SGS 10 (MBO Provisions) Flashcards
What is a deed of adherence and why is it necessary?
Requires any incoming shareholders to sign up to and be bound by the provisions of the Investment Agreement. Required because incoming shareholders bound by articles of Newco but not Investment agreement.
What is the Investment Agreement and who is a party to it?
Investment Agreement is a contract between Managers, Investor and Newco 1 (similar to a SH agreement) setting out how Newco 1 and companies in the group are to be governed. Contains veto rights for Fund how ratchet provisions work warranties given by MT to Fund.
What is the purpose of a drag along?
Operate on exit to allow majority shareholders to force minority to sell their shares should there be an offer for the company that majority shareholders want to accept.
In the absence of a drag along - what is the default position?
squeeze out procedure under s.979.
But time consuming and costly and unlikely in context of MBO that management hold less than 10% share capital.
Why do MT also want drag alongs?
A majority of managers wishing to sell can drag along any dissenting minority with them on exit.
Why is the % at which drag along is activated contentious?
Fund wants it at same % of their shareholding before ratchet provisions activated, so they alone can invoke the provisions
Any higher %, unacceptable to the Fund as giving power away to the MT (need at least one to agree to deal in order to trigger the drag along provisions.)
What does a tag along do>
Allows minority SHs to sell shares to a purchaser if an offer is received for the majority shareholding.
Why not simply rely on statutory sell out?
Only arises if the offeror has secured acceptance of his offer by the holders of 90% in value of the shares in the company
Not usually applicable in an MBO context.
Contentious extra for tag along?
Existence!
some funds will not consent as highly unlikely anybody will want to buy anything other than 100%.
Why are good / bad leavers necessary?
Each manager is both an employee and SH, restrictive covenants and gardening leave provisions in service agreement have no effect on position as SH. Good / bad leaver provisions, aim to prevent managers remaining shareholders after they cease to be employees.
Why do the fund want good / bad leaver provisions?
to ensure manager is obliged to sell shares if leave the company and gives Fund control over how much they are paid.
to ensure they are sufficiently motivated to remain in the post and not leave while holding onto shares that may increase in capital value.
Why will the Fund argue unfair dismissal amounts to a bad leaver?
What amounts to a bad leaver?
MT still have statutory and contractual remedies.
Anything other than good (death or long-term illness)
Why are restrictive covenants repeated in the Investment Agreement?
if NewCo breaches the service agreement, manager no longer bound by the covenants.
Court more likely to enforce covenants contained in the IA (equality of bargaining powers of two parties dealing with each other as co-investors rather than employer and employee)
What is the purpose of gardening leave provision?
Enables company to compel manager to stay at home during notice period thereby not breaching notice period and rendering restrictive covenants unenforceable.
Prevents contact with customers, employees and access to confidential information.
Acquisition documentation?
Acquisition Agreement (Seller + Newco 2)
Disclosure Letter (Seller to Newco 2)
Stock transfer form (Executed by the Seller)
Equity documentation at completion?
Investment agreement (Fund, MT, Newco 1)
Disclosure Letter (MT to Fund)
AAs (Newcos 1 and 2)
Service Agreements (MT and Newco 1)
Financing Documents at completion?
Loan Agreement (Bank and Newco 2)
Guarantee (from T and Newco 1 to Bank)
Security (from Newco 2 to Bank)
Intragroup loan agreement (Newco 1 and Newco 2)
Who wants tag along provisions?
MT
prevent Fund negotiating a deal for themselves while leaving minority shareholders behind
What are the drafting points of contention for gardening leave?
Notice periods during which gardening leave provisions apply.
Fund don’t want to be paying for too long but investing in MT so want to ensure they are happy.
Time period usually the same as notice period (6-12 months)
What is the role of the completion meeting and what happens?
Go through legal formalities to be able to transfer shares or assets.
Preparation of completion agenda and conduct of completion meeting
Target to hold board meetings to approve transaction and enter into AA (Delivery of documents, holding board meetings, post-meeting matters)
Execution of documents
Problem solving / timing issues
Money transfers and undertakings
Release of security.
execution of documents.
