MBOs

Question 1

What are the 3 types of funding Newco1 will receive?

Answer 1

1. Management investment
2. Fund investment
3. Debt finance

Question 2

What are the 3 methods of a scuccessful return on an MBO?

Answer 2

1. Flotation
2. Sale of newco1 to a trade buyer
3. Another private equity firm buys newco1

Question 3

Why are SPV’s used?

Answer 3

1. Tax reasons
2. Lower liability
3. Specialist vehicle, specialist mangement
4. Jurisdictional implications

Question 4

Steps in a ratcheting calculation:

Answer 4

1. What is 1% of company in number of ordinary shares.
   (Mang. share/Mang %)
2. How many shares do the fund need to have the required equity share?
   (1% in shares x equity percentage required)
3. How many shares need to be converted?
   (Required - actual)
4. How many ordinary and preferences shares will be left over?

Question 5

What are safeharbour provisions?

Answer 5

A set of rules decided between BVCA and HMRC which if complied with will mean that market value has been paid for shares, and as such only CGT is payable, not income tax on a deemed distribution.

Question 6

What are the safeharbour tests in relation to an acquisition without ratcheting provisions?

Answer 6

1. management’s shares must be ordinary share capital
2. Leverage provided must be on commercial terms
3. Management must pay same as fund for shares
4. Management and fudn must acquire shares at the same time.
5. Management’s shares must not have features unavailable to other shareholders
6. Management must be fully remunerated for their work by a separate salary

Question 7

What are the safeharbour provisions in relation to an acquisition with ratcheting provisions?

Answer 7

1. Ratchet arrangements must vary according to the performance of the company
2. Ratchet arrangements must exist when fund acquires shares
3. Management must pay fee for shares which reflects maximum economic entitlement.

Question 8

What circumstances must exist for the managers loan to be set off against income?

Answer 8

• Loan is for acquiring ordinary shares
  2. Newco1 must be a close company
  3. Company must exist for purpose of carrying on a commercial trade
  4. Throughout the period of the loan the individual must have:
  
  1. Owned shares
  2. Managed company

Question 9

What are the transfer pricing rules?

Answer 9

The rules which state when a company can deduct interest from loan notes from profits.
- Essentially the interest paid on the loan notes must be equal to what would be paid to an unconnected party on arms length terms. (commercial terms)