with publicly traded debt, the target must have an audit committee comprised entirely of inde-pendent directors and must comply with enhanced disclosure require-ments (for example, disclosure of off-balance sheet arrangements); and

• if a private equity sponsor intends to exit an investment following an initial public offering of the target’s stock, the exit strategy must take into account the time, expense, legal issues and accounting issues that may arise in connection with becoming a public company.

A number of public companies consider going-private transactions in the light of the stringent US corporate governance regime and scrutiny of accounting and executive compensation policies and practices. Companies that do not have publicly traded equity or debt securities are exempt from complying with the corporate governance rules in the Sarbanes-Oxley Act and related SEC and stock exchange rules. Some of the advantages of a going-private transaction include the reduction of expenses relating to compliance and audit costs, elimination of public disclosure requirements and decreased risks of shareholder liability for directors and management.



When the board of directors (or any special committee thereof, as described below) reviews a going-private or private equity transaction pro-posal, the directors must satisfy their fiduciary duties, as would always be the case, and their actions must satisfy the applicable ‘standard of review’ under the law of the state of organisation of the target company, which may affect whether the directors could be personally liable in any lawsuit that challenges the transaction. Other preliminary issues to be considered by the board of directors of a public company in considering a going-private or private equity transaction proposal include various disclosure issues. Generally, the board of directors of the target company will be consulted

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by management before the target company discloses confidential infor-mation regarding itself to a prospective private equity investor pursuant to a confidentiality agreement, which may include both an employee non-solicitation provision and a ‘standstill’ provision that prevents a sponsor and its affiliates from acquiring or making proposals to acquire any securi-ties of the company without the board’s prior consent. Note that, under US securities laws, a sponsor and its affiliates may be restricted from acquiring securities of a public company if the sponsor is in possession of material, non-public information with respect to such company. Also, as discussed in question 12, boards of directors must consider fraudulent conveyance issues presented by any proposed debt to be incurred by the company in connection with the private equity transaction.

A critical threshold determination to be made by a board of directors regarding its consideration of a going-private or private equity transaction proposal is whether the board should form a special committee of directors to consider and make decisions with respect to the proposed transaction. In Delaware (the leading US corporate jurisdiction), if persons affiliated with the parties making the going-private or private equity transaction proposal (including any significant shareholders participating in the trans-action) or persons otherwise subject to a conflict of interest (including members of the board of directors or management of the target company participating in the transaction) with respect to the proposal comprise a majority of a corporation’s board of directors, the ‘entire fairness’ stand-ard will apply – which places the burden of proof on the board to show that the transaction was fair to the unaffiliated shareholders. To reach such a determination, both the transaction process and the resulting transaction price must be found to be fair to the unaffiliated shareholders. In the event that a transaction may be subject to the entire fairness standard, a board of directors will typically form a special committee comprised entirely of disinterested directors to shift the burden of proof to any person who may legally challenge the transaction. Generally, best practices would result in the special committee being comprised solely of disinterested directors, having the right to engage its own financial adviser and legal counsel and being authorised to independently negotiate and evaluate the transaction as well as alternative courses of action, including pursuing other acquisi-tion proposals or continuing to implement the target company’s strategic plan as a stand-alone company.

4 Disclosure issues


Generally, going-private transactions and other private equity transac-tions are subject to the same disclosure requirements under the US securi-ties laws that are applicable to other merger and acquisition transactions. However, certain going-private transactions are subject to rule 13e-3 of the US Securities Exchange Act of 1934, which mandates significantly greater disclosure than is ordinarily required by the federal proxy rules or tender offer rules. Generally, rule 13e-3 will apply only if the going-private transac-tion involves a purchase of equity securities, tender offer for equity securi-ties or proxy solicitation related to certain transactions by the company or its affiliates (which includes directors, senior management and significant shareholders); and will result in a class of the company’s equity securities being held by fewer than 300 persons or a class of the company’s equity securities listed on a stock exchange to no longer be listed. The height-ened disclosure requirements applicable to going-private transactions subject to rule 13e-3 include, among other items, statements by the target and other transaction participants as to the fairness of the transaction to disinterested shareholders, plans regarding the target company, alterna-tive transaction proposals made to the target, disclosure regarding control persons (for example, information about directors and officers of private equity sponsors) and information regarding the funding of the proposed transaction. Also, the target company will need to publicly file or disclose any report, opinion or appraisal received from an outside party that is materially related to the transaction and any shareholder agreements, vot-ing agreements and management equity agreements. If the going-private transaction (whether or not subject to rule 13e-3) is structured as a tender offer or transaction requiring the vote of the target company’s shareholders (for example, a cash or stock merger), the subject company’s shareholders will be required to receive a tender offer disclosure document or a proxy statement or prospectus containing disclosure that satisfies the applicable US tender offer rules, proxy rules or Securities Act requirements (these

generally require disclosure of all material information relating to the offer or transaction). In addition, a target company board of directors effect-ing going-private transactions and other private equity transactions must still comply with any applicable state law requirements. For example, the Delaware courts are increasingly requiring additional disclosure in proxy and tender materials disseminated to shareholders with respect to pro-spective financial projections and forecasts that the target company shared with the private equity sponsor.



Timing considerations depend upon a variety of factors, including:• the time necessary for the target’s board or special committee to evalu-

ate the transaction and any alternatives;• the first date on which public disclosure of any proposal to acquire a

public company target must be made if the proposal is being made by any person who has an existing schedule 13D or 13G filing;

• the time necessary for bank financing syndication, sales of debt secu-rities, tender offers or consent solicitations relating to existing debt securities and any attendant delays;

• the time necessary for regulatory review, including requests for addi-tional information from antitrust or other regulators;

• the magnitude of disclosure documents or other public filings and the extent of the SEC review;

• timing relating to solicitation of proxies, record dates and meeting dates in connection with a shareholder vote;

• timing relating to solicitation of tenders and other required time peri-ods under the US tender offer rules (for example, tender offers must remain open for a minimum of 20 business days);

• the risks of significant litigation related to the transaction; and• the time necessary to establish alternative investment vehicles and

special purpose vehicles or to complete a restructuring of the target prior to closing.



Although the details vary depending on the state in which a target com-pany is incorporated, in connection with a going-private transaction of a Delaware corporation, shareholders who are being cashed out (includ-ing those pursuant to a second-step merger following a first-step tender offer) may petition the Delaware court of chancery to make an independ-ent determination of the ‘fair value’ of their shares in lieu of accepting the consideration in the going-private transaction. Both the dissenting shareholders seeking appraisal and the target company must comply with strict requirements under the statute, and in the case of the dissenting shareholders, they may not vote in favour of the transaction. Such share-holder appraisal actions are costly for the acquiror (including as a result of the incurrence of a statutorily designated interest rate on the value of the dissenting shares) and often take years to resolve. As a result, to the extent that there is a significant number of shares for which shareholders are seeking appraisal, it will create a potentially unknown contingent payment obligation for the acquiror many years post-closing, which may complicate the acquirer’s financing. As such, it is not uncommon for acquirers to seek the inclusion of a condition to the acquisition agreement limiting the maxi-mum number of shares for which appraisal may be sought. However, such appraisal conditions are not commonly found in acquisition agreements involved in competitive auctions.



Historically, to the extent private equity sponsors required financing to complete a transaction, they negotiated for the right to condition their obligation to consummate the transaction upon their receipt of financ-ing proceeds. Current market practice however, has resulted in private



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equity buyers typically agreeing to buy companies without the benefit of a financing condition but, in such cases, the buyer typically has the right to pay a ‘reverse termination fee’ to the seller as the sole remedy of the seller or target company against the buyer in the event that all of the con-ditions to closing have been satisfied (or are capable of being satisfied on the applicable closing date) but the buyer was unable to obtain the third-party debt-financing necessary to consummate the transaction. Because the acquisition vehicle that is party to the transaction is almost always a shell entity (and, as such, not independently creditworthy), target compa-nies typically require the acquisition vehicle’s potential obligation to pay a reverse termination fee to be supported by a private equity fund limited guarantee. In addition, target companies often require a limited right to enforce the ‘equity commitment letter’ provided by the private equity fund to the acquisition vehicle, pursuant to which the fund commits to provide a specified amount of equity capital to the acquisition vehicle at closing. Most purchase agreements providing for a reverse termination fee include provisions that deem payment of such fee to be liquidated damages and otherwise cap the private equity fund’s liability exposure to an amount equal to the reverse termination fee amount. Particularly in transactions involving third-party financing, private equity firms rarely agree to a full specific performance remedy that may be enforced against the private equity firm or special purpose acquisition vehicle used in the transaction.

In addition to the circumstances above, participants on the other side of a private equity transaction (whether sellers or buyers) will frequently require evidence of the creditworthiness of any special purpose acquisition vehicles used in the transaction to ensure they have a sufficient remedy in the event that the acquisition vehicle breaches its obligations under a purchase agreement or is required to satisfy an indemnification obliga-tion. Participants in private equity transactions may attempt to negotiate guarantees, equity commitments or other support arrangements from a private equity sponsor, but most private equity sponsors resist indemnifi-cation, guarantee or other obligations that permit recourse directly against the private equity fund. However, as described above, in circumstances where a sponsor has agreed to pay a reverse termination fee, private equity funds frequently agree to provide a limited guarantee of the payment of the reverse termination fee or may provide the target company with a right to specifically enforce the equity commitment letter from the private equity fund to the extent of the reverse termination fee.

Both sellers and buyers in private equity transactions will generally seek to obtain fairly extensive representations, warranties and covenants relating to the private equity sponsor’s equity and debt-financing commit-ments, the private equity sponsor’s obligation to draw down on such financ-ing and obtain any required alternative financing and the target company’s obligation to assist with obtaining the financing and participating with any required marketing of the financing. These types of provisions, as well as various other financing-related provisions, are discussed further in ques-tion 11.



In a private equity transaction, the management of a target company may be offered the opportunity (or may be required) to purchase equity of the target company or the acquisition vehicle, which investment may be structured as a ‘rollover’ of such management’s existing equity holdings. Whether and to what extent such investments are made may depend heav-ily on the type and amount of the management’s historic compensation arrangements as well as the amount, if any, of cash payments manage-ment will receive in the going-private transaction, in respect of current equity and equity-based awards and payouts under deferred compensation and other plans. In connection with such investment, management typi-cally also receives equity incentive awards (for example, stock options in a corporation or profits interests in a partnership). These equity awards generally become vested based upon continued employment, the achieve-ment by the company of specified performance targets, the private equity sponsor achieving a particular return on its investment or a combination of the foregoing conditions. These agreements also typically provide for

acceleration of vesting, repurchase or forfeiture of the equity incentive awards upon a termination of employment (the acceleration, repurchase or forfeiture depends upon the circumstances for the termination of employ-ment) and often impose on the employees post-termination covenants not to compete with, or disparage, the company and not to solicit company employees or clients. All equity acquired by an employee will typically be subject to a shareholders’ agreement, which customarily includes transfer restrictions, a repurchase right held by the company upon the employee’s termination of employment for any reason (with the price varying based on the circumstances for the termination), drag-along and tag-along rights (which are described in question 13) and, in some cases, piggyback registra-tion rights. Customary terms of shareholders’ agreements are discussed in question 13.

Historically, one of the key concerns in private equity led going- private transactions has been continuity of management under the theory that pri-vate equity sponsors do not have the time, resources or expertise in oper-ating the acquired business on a day-to-day basis. As such, the principal executive compensation issues in a private equity transaction relate to ensuring that equity-based and other compensation has been appropriately structured to provide an incentive to management to increase the compa-ny’s value and remain with the company following the closing. To this end, primary questions involve whether management may rollover existing equity on a tax-free basis as part of their investment, the accounting and tax treatment (both for the company and management) of equity incentive awards and other compensation arrangements, and to what extent man-agement can achieve liquidity under their investment and equity awards. It should also be noted that other issues, such as ongoing employee benefit protections (for example, post-termination welfare and pension benefits) and certain compensation arrangements (for example, base salary and annual cash bonus opportunities), will factor into any private equity trans-action negotiation with management of the target company.

As described above, management participating in a private equity transaction may have several opportunities to earn significant value (both in the primary transaction and upon a successful future exit event). As a result, shareholders of a public company engaged in a going-private trans-action are particularly concerned about conflicts between management’s desire to complete a transaction or curry favour with the new private equity buyer, on the one hand, and shareholders’ desire to maximise value in the going-private transaction, on the other. In recent years, this issue has received significant attention, resulting in some boards of directors restricting their senior management from participating in certain aspects of going-private transaction negotiations or discussing post-closing com-pensation arrangements with the private equity firm until after the price and material terms of the sale have been fully negotiated with the private equity firm and, in some cases, completed. In addition, in circumstances where a target company has negotiated the right to conduct a post-signing market check, or ‘go-shop’, or where an interloper has made an unsolic-ited acquisition proposal after signing that the board of directors of the target believes may result in a superior transaction for its shareholders as compared to the transaction entered into with the private equity firm, the target board may further restrict its senior management from participat-ing in negotiations or discussions regarding post-closing compensation arrangements with all bidders, including the private equity firm, until the final winning bidder is agreed upon. Given the importance to private equity firms of the continuity of management and the structure of their equity and compensation-based incentives, which they often prefer finalising before entering into a going-private transaction, there is often a tension between the time when the board of directors of a target company will permit its senior management to negotiate such arrangements with a potential pri-vate equity buyer and when such a private equity buyer desires to have such arrangements agreed upon with such senior management. In addition, the SEC has required significant disclosure regarding management’s conflicts of interests, including quantification of the amount to be earned by execu-tives of the target company in the transaction.



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9 Tax issues


Many US private equity funds are structured as limited partnerships or lim-ited liability companies, which are generally treated as pass-through enti-ties for tax purposes. Private equity transactions are frequently structured in such a manner to avoid or minimise the effect of ‘double taxation’ that results from investing directly into entities that are treated as corporations for tax purposes. However, such ‘flow-through’ structures could create US tax issues for tax-exempt and non-US limited partners of private equity funds. Generally, the substantial amount of debt involved in LBO transac-tions affords a target company significant interest expense deductions that offset taxable income. Careful attention must be paid to the terms of the acquisition debt to ensure that the interest is deductible under applicable US tax rules.

Private equity sponsors must also be aware of tax issues relating to management and employee compensation. Severance and consideration for equity holdings in connection with a change of control may be consid-ered ‘excess parachute payments’, which are subject to a 20 per cent excise tax (in addition to ordinary income taxes) and which may not be deducted by the target. If an award granted is an ‘incentive stock option’, no income is realised by the recipient upon award or exercise of the option and no deduction is available to the company at such times. If the award granted is a non-qualified stock option, no income is recognised by the recipient at the time of the grant and no deduction is available to the company at such time. There are a number of limitations on incentive stock options; accord-ingly, non-qualified stock options are more typical. If a deferred compensa-tion plan is ‘non-qualified’, all compensation deferred in a particular year and in prior years may be treated as taxable income in such taxable year to the extent that it is not subject to substantial risk of forfeiture.

In transactions where cash is paid for the shares of a target corpo-ration, a seller and buyer may agree to treat the acquisition of stock of a corporation as an asset acquisition for US federal tax purposes by making a 338(h)(10) election. This election leads to a ‘step-up’ in the target’s tax basis in its assets to the purchase price paid for such shares, resulting in additional depreciation/amortisation deductions and a tax shield to offset taxable income. A ‘qualified stock purchase’ of the target’s stock (generally an acquisition by a corporation of at least 80 per cent of the target’s issued and outstanding stock) must be made to make this election. Certain typi-cal structures used in LBOs (for example, rollover of management equity to a newly formed vehicle that purchases target stock) must be carefully analysed to determine whether such structures will render the 338(h)(10) election impermissible.



LBOs generally involve senior bank debt, which is typically provided by commercial lending institutions in the form of a revolving credit facility and term loans (which are typically secured by the target’s assets), and mezzanine debt, which is typically provided by private purchasers in the form of senior or senior-subordinated notes (or both), or by a public or rule 144A offering of high-yield bonds. In certain circumstances, mezzanine debt may be issued in conjunction with warrants to purchase equity in the target. Private equity transactions typically involve ‘bridge-financing com-mitments’ pursuant to which a commercial lending institution agrees to provide ‘bridge’ loans in the event that the mezzanine debt cannot be sold prior to the closing.

In transactions where target indebtedness is not expected to be retired at or before closing, the private equity sponsor must determine whether such indebtedness contains provisions that could restrict or prohibit the transaction, such as restrictions on changes of control, restrictions on subsidiary guarantees, restrictions on the granting of security interests in the assets of the target or its subsidiaries, restrictions on debt incurrences

and guarantees and restrictions on dividends and distributions. A private equity sponsor must also determine the manner in which and the cost at which existing indebtedness may be repaid or refinanced and evaluate the cost of the existing indebtedness compared with acquisition-related indebtedness, as well as the requirements of its financing sources relat-ing to existing debt, capitalisation and other financial ratios applicable to the target. Private equity sponsors may require that certain debt of a tar-get be repaid, redeemed, repurchased or amended as a condition to the closing of a transaction. In the case of public debt, private equity sponsors may require the target to effect a consent solicitation to eliminate certain covenants in the governing indenture (for example, financial information delivery requirements).

Generally, acquisitions of a US target are not subject to any statutory financial assistance restrictions or restrictions on granting security inter-ests in the target company’s assets, except as described herein or in the case of target companies in certain regulated industries. If a ‘shell’ com-pany issues unsecured debt securities in a non-public offering with the pur-pose of acquiring the stock of a target corporation, such debt securities may be presumed to be indirectly secured by ‘margin stock’ (namely, any stock listed on a national securities exchange, any over-the-counter security approved by the SEC for trading in the national market system or any secu-rity appearing on the US Federal Reserve Board’s list of over-the-counter margin stock and most mutual funds). If so, such debt would be subject to the US Federal Reserve Board’s margin requirements and thus could not exceed 50 per cent of the value of the margin stock acquired. Private equity sponsors may avoid these requirements by utilising publicly offered debt or having the debt guaranteed by an operating company with substantial non-margin assets or cash flow.



Purchase agreements in a going-private transaction typically include rep-resentations and warranties by the private equity sponsor regarding the equity-financing commitment of the private equity sponsor and, in the case of LBOs, the third-party debt-financing commitments obtained by the private equity sponsor at the time of entering into the purchase agreement. An equity commitment letter from the private equity sponsor as well as the debt-financing commitment letters obtained by the private equity sponsor from third-party lenders are customarily provided to the target company for its review prior to the execution of the purchase agreement. In US transac-tions, definitive debt-financing documentation is rarely agreed at signing; instead, the definitive debt-financing documentation is typically negoti-ated between signing and closing on the basis of the debt-financing com-mitment letters delivered by third-party debt-financing sources at signing. Purchase agreements in LBOs also contain covenants relating to obliga-tions of the private equity sponsor to use a certain level of effort (often reasonable best efforts) to negotiate definitive debt-financing agreements and obtain financing, flexibility of the private equity sponsor to finance the purchase price from other sources and obligations of the target company to assist and cooperate in connection with the financing (for example, assist with the marketing efforts, participate in road shows, provide financial statements and assist in the preparation of offering documents).

A purchase agreement may (or, as is more frequently the case, may not) condition the closing of a transaction on the receipt of financing pro-ceeds by the private equity sponsor. If the closing is not conditioned on the receipt of financing proceeds, the purchase agreement would typically pro-vide for a ‘marketing period’, during which the private equity sponsor will seek to raise the portion of its financing consisting of high-yield bonds or syndicated bank debt financing, and which begins after the private equity sponsor has received certain financial information about the target com-pany necessary for it to market such high-yield bonds or syndicate such bank debt. If the private equity sponsor has not obtained the proceeds of such financing by the end of the marketing period (or has failed to obtain such proceeds from a ‘bridge’ financing) and thus fails to close the trans-action, the private equity sponsor may be required to pay a reverse termi-nation fee – which often functions as a cap on the maximum amount of damages the target company (on behalf of itself or its shareholders) is per-mitted to seek from the private equity sponsor for its failure to close the transaction.



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Generally, under applicable US state laws, a company may not transfer assets for less than fair consideration in the event that the company is insolvent or such asset transfer would make it insolvent. Thus, in highly leveraged transactions, there is some concern that when a target com-pany issues or transfers its assets or equity to a private equity sponsor in exchange for the proceeds of acquisition financing, which is secured by the assets or equity of such target company, the lender’s security interests in such assets or equity securities may be invalidated on a theory of fraudu-lent conveyance (namely the target company has transferred its assets for inadequate value). It is common for a certificate as to the ongoing solvency of the continuing or surviving company to be obtained from the target company’s chief financial officer prior to closing a leveraged transaction. Purchase agreements in leveraged transactions may also include represen-tations and warranties made by the private equity buyer as to the solvency of the company after giving effect to the proposed transaction.

Fraudulent conveyance issues should also be carefully considered by sellers in highly leveraged transactions. A board of directors considering a sale of the company should review the financial projections provided by management to a prospective buyer, and the indebtedness that the pro-spective buyer proposes the company incur in connection with the trans-action, to evaluate any fraudulent conveyance risks. Directors of a target company must be particularly cautious in highly leveraged transactions in which the company has existing debt that will remain in place follow-ing the closing of the transaction. In Delaware (the leading US corporate jurisdiction), creditors of an insolvent corporation have standing to bring derivative actions on behalf of the corporation directly against its directors because, when a corporation is insolvent, creditors are the ultimate benefi-ciaries of the corporation’s growth and increased value.



Shareholders’ agreements entered into in connection with minority investments or ‘consortium’ deals typically include the right of the minor-ity investors to designate a certain number of directors and the right to approve (or veto) certain transactions (for example, change in control transactions, affiliate transactions, certain equity or debt issuances, divi-dends). Private equity sponsors may also seek pre-emptive rights to allow them to maintain the same percentage equity ownership after giving effect to a primary equity issuance by the target. In addition, shareholders’ agree-ments frequently include transfer restrictions (which prohibit transfers of target securities for a particular time period and in excess of specified per-centages, or both), tag-along rights (namely, the right of a shareholder to transfer securities to a person who is purchasing securities from another holder) and drag-along rights (namely, the right of a shareholder, typically the largest shareholder or a significant group of shareholders, to require other holders to transfer securities to a person who is purchasing securi-ties from such shareholder). Private equity sponsors typically seek other contractual rights with respect to receipt of financial and other information regarding the target company, access to the properties, books and records, and management of the target company, and also rights relating to their potential exit from the investment, such as demand and piggyback regis-tration rights (which may include the right to force an initial public offer-ing), and, in some cases, put rights or mandatory redemption provisions. In certain circumstances, shareholders’ agreements in private equity trans-actions may also contain ‘corporate opportunity’ covenants that either restrict (or in some cases, expressly permit) the ability of shareholders (including private equity sponsors) to compete with the subject company or make investments outside the subject company that may otherwise be a potential investment or acquisition opportunity for the subject company. Target companies or other large shareholders that are party to sharehold-ers’ agreements may also ask for a right of first offer or right of first refusal, which would require any shareholder seeking to transfer its shares to offer to sell such shares to the company or other shareholders.

To the extent that a minority investment is made, the new shareholder should be careful to consider potential misalignment issues between the parties that may arise from its and the existing shareholders’ differing investment prices, particularly as such issues may arise in terms of liquidity rights. In these types of transactions, the new shareholder often will seek one or more of:• the right to control the timing of the liquidity event (whether it be a

change of control transaction or an initial public offering) or the right to block such a liquidity event unless it will achieve a required mini-mum return on its investment;

• the right to cause a sale of the company or an initial public offering after some specified number of years; and

• in the event the company effects an initial public offering, the right to sell more than its pro rata portion of any equity securities in any regis-tered offering of registrable securities relative to the number of equity securities sold (or to be sold) by the existing shareholder.

In the US, minority shareholders often have limited protections outside of what may be contractually negotiated in a shareholders agreement. Generally, under applicable US state laws, the board of directors of cor-porations are subject to certain fiduciary duties in respect of the minority shareholders (for example, heightened scrutiny in controlling shareholder transactions with the target company, etc), and certain minimum voting requirements may apply for significant corporate actions, such as a merger. However, in most states, provisions in a target company’s organisational documents may supersede the underlying statutory approval require-ments. In addition, many private equity investments are held through non-corporate structures, which are subject to whatever fiduciary duties, if any, that are agreed in the applicable limited liability company agreement, part-nership agreement or other similar governing arrangements. For private equity transactions structured as tender offers, US securities laws provide certain protections for minority shareholders (for example, the soliciting person is required to offer the same price to all holders of the applicable security and that the tender offer must be open for 20 business days, etc).



Under applicable US state and federal law, there are no statutory require-ments to make a mandatory takeover offer or maintain minimum capi-talisation in connection with shareholders acquiring controlling stakes in public or private companies. However, under applicable US state law, the board of directors of public and private companies have fiduciary duties to their shareholders that they must be mindful of when selling a control-ling stake in the company. In Delaware, for example, and in many other US states, a board of directors has a duty to obtain the highest value rea-sonably available for shareholders given the applicable circumstances in connection with a sale of control of the company. In certain states, the applicable law permits a board of directors to consider ‘other constituen-cies’ as well, and not simply focus on the impact that a sale of a control-ling interest in the company will have on the shareholders of the company. Private equity sponsors must be mindful of these duties of target company boards of directors as they seek to negotiate and enter into an acquisition of a controlling stake of a target company, as it may result in the target com-pany conducting a market check by implementing a pre-signing ‘auction’ or post-signing ‘go-shop’ process to seek out a higher bid for a controlling stake (or even the entire company) in order for the board of directors to feel comfortable that it has satisfied its fiduciary duties to the target company’s shareholders. In addition, as discussed in question 17, US target companies in certain regulated industries may be subject to certain minimum capitali-sation requirements or other restrictions that may impede an private equity sponsor’s ability to acquire the company.



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15 Exit strategies


A private equity sponsor will generally seek to retain flexibility on its ability to sell its stake in an acquired company, which may include having the right to require an initial public offering and the right to drag along other investors in the event of a sale by the private equity sponsor of all or a significant por-tion of its investment in the company. The ability to achieve a tax-efficient exit and the ability to receive dividends and distributions in a tax-efficient manner will also be critical factors in determining the initial structur-ing of a transaction, including the use of acquisition financing or other special-purpose vehicles. Private equity sponsors must also consider the interests of company management in connection with any exit and must agree with management on any lock-up or continued transfer restrictions with respect to the equity of the target company held by management as well as ongoing management incentive programmes that will continue fol-lowing an IPO. In an exit (or partial exit) consummated pursuant to a port-folio company IPO, private equity sponsors typically remain significant shareholders in the company for some period of time following the IPO and, thus, continue to be subject to fiduciary duty considerations as well as securities laws, timing and market limitations with respect to post-IPO share sales and various requirements imposed by US stock exchanges with respect to certain types of related party transactions.

When private equity sponsors sell portfolio companies (including to other private equity sponsors), buyers may seek fairly extensive represen-tations, warranties and covenants relating to the portfolio company and the private equity sponsor’s ownership. Private equity sponsors often resist providing post-closing indemnification for breaches of such provisions. In limited situations in which a private equity firm agrees to indemnifica-tion following the closing of a portfolio company sale, sponsors often use a time and amount limited escrow arrangement as the sole recourse that the buyer may have against the private equity sponsor. Sponsor sellers and buyers have also addressed disagreements over indemnity through the purchase of transaction insurance (for example, representations and warranties insurance) to provide post-closing recourse to the buyer for breaches of representations or warranties. In such a case, the cost of pur-chasing the transaction insurance is typically negotiated by the buyer and seller as part of the purchase price negotiations.



Private equity sponsors take a variety of approaches in connection with the rights they retain following a portfolio company IPO, depending on the stake retained by the private equity sponsor following the IPO. In many cases, the underwriters in the applicable IPO will seek to significantly limit the rights that a private equity sponsor will be permitted to retain follow-ing the IPO as it may diminish the marketability of the offering. For exam-ple, tag-along rights, drag-along rights, pre-emptive rights, and rights of first offer or rights of first refusal, in each case, for the benefit of the pri-vate equity sponsor frequently do not survive following an IPO. Except as described herein, US regulations and US stock exchange rules do not gen-erally legislate which governance rights may survive an IPO.

However, the private equity sponsor will often retain significant board of director nomination rights, registration rights and information rights following an IPO, and may, in certain limited circumstances, retain vari-ous veto rights over significant corporate actions depending on the board control and stake held by the private equity sponsor. Under applicable US stock exchange rules, the board of directors of public companies are typi-cally required to be comprised of a majority of ‘independent’ directors,

but certain exceptions exist if a person or group would retain ownership of more than a majority of the voting power for the election of directors of the company, in which case the company is referred to as a ‘controlled company’. However, in order to improve the marketability of the offering and employ what are perceived to be favourable corporate governance practices, many private equity sponsors forgo the benefits of controlled-company status and employ a majority of independent directors and only retain minority representation on the board of directors following the IPO.

In addition, private equity sponsors typically retain the right to cause the company to register and market sales of its securities and participate in piggyback registrations following an agreed-upon lock-up period (which is typically about six months following an IPO), subject to any applicable black-out rules and policies of the company and US securities laws. Private equity sponsors often seek to control the size and timing of their exits, including sales of their equity securities following an IPO. As a result, many private equity sponsors often seek to sell large blocks of their securities in an ‘overnight’ underwritten shelf takedown off of a pre-existing shelf reg-istration statement. Given the timing limitations on such shelf takedowns, it is not uncommon for such registered offerings to be exempt from, or have very truncated notice provisions relating to, piggyback registration rights of other holders of registrable securities.



Private equity sponsors target companies as attractive acquisition candi-dates based on a variety of factors, including steady cash flow, strong asset base to serve as loan collateral or as the subject of future dispositions, strong management team, potential for expense reduction, undervalued equity and limited ongoing working capital requirements. Historically, typ-ical targets have included manufacturing or production-based companies. In the past several years, private equity sponsors have been looking toward targets in the energy, financial, food, health-care, media, real estate, retail, software, technology and telecom industries. In addition, certain private equity funds have a specified investment focus with respect to certain industries (for example, energy, retail, technology) or types of investments (for example, distressed debt).

Many regulated industries (for example, banking, energy, financial, gaming, insurance, media, telecom, transportation, utilities) must comply with special business combination legislation particular to those indus-tries. Typically, approval of the relevant federal or state governing-agency is required before transactions in these industries may be completed. In certain situations, regulators may be especially concerned about the capi-talisation and creditworthiness of the resulting business and the long and short-term objectives of private equity owners. In addition, as a result of the extensive information requirements of many US regulatory bodies, sig-nificant personal and business financial information is often required to be submitted by the private equity sponsor and its executives. Furthermore, in certain industries in which non-US investments are restricted (for exam-ple, media, transportation), private equity sponsors may need to conduct an analysis of the non-US investors in their funds to determine whether specific look-through or other rules may result in the sponsor investment being deemed to be an investment by a non-US person. While none of these factors necessarily preclude private equity companies from enter-ing into transactions with regulated entities, all of these factors increase the complexity of the transaction and need to be taken into account by any private equity sponsor considering making an investment in a regulated entity.



The structure of a cross-border private equity transaction is frequently quite complicated, particularly given the use of leverage in most transac-tions, the typical pass-through tax status of a private equity fund and the existence of US tax-exempt and non-US investors in a private equity fund. Many non-US jurisdictions have minimum capitalisation requirements and financial assistance restrictions (which restrict the ability of a target



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company and its subsidiaries to ‘upstream’ security interests in their assets to acquisition financing providers), each of which limits a private equity sponsor’s ability to use debt or special purpose vehicles in structuring a transaction. As noted in question 17, non-US investors may be restricted from making investments in certain regulated industries, and similarly, many non-US jurisdictions prohibit or restrict the level of investment by US or other foreign persons in specified industries or may require regulatory approvals in connection with acquisitions, dispositions or other changes to investments by foreign persons. In addition, if a private equity spon-sor seeks to make an investment in a non-US company, local law or stock exchange restrictions may impede the private equity sponsor’s ability to obtain voting, board representation or dividend rights in connection with its investment or effectively exercise pre-emptive rights, implement capi-tal raises or obtain additional financing.

Furthermore, in a cross-border transaction, the private equity spon-sor must determine the impact of local taxes, withholding taxes on divi-dends, distributions and interest payments and restrictions on its ability to repatriate earnings. Private equity sponsors must also analyse whether a particular target company or investment vehicle may be deemed to be a controlled foreign corporation or passive foreign investment company, both of which can give rise to adverse US tax consequences for investors in the private equity fund. Any of these issues may result in tax inefficien-cies for investors or the violation of various covenants in a private equity fund’s underlying documents that are for the benefit of its US tax-exempt or non-US investors.



Private equity sponsors may form a consortium or ‘club’ to pursue an acqui-sition or investment for a variety of reasons, including risk-sharing and the ability to pursue a larger acquisition or investment, since most fund part-nership agreements limit the amount a fund may invest in a single portfo-lio company. In addition, private equity sponsors may form a consortium that includes one or more strategic partners who can provide operational or industry expertise and/or financial resources.

An initial consideration to be addressed in a club deal is the need for the confidentiality agreements often negotiated with the target company to allow each participant in the consortium to share confidential informa-tion regarding the target company with the other members of the consor-tium. Such confidentiality agreements may include language permitting each participant to share information with co-investors generally, may specifically identify each member of the consortium or may restrict a par-ticipant from approaching any potential co-investors (at least during an initial stage of a sale process) without obtaining the target company’s prior consent. Such confidentiality agreements may also provide for an alloca-tion of responsibility for any breach of the confidentiality agreements by a member of the consortium or such member’s representatives and agents. Potential buyers’ compliance with confidentiality agreements, including provisions limiting the ability of the potential buyer to share information with co-investors, has received significant attention in the US, with various litigation having been commenced with respect to these issues in the past few years.

Counsel to a consortium must ensure that the consortium agrees upon the proposed price and other material terms of the acquisition before any documentation is submitted to, or agreed with, the target company. In addition, counsel to a consortium will be required to ensure that the terms of any proposed financing, the obligations of each consortium member in connection with obtaining the financing and the conditions to each con-sortium member’s obligation to fund its equity commitment have been agreed by each member of the consortium. It is not uncommon for consor-tium members to enter into an ‘interim investors agreement’ at the time of signing a definitive purchase agreement or submitting a binding bid letter that governs how the consortium will handle decisions and issues related to the target company and the acquisition that may arise following signing and prior to closing. An interim investors agreement may also set forth the key terms of a shareholders’ agreement to be entered into by the consor-tium members related to post-closing governance and other matters with respect to the acquisition.

Each member of the consortium may have different investment hori-zons (particularly if a consortium includes one or more private equity spon-sors and a strategic partner), targeted rates of return, tax or US Employee Retirement Income Security Act issues and structuring needs that must be addressed in a shareholders’ agreement or other ancillary documentation relating to governance of the target company and the future exit of each consortium member from the transaction. Particularly in the case where a private equity sponsor is partnering with a strategic buyer, the private equity sponsor may seek to obtain certain commitments from the strategic buyer (for example, non-competition covenants, no dispositions prior to an exit by the sponsor) and the strategic buyer may seek to limit the veto rights or liquidity rights (or both) of the private equity sponsor. As discussed in question 13, a shareholders’ agreement would typically provide the consor-tium members with rights to designate directors, approval rights and veto rights and may include provisions relating to pre-emptive rights, tag-along and drag-along rights, transfer restrictions, future capital contributions, put rights, mandatory redemption provisions, rights of first offer or rights of first refusal, and restrictive covenants that limit the ability of each con-sortium member to engage in certain types of transactions outside of the target company. The various rights included in a shareholders’ agreement are frequently allocated among consortium members on the basis of each member’s percentage ownership of the target company following the con-summation of the acquisition.



Target companies generally seek to obtain as much certainty to closing as possible, which includes limited conditions to the buyer’s obligation to close the transaction and the ability to specifically enforce the obligation to close a transaction against the buyer. In private equity transactions without a financing condition, many private equity sponsors have made efforts to ensure that the conditions to their obligation to consummate the acquisi-tion pursuant to the purchase agreement are substantially the same as the conditions of the lenders to fund third-party debt financing to the private equity sponsor’s shell acquisition vehicle or are otherwise fully within the private equity sponsor’s control. In this regard, there have been some transactions in recent years in which the purchase agreement included certain financial performance or other specific conditions related to the target company (for example, minimum amount of EBITDA, minimum credit rating or cash position, maximum debt to EBITDA ratio) that cor-respond to specific conditions contained in the third-party debt financing commitments.

Private equity sponsors have typically resisted a specific performance remedy of the seller in acquisition agreements. Private equity sponsors often use third-party debt financing in acquisitions and do not want to be placed in a position where they can be obligated to close a transac-tion when such third-party debt financing is unavailable and the ability to obtain alternative financing is uncertain. In addition to the fact that the transaction would likely no longer be consistent with the private equity

Update and trends

Given the all-time highs in equity valuations, we have seen strong sponsor exit activity in 2014. Perhaps in order to bridge potential valuation gaps that may arise between a buyer and a selling sponsor, we have seen several sponsors agree to sell their portfolio companies to large public companies for a combination of cash and stock consideration. This exit structure forces the selling sponsor to keep ‘skin in the game’ by continuing a partial ownership interest in the portfolio company (and to take on the risks associated with the acquiror’s business) and also forces the selling sponsor to share the risks associated with achieving any cost and revenue synergies that were used in determining their agreed-upon deal price. Notable sponsor exits using such a cash and stock consideration structure included the sale of Biomet Inc by affiliates of The Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis and Roberts & Co and TPG to Zimmer Holdings Inc for approximately US$13.35 billion; and Hellman & Friedman’s sale of Sheridan Healthcare to AmSurg Corp for US$2.35 billion.



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sponsor’s financial modelling for the transaction in the absence of such debt financing (namely, the transaction would be unlikely to generate the private equity sponsor’s target internal rate of return), private equity spon-sors are limited in the size of the investments they are permitted to make pursuant to their partnership agreements and therefore may not be able to purchase the entire business with an all-equity investment. As a result, private equity sponsors historically required a financing condition, and more recently, in lieu thereof, the ability to terminate the purchase agree-ment and pay a reverse termination fee to the target company in the event that all of the conditions to the closing had been satisfied (or are capable of being satisfied on the applicable closing date) and the sponsor was una-ble to obtain the debt financing necessary to consummate the closing, as described in question 11.

In recent years, in addition to negotiating the right to terminate the purchase agreement and pay a reverse termination fee to the target com-pany, some private equity sponsors have agreed to a limited specific per-formance remedy in which, solely under specified circumstances, target companies have the right to cause the shell acquisition vehicle to obtain the equity proceeds from the private equity fund and consummate the

transaction. In the relatively few instances in which such a limited specific performance right has been agreed, such right will arise solely in circum-stances where:• the closing has not occurred by the time it is so required by the pur-

chase agreement (which is typically upon the expiration of the market-ing period for the buyer’s third-party debt financing);

• all of the conditions to closing have been satisfied (or will be satisfied at the closing);

• the debt financing has been funded (or will be funded if the equity financing from the private equity sponsor will be funded); and

• in some cases the seller irrevocably confirms that, if specific perfor-mance is granted and the equity and debt financing is funded, then the closing will occur.

In addition, some private equity sponsors have agreed to give the seller the right to specifically enforce specified covenants in the purchase agreement against the private equity sponsor’s shell acquisition vehicle (for example, using specified efforts to obtain the debt financing, complying with the confidentiality provisions, paying buyer expenses).

Bill Curbow [email protected] Kathryn King Sudol [email protected] Atif Azher [email protected]

425 Lexington AvenueNew York, NY 10017-3954United States


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Private Equity - Association of Corporate Counsel · 2015-03-17 · range in particular rising 58...

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Transcript of Private Equity - Association of Corporate Counsel · 2015-03-17 · range in particular rising 58...