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                                     UK code is working
                                     But a European version isn’t close

                                     Define your Macs clearly
                                     The best method to avoid litigation

                                     Reverse break-up fees stall
International financial law review   Keep termination options simple

        Private equity
         and venture
        capital review

                                                                  July 2008
               Private equity and venture capital review
               News analysis
               UK “has hedge funds in its sights”; European Spacs don’t need formal regulation;
               Debt buy-backs force change to documentation; Clear Channel infects global
               lending; Spacs hit Asia                                                                                          4

               United Kingdom
               Don’t be too optimistic                                                                                          6
               Jeremy Hand, chairman of the BVCA, assesses the UK code of conduct

               New ways to kill a deal                                                                                          8
               Clearly defined clauses will benefit all parties in court

               United States
               Reverse break-up fees aren’t working                                                                             12
               Plain termination options with set fees are advisable

               Keep corporate structures simple                                                                                 14
               In reality, the new Company Law does not enable dual levels of shares

               Easier buyouts                                                                                                   15
               Loosened rules on joint-stock companies should encourage private equity

               British Virgin Islands
               Bric and limited partnerships                                                                                    16
               Leonard A Birmingham of Harneys explains why BVI limited partnerships are attractive

               Cayman Islands
               Partnership rules                                                                                                19
               Iain McMurdo of Maples and Calder details how to draft exempted limited partnerships

               A European company for PE investors                                                                              21
               Pöllath + Partners lawyers describe a cost reducing standardised company

               Family estate planning                                                                                           24
               A new tax efficient vehicle for the management of private assets. Gérald Origer of Loyens & Loeff explains

               Keeping debt secure                                                                                              26
               Kuri Breña Sánchez Ugarte y Aznar explains how acquisitions are financed

               United Kingdom
               Going public                                                                                                     29
               Partial exits can benefit private equity firms. Adam Levin and Claudine Ang of Dechert explain                                                                                                PEVCR from IFLR 2
Nestor House, Playhouse Yard, London EC4V 5EX
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                                                                                       Codes make sense
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Editor: Simon Crompton
                                                                                                    hen it comes to private equity, targets want reassurance, governments
E-mail:                                                                          want to meddle and firms themselves want consistency of treatment. But
                                                                                                    it’s rare for all three to be able to compromise. What to do?
Supplement editor: Nicholas Pettifer
E-mail:                                                               The onus is on national governments to collaborate. In the UK, private equity
Tel: +44 207 779 8596                                                                  houses have shown that they are willing to cooperate. As Jeremy Hand, chair-
Sub-editor: Frieda Klotz
                                                                                       man of the British Venture Capital and Private Equity Association, describes on
                                                                                       page 6, some UK private equity reports are now more thorough than those pro-
Asia editor: Tom Young                                                                 duced by public companies.
Tel: +852 2842 6915                                                                      The UK code of conduct has faced criticism, but it does deserve praise. Yes, it
                                                                                       asked for less substantive attribution analysis than expected. Yes, it gave longer
PRODUCTION                                                                             for annual reports to be published than planned. But it was the first attempt to
Production editor: Richard Oliver
                                                                                       codify private equity in the world, let alone in Europe.
Asia                                                                                     And it is not afraid to review itself. The Guidelines Monitoring Group
Publisher: Nick Shrimpton                                                              (GMG) will independently review the code to ensure that it remains relevant,
Tel: +852 2842 6927
Fax: +852 2537 5585
                                                                                       something that was put under pressure at the end of last month by Sir David
E-mail:                                                    Walker, head of the committee that created the code.
Europe                                                                                   He called for a lower disclosure threshold. Presently, the code covers UK com-
Claudia Tan                                                                            panies with more than 1000 employees that were taken private for at least £300
Tel: +44 20 7779 8637
Fax: +44 20 7779 8637                                                                  million ($598 million). This will give the GMG food for thought. If it meets
Email:                                                        this challenge, there can be no argument that the code is soft.
Americas                                                                                 This fluid regulation should be replicated on an international scale.
Krystle Fonyonga
Tel: +44 20 7779 8142
                                                                                       Admittedly, the level of regulation will depend on political appetite, but this is a
Fax: +44 20 7246 5326                                                                  great starting point.
                                                                                         Otherwise more codes and regulations will start being introduced in individ-
SUBSCRIPTIONS AND CUSTOMER SERVICES                                                    ual countries and inconsistency will reign. Denmark has already announced a
UK Hotline Tel: +44 20 7779 8999                                                       code and Germany is in the late stages of planning legislation.
Fax: +44 20 7246 5200
                                                                                         Implementing an international code sooner rather than later would create a
US Hotline Tel: +1 212 224 3570
Fax: +1 212 224 3671                                                                   more standardised and simpler system.
Asia subscriptions:
Chandra Bogaerts                                                                       Nicholas Pettifer
Tel: +852 2912 8012

Customer service: +44 20 7779 8610

Group publisher: Danny Williams
Director: Christopher Fordham

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International Financial Law Review 2007
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2521.                                                                                                                                  PEVCR from IFLR 3

 UK “has hedge funds in its sights”                                                                   The main points of the
                                                                                                      FSA’s Market Watch 24
                                                                                                     •   Hedge fund senior management is solely
                                                                                                         responsible for its market abuse regime. This
                                                                                                         responsibility cannot be delegated.
                                                                                                     •   All hedge funds should have independent
                                                                                                         monitoring of their market abuse controls and
                                                                                                         procedures. In addition, the FSA highlights the
                                                                                                         potential benefits of automated controls in IT
                                                                                                         systems to identify or restrict market abuse.
                                                                                                     •   A list of all securities that inside information has
                                                                                                         been received on must be kept and trading on
                                                                                                         these securities must be restricted. The FSA
                                                                                                         notes the benefit of Chinese Walls, but
                                                                                                         concedes that they are not always appropriate,
                                                                                                         depending on the size of the funds.
                                                                                                     •   All staff must receive appropriate and regular
                                                                                                         market abuse training.
                                                                                                     •   There is a general responsibility to ensure that
                                                                                                         confidentiality is stressed where needed. This is

        he UK Financial Services Authority           declared that senior management at hedge            part of the FSA's plan to reduce the dissemi-
        (FSA) is targeting hedge funds over          funds hold ultimate responsibility for com-         nation of information and rumours.
        market abuse allegations. And if it          pliance with the market abuse regime. "This     •   Hedge funds are recommended to consider the
can't prove insider trading, it's going after        proved that the FSA has hedge funds in its          benefits of recording telephone lines. The FSA
internal controls.                                   sights," said Patrick Buckingham, regulatory        also asks hedge funds to consider their
   "I would not rule out a situation where           partner at Herbert Smith. "And now funds            remuneration structures.
the FSA takes action on insider trading,             have had a couple of months to digest           •   Long-term structures may reduce the attraction
doesn't have enough to prosecute, but is so          Market Watch 24, it is only a matter of time        of committing market abuse for short-term
disappointed with the internal controls it           before action is taken."                            gain.                                           NP
finds that it takes action on those as a con-           Hedge fund managers will have the oner-
solation prize," said Martyn Hopper,                 ous job of considering and checking their
regulatory partner at Herbert Smith.                 compliance with market abuse rules.             the fact that many hedge funds have small
   "I have certainly heard FSA officials talk        Principles-based regulation such as Market      compliance resources, they may not be able
about their concerns about systems and con-          Watch 24 allows the flexibility to create a     to get up to speed in time. Indeed, there has
trols."                                              bespoke system, but does not offer much         been speculation that the HBOS scandal
   The FSA signalled its intent in October           prescriptive guidance.                          would be the perfect opportunity for the
by publishing Market Watch 24. There it                 But the FSA is keen to act soon. Due to      FSA to swoop.                            NP

European Spacs don’t need formal regulation

      pecial Purpose Acquisition Companies           those setting them up, rather that the finan-   er vote will fail," said a panel member.
      (Spacs) are so transparent that market         cial records of investment managers in other       "But if the share price spikes, the market
      forces will be enough to regulate them.        permanent capital products.                     likes the acquisition. Any Spac unit holder
"We shouldn't chip away at the general                  And it is this structure that reduces the    that disagrees with the acquisition can sell
structure. It would be a great shame to              need for formal regulation. Typically, Spacs    over the exchanges. They will often profit
ignore the genesis of Spacs and fiddle with          require 80% of shareholders to agree with a     and the shareholder vote will go through at
them," said one panel member at the IFLR             proposed acquisition. Anyone who voted          near enough 100%."
capital markets forum in April.                      against has the opportunity to get out what        This point also acted as a veiled warning
   "Some US Spacs have tried to change               they paid.                                      to London. If Spacs are the future of perma-
standard terms and have been beaten back.               The fact that Spacs are equity products      nent capital, then London will have to make
The European market has an opportunity to            also helps. Euronext Amsterdam is where         some changes to compete. At the moment,
police itself and say 'that's a bridge too far' if   the majority of European Spacs are traded       London rules mean that as soon as a Spac
anyone steps out of line."                           and the panel described the benefits:           announces a proposed acquisition, shares are
   Spacs are set up to attract investors who            "A Spac unit is a tradable instrument from   suspended.
buy shares in an investment company and              day one. If the market doesn't like a pro-         "This unwinds what can be an
then get to vote on a potential acquisition.         posed acquisition, the share price will drop    incredibly transparent structure," concluded
They play on the entrepreneurial record of           and this is an indication that the sharehold-   the panel.                               NP                                                                                                                      PEVCR from IFLR 4

Debt buy-backs force change to documentation
                                                                      natural order of repayment,"        lar to those in the US. There,
                                                                      said a private equity partner at    the Loan Syndication and
                                                                      a magic circle firm.                Trading Association has clari-
                                                                         "It will affect how banks        fied a strong position on the
                                                                      draft their documentation; they     transferability      of    loans.
                                                                      will definitely want to try and     Borrowers and any of their
                                                                      stop it. Financing partners at      affiliates are restricted from
                                                                      our office have already started     purchasing their own bank
                                                                      working on redrafting terms."       debt. Private equity houses are
                                                                         Most UK loan contracts           deemed to be affiliates to com-
                                                                      require a two-thirds majority to    panies they have invested in.
                                                                      implement an accelerated               "Exceptions are sometimes
                                                                      default procedure. If a private     negotiated allowing a private
                                                                      equity house holds a substantial    equity sponsor to purchase up
                                                                      proportion of the debt in one       to a certain percentage of a
                                                                      of its companies, it could frus-    portfolio company's bank debt.
                                                                      trate lenders in a default or a     This is usually less than 30% in

        he trend of private equi-   debt and equity in the same       restructuring. It could also        order to prohibit the sponsor
        ty houses buying back       company – giving them greater     block votes on other aspects of     from gaining a blocking vote,"
        their own debt has wor-     control.                          loans such as pricing, security     said Jones Day partner Andrew
ried banks into changing their        Danish telecommunications       or seniority.                       Barker.
lending documentation.              company TDC, which is                "It gets problematic if people      "Additionally, banks will
   The debt issued for previous     owned by a private equity con-    are wearing both hats. It also      sometimes allow a private equi-
buy-outs is trading at a dis-       sortium, did this recently by     raises the issue of fiduciary       ty sponsor to own the bank
count, making it an attractive      buying back ?200 million of its   duties and when they apply,"        debt on the condition that they
investment for private equity.      loans at a low rate of 90-95%.    said the private equity partner.    cannot exercise any voting
But the banks are worried             "Typically, any money avail-       If redrafting doesn't deal       rights, so they cannot impact
because if it is bought up the      able should go to repaying the    with banks' concerns, they          enforcement and other deci-
private equity houses will own      debt. This is messing with the    could push for proposals simi-      sions."                     NP

Clear Channel infects global lending                                                           Spacs hit Asia

 D                                                                                             T
           espite the Clear Channel dis-       the end, the deal didn't go through any-                 he burgeoning trend of Special
           pute being settled out of court     way."                                                    Purpose Acquisition Companies
           in April, the case is infecting        The straining of relations between                    (Spacs) has finally hit Asia, with
 lending deals at least as far away as         borrowers and banks could have a pro-           China's first high-profile case.
 Europe.                                       found effect on the market. This is not            Heckmann's $625 million takeover of
   In May, private equity houses Thomas        the only acquisition finance case going         China Water is the first large Spac acqui-
 H Lee Partners and Bain Capital agreed        on, as IFLR highlighted in its May issue        sition of a Chinese target. Credit Suisse
 to funding of $17.9 billion ($36 per          and reported when the PHH deal fell             and DLA Piper acted as Heckmann's
 share) for their purchase of Clear            apart in January.                               financial advisor, and counsel in both the
 Channel Communications. Previously,              Given that Clear Channel involved six        US and Hong Kong.
 the bank syndicate had refused to fund        lenders (Citigroup, Credit Suisse,                 The first Spac in China was Jaguar's
 the buyout price of $39.20, prompting         Deutsche Bank, Morgan Stanley, Royal            takeover of China Cablecom in April,
 legal action for breach of contract.          Bank of Scotland, Wachovia) and one of          but the deal was only $34.3 million.
   This workable solution (subject to          them is already facing questions from              While the products have become com-
 shareholder approval) is welcome news to      borrowers, further cases could make the         monplace in Europe and the US over the
 the parties involved in the transactions,     leveraged lending market even more              last year, their growth is still relatively
 but the case is disrupting other deals.       conservative.                                   nascent in Asia.
   "I was working on a deal this week             The fact that the case was settled              That said, several Spacs have been
 where one of the lending banks was a          means that the debate on how a US               formed to acquire companies in India
 party to the Clear Channel case. The          court would enforce the breaking of a           and some Indian companies are looking
 borrower wanted special reassurance that      commitment letter continues – no one            to use the vehicles to acquire foreign
 the bank would not renege on the deal,"       knows if the judge would enforce specif-        companies. But the disclosure require-
 one partner in London told IFLR.              ic performance or impose damages.               ments of the Securities Exchange Board
   "But the bank was hardly going to say,         "If the original terms were enforced,        of India (Sebi) prevent companies with
 'we're not going to lend to you either',      then the banks would be back where              no track record from listing which may
 so it just gave the normal assurances. In     they started," said the partner.    NP          restrict Spac growth there.            TY                                                                                                           PEVCR from IFLR 5

    Don’t be too optimistic
    Jeremy Hand, chairman of the British Private Equity and Venture Capital Association,
    celebrates the early success of the UK code of conduct. But the jury’s out in Europe

    Nicholas Pettifer
    Staff writer

            n November last year, Sir David
            Walker published his report on private
            equity on behalf of the BVCA. At the
                                                                                                            “You now get
            time, critics poured scorn on the
                                                                                                            more from the Terra
    guidelines it contained, arguing that they
    did not go far enough. Ironically, this
                                                                                                            Firma report than
    brought a focus back onto private equity                                                                you would do from
    despite the code being designed to mollify
    opposition.                                                                                             any public company
      But then sub-prime mortgages, Northern
    Rock, sovereign wealth funds, Bear Stearns
    and a string of other issues pushed private
                                                                                                            report       ”
    equity off the front pages.
      Jeremy Hand of Lyceum Capital is chair-
    man of the BVCA. Here he explains the
    initial success of the voluntary code of con-      that is less of a priority now, as it has happened   Do you think the code will stand up to
    duct and how the designated committee that         pretty much across the board.                        examination if the industry picks up
    makes sure that the guidelines remain rele-                                                             again?
    vant.                                              How successful has the code been?                       One of the Rake Committee objectives is
                                                          I think it has been successful and the early      to ensure that the code remains relevant.
    Could you describe your role at the                adopters have done an outstanding job –              They continue to review how appropriate it
    BVCA?                                              firms like Terra Firma and Permira. You now          is. The committee is made up of five people:
       We have gone through a lot of changes in        get more from the Terra Firma report than            three independents (one of whom is a trade
    the last 12 months. The role of the chair-         you would do from any public company                 unionist) and two well-respected private
    man, now we have a high quality CEO and            report. It is an outstanding example.                equity guys. So as a group, they can look at
    COO, is to ensure that we are delivering              There has been impressive adoption of the         the merits of the code in a detached and
    what members want. We’ve reorganised the           code as well. The bigger buy-out members             objective way.
    structure and its committees to ensure that        have all adopted it. And many other mid-                We welcome the ability for the code to
    there is a relevant, high quality group of         market firms have decided to comply on a             change over time. We are entering trickier,
    practitioners from the venture end, from the       voluntary basis. There has been very little          choppier waters from an economic point of
    mid-market end and from the big buy-out            dissent from the core. Now it is a question of       view and although there have been no major
    end. They have to fit together.                    making sure that it all gets pulled together,        private equity blow-ups so far, the industry
       We then have technical committees – tax,        which seems to be happening. It is still early       will have to adapt. Problems will have to be
    regulatory, investor relations, legal – which,     days; we’ve got to make sure it happens.             dealt with in a grown up, sensible way.
    together with the executive team itself, deal      Then we’ve got to make sure the communi-                There could be some disappointments
    with communication, public affairs,                cations around it are good so that we don’t          over the next 12 to 24 months. How those
    research, training and events. My job is to        lose ground.                                         things are reported on and how the media,
    ensure that what the members really want is                                                             the boards of the companies and the private
    what they are getting from the executive           The process seems to have been smooth.               equity sponsors handle that process will be
    team.                                              Have their been any stumbling blocks?                key.
                                                         Most private equity houses seem to be                 People are beginning to say that as private
    How is the implementation of the volun-            behind what we are doing. People realise             equity takes on more leverage it is more vul-
    tary code of conduct going?                        that it is a completely different landscape          nerable in a downturn. But the reality is that
       Following the Walker review and the forma-      today than 24 months ago or 12 months                private equity drives a robust balance sheet.
    tion of the Guidelines Monitoring Group            ago. People have genuinely woken up to               It also brings in additional management
    (Rake Committee), we are ensuring that the         that. Private equity makes its money by              practices and the business is a lot better.
    self regulation regime we introduced is going      evolving quickly and changing. People have              But more will be needed to support the
    to be properly implemented by our members          realised that they need to be transparent and        code in the future. That’s why I think the
    on the bigger deals. And that is going well. But   communicate better.                                  failure rate among buy-outs is not going to                                                                                                                     PEVCR from IFLR 6

     Guidelines Monitoring                                                                              the controlling investor doesn’t want to
     Group                                                                                              comply, you can’t force it to.
     Sir Mike Rake – Chair of group and                                                                    So, we will take it on a case-by-case basis.
     chairman of BT
     Alan Thomson – Former group finance
                                                      “We would have                                    Ultimately, the biggest sanction is to be held
                                                                                                        up to public scrutiny. Firms’ limited partners
     director of Smiths Group                         no compunction                                    are going to want to know why they think
     Jeannie Drake – Retiring deputy general                                                            they are so special they do not have to com-
     secretary of the Communication Workers           whatsover in                                      ply with rules that the limited partner
     Union                                                                                              community as a whole thinks are a good
     Robert Easton – Managing director at             expelling someone                                 thing.
                                                                                                           Plus non-compliers would have to face the
     David Blitzer – Senior managing director
     at Blackstone
                                                      from the BVCA                    ”                media and public opprobrium. Questions
                                                                                                        like: ‘why don’t you want to? You don’t have
                                                                                                        a decent excuse.’ That is the biggest sanc-
                                                                                                        tion. If it reaches that point, we would have
    be anything like as bad as some people pre-       everything that people were calling for in        no compunction whatsoever in expelling
    dict.                                             terms of transparency and disclosure. And         someone from the BVCA. But I think that
                                                      many recognise that it is realistic to take it    would be the least of their worries.
    Is there an appetite for this code interna-       from the UK. What we have created could
    tionally?                                         easily be copied.                                 With the focus off private equity at the
       That is a very good question. The events          Unfortunately, politicians today think         moment, what else does the BVCA have
    in the UK over the last 12 months have been       that introducing laws and regulations is the      planned?
    experienced elsewhere around the world, not       way to improve the world. I understand               The interest in private equity has been
    just in Europe. Especially in places like         there are now eight different laws passed         overtaken by Northern Rock, sub-prime
    Australia and South Africa. People are look-      every single week in the UK. It is just as bad    mortgages and the like. We can now get on
    ing very carefully at the Walker report and       in Europe. So companies may welcome a             with doing our job properly; persuading
    the subsequent code, how people comply            code, but some governments will continue          people that private equity is good for Britain
    with it and what it means to them.                to push for more stringent regulation which       is an ongoing project. We have to produce
       Remember, the industry is tremendously         is a shame as we do not consider this appro-      some high-quality research to prove that.
    global, many companies based in the UK            priate.                                           There is a hell of a lot of work going on and
    have a pan-European focus and if the system                                                         a lot of resource has been put into the
    works in the UK they will want to do a sim-       Regarding enforceability, is it still the case    BVCA. We are in the process of hiring a top
    ilar thing in other jurisdictions.                that BVCA members can be threatened               economist who can drive the research effort
       But there is always opposition. In Europe      with expulsion if they don’t comply with          that will explain to people, not just with
    there are two bits of legislation being consid-   the code?                                         anecdotes but with hard facts, that what we
    ered – private member’s bills if you want –          It is a ‘comply or explain’ regime. If peo-    do is good.
    that are highly hostile to private equity. They   ple don’t comply, then we will listen very           Another big job is re-launching the ven-
    disregard what we have done in the UK, but        carefully as to why they can’t comply.            ture end, because it has been rather
    I think it is because they don’t really know      Integrated finance deals are a good example       neglected in the last 12 months or so.
    about it. They certainly haven’t focused on       of this. If a private equity house invests in a   There’s a really good story to tell there. So
    it. They want pan-European curbs and              company with the assistance of an existing        again, a bit of research is needed to draw that
    restraints on private equity. Not just on the     shareholder, it could be hard to comply. If       out. Britain needs to be able to compete
    reporting, but on things like leverage. There     the shareholder doesn’t want to comply and        with the US, Israel and other countries
    are some very emotional terms used.               you can show that you made strenuous              where the venture economy is possibly more
       One is called the Rasmussen report and         efforts to persuade them, then it might be        prosperous.
    the other is the Lehne report. I think they       unfair to punish the private equity house. If
    will be unsuccessful because they go too far.                                                       What would encourage growth in venture
    There isn’t widespread support for them.                                                            capital?
    But it does show the direction of travel some                                                          We reconstituted the Venture Committee
    people have in mind. Only last month,                                                               and are focusing on specific research. We
    German Chancellor Angela Merkel gave a
    very anti-business, anti-free trade interview
                                                      “The failure rate                                 need to tell people that the returns from the
                                                                                                        venture end aren’t as bad as they think they
    and although it didn’t single out private         among buy-outs is                                 are.
    equity it did mention pan-European legisla-                                                            It is also important to point out that there
    tion to control the free market. From my          not going to be                                   is a lot more that the government can and
    point of view, it is all bonkers.                                                                   should be doing. There isn’t a politician alive
                                                      anything like as bad                              that doesn’t say wonderful things about
    IFLR’s recent corporate counsel poll found                                                          small business, and yet we know there is too
    that 40% of companies in Europe would
                                                      as some people                                    much regulation and a really complex and
    like the UK code to be adopted in their
    country. That proves an appetite for a vol-
    untary code.
                                                      predict        ”                                  inconsistent tax regime.

       I think that’s right. The UK code does                                                                                                                  PEVCR from IFLR 7

    New ways to kill a deal
    Banks are trying to pull out of more leveraged loans, bringing Mac clauses to centre stage.
    As more clauses appear in court, both sides will realise the benefits of clearly defining a Mac

    Tom Young                                        mature in six to eight years, the banks now      the date of the seller’s most recent financial
    Asia editor                                      insist on a three-year maturity.                 statements to the closing of the deal. With
                                                        The case came to represent the state of       the fading of financing outs (in private

           t’s rare for a private equity buyer and   play in large M&A deals.                         equity-led deals) the clauses are often the
           its target to team up and litigate on        A new phrase is emanating from Wall           only way for a buyer to terminate a deal
           the same side. But in the US, radio       Street, across the Atlantic to Canary Wharf      without paying the hefty reverse breakup
           company Clear Channel and its pri-        and reaching even as far as Hong Kong:           fee.
    vate equity acquirers Bain Capital and           lender’s remorse. Banks are regretting the          Until last summer, buyers generally had
    Thomas H Lee (THL) did just that. The            terms of financing they agreed on last year,     no desire to kill deals. And with the avail-
    New York suit centred on the financing           and some are trying to back out.                 ability of cheap financing and a glut of
    banks reneging on lending terms. As the             And for deals negotiated now, there is a      suitors, Macs were mere boilerplate. Now
    company’s stock had been trading below           shift in the conditionality that banks are       things have changed. With financing terms
    the offer price due to the turmoil in the        prepared to accept in their commitments          far harsher than a year ago (as Bain and
    credit markets, the private equity firms and     to fund acquisition financing. This push-        THL will testify), the Mac is expected to
    Clear Channel accused the banks of shying        back is shifting the risk of financing back      take on increased prominence. But with
    away from providing funding now that             to the buyers, who in turn feel compelled        companies underperforming and a wave of
    market conditions have deteriorated. After       to transfer some of the risk back to the sell-   litigation expected, these clauses are now
    agreeing to provide credit that would            er.                                              being negotiated with one eye on how
                                                        In short, if banks insist on making bor-      they’ll look in courts.
                                                     rowing more risky, those doing the                  The benefits of Macs are clear and buy-
                                                     borrowing will pass whatever risk they can       ers have little to lose in asking for it. For
                                                     onto the sellers. This, coupled with the         instance, most deals are structured to limit
     “With the fading of                             volatility of the markets, has hastened the
                                                     rise of the material adverse change (Mac)
                                                                                                      the buyer’s downside to the reverse
                                                                                                      breakup fee (the charge leveled at an
     financing outs, the                             clause. But the clause will not simply           acquirer that backs out of a deal). If the
                                                     become more important in the coming              buyer claims a Mac has occurred but the
     clauses are often                               months. With the threat of litigation, the       court disagrees, it will be treated just the
                                                     clauses will start to look different too.        same as a terminated deal without a Mac,
     the only way to                                                                                  and have to pay the reverse breakup fee.
     terminate a deal                  ”             Get-out clause
                                                     The Mac clause functions as a condition to
                                                                                                      This breakup fee may be smaller than a
                                                                                                      multi-billion dollar acquisition, but firms
                                                     the buyer’s obligation to close on a transac-    are aware of the damage to their reputation
                                                     tion – it’s a get-out clause. It applies from    if they walk away from a deal with suppos-

     Macs in China
     Foreign private equity investors in China           But Chinese sellers vary a lot in their      won’t play well for next time it wants to
     have been dealing with Macs for years.          attitudes toward the clauses. “With some         invest in a Chinese target. “If you are a high-
         It’s easy to see why. International         Chinese sellers, you could put in a well-        profile foreign investor and you make
     buyers insist on one because of the long        developed Mac and they wouldn’t even             negative waves, even in a province, the
     interval between signing and completion         read it,” says Richard Kim, partner at Allen &   reputation will spread,” says one Beijing-
     in China. The slow, multi-layered approval      Overy in Shanghai. “In other instances, the      based partner.
     system means that there is a higher             negotiation starts with an education,                In a one-off investment, the investor
     chance of a deal running over and hitting       getting the sellers up to speed with the         will have less to lose from exercising the
     trouble.                                        concept of a Mac. Only then can we start         clause and walking away. “But most of our
         There is a 12-month drop-dead date in       debating the terms of it.”                       clients are looking to build long-term
     Chinese M&A documents, but according to             And it would be difficult to exercise a      platforms in the country, so they need the
     reports this is routinely being waived as       Mac clause unless the circumstances were         authorities on their side,” adds Kim.
     deals take longer. Because of these             completely understandable, due to the                “If you are going to exercise you Mac,
     delays, the need for a clause is even           backlash from government departments. If         you really will have to tell Mofcom the
     stronger.                                       a buyer has exercised a Mac clause lightly it    whole story,” says the lawyer.                                                                                                                 PEVCR from IFLR 8

                                                     Cerberus and the forthright negotiator principle
                                                     Cerberus Capital’s Delaware Court battle        $100 million break-up fee was the sole and
                                                     with its former target United Rentals in        exclusive remedy, the case came down to
                                                     December 2007 showed how important              which side was clearer on what they took to
                                                     clear contract negotiations are, especially     be the remedy.
                                                     in the midst of a credit crunch. The case
                                                     didn’t directly involve Macs, but it did
                                                     highlight the importance of establishing, or
                                                     at least attempting to establish buyer
                                                     conditions when negotiating.
                                                         Cerberus, a private equity investor, had
                                                     pulled out of its $4 billion acquisition of         In this, the court relied on the obscure
                                                     United Rentals, a machine rental company,       principle of contract interpretation called
                                                     amidst turmoil in the credit markets. It        the “forthright negotiator principle.” Under
                                                     pressed to pay the $100 million break-up        this principle, the understanding of one
                                                     fee and walk away.                              party to a contract can bind the other party
                                                                                                     when the other party knows of that under-
                                                                                                         Simply put, because the parties never
                                                                                                     clearly drafted any agreement on the termi-
                                                                                                     nation fee, the court awarded the judgment
                                                                                                     to the side that most clearly and consis-

     “ The seller will                                                                               tently articulated its understanding of the
                                                                                                     agreement to the other side.
     argue that its                                                                                      The court found that the Cerberus
                                                                                                     attorney, Scott Edelman of Milbank Tweed
     results may deteri-                                 United Rentals insisted that the            Hadley & McCloy, was more consistent in
                                                     contract had language providing for             his statements that the termination fee was
     orate, but that so                              equitable remedies like specific                intended to preclude specific performance.

                                                     performance, even though other sections         The Simpson Thacher & Bartlett attorney
     will its peers’                                 said that this remedy was superseded by         for United Rental, the court found, implicitly
                                                     the break-up fee.                               agreed with the Cerberus position during
     Barbara Mok, Jones Day                              Because counsel on both sides never         oral contract negotiations.
                                                     explicitly resolved the issue of whether the        The court ruled in favour of Cerberus.

    edly acceptable terms. Macs cost no more        London thinks not, and predicts sellers          the seller, wants it killed, for the sake of its
    than a reverse breakup fee, but are priceless   will be granted these carve-outs as a matter     reputation.
    in terms of salvaging reputation. So on the     of routine from now on. “This kind of               Nevertheless, the definition of a Mac
    buyer side, there is no harm in asking for      volatility in the world markets will be an       hasn’t changed since the market crashed
    one.                                            area where sellers will want to limit termi-     last summer. A study by Kenneth Wolff
      However, asking for a Mac and agreeing        nation risk by narrowing Mac-out clauses,”       and Cason Moore of Skadden Arps Slate
    on one are entirely different propositions.     say Sarkar. “It’s just not going to be accept-   Meagher & Flom compared the terms of
                                                    able to the seller to be subject to those        Mac clauses in recent public deals to those
    The devil’s in the drafting                     kinds of uncertainties.” he says.                before the crash. It looked at the
    This is because Mac clauses have no defini-        It’s understandable then, that sellers are    3Com/Bain & Huawei, Radiation
    tion. What, for instance, constitutes           focusing on aligning their performances          Therapy/Vestar           and        Goodman
    material? This ambiguity means that buy-        with those of their peers. Genesco’s             Global/Hellman & Friedman deals (all
    ers’ and sellers’ counsel face fierce           Delaware victory of Finish Line (see box-        made from October 2007 onwards) along-
    negotiations over the wording of a clause,      out) set a precedent for sellers successfully    side five transactions announced in July
    especially in grim financing conditions.        claiming these industry-focused carve-           2007. The definition of a Mac was broad-
       Sellers have always wanted narrow, spe-      outs.                                            ly the same.
    cific terms with carve-outs (terms that            It’s not so simple for buyers and their          A Mac, according to these deals, is
    limit what constitutes a Mac). Their main       counsel. Historically, buyers fought for a       “facts, circumstances, events or changes
    priority now is to seek carve-outs that         broad Mac, because the vaguer the defini-        that are, or are reasonably expected to
    reflect market conditions. “The seller will     tion, the more scope there is for claiming       become, materially adverse to the business,
    argue that its results may deteriorate, but     one. A broadly drafted Mac is more of a          financial condition or results of operations
    that so will its peers’,” says Barbara Mok,     mission statement to play on ambiguity           of the company and its subsidiaries, taken
    partner at Jones Day in Hong Kong.              further down the line. “It gives the buyer       as a whole”.
       This is where the major battles are being    some wiggle room,” says Lee Suet Fern,
    fought. Do a target’s poor results, when        director of Stamford Law in Singapore. No        Buyers: be specific
    similar to those of its industry peers, war-    seller wants its financial records examined      But things are likely to change soon. If a
    rant a buyer terminating a deal? Tihir          under the cold light of a court. And once a      case is remotely likely to end up in court,
    Sarkar, a partner at Cleary Gottlieb in         deal is announced neither party, especially      case law shows that the clause will be read                                                                                                               PEVCR from IFLR 9

     Key Mac cases in the US                                                                         against the party that tries to cite it. This
                                                                                                     means buyers should also be willing to nar-
     IBP v Tyson Foods                                                                               rowly define what constitutes a Mac. The
     Tyson Foods made a bid for IBP in 2000 and the two entered a merger agreement in 2001.          terms may be demanding of the target, but
     Since both companies showed poor financial performance, Tyson wanted to exit the                they should at least be specific.
     merger, claiming that IBP had increased earnings write-offs, a Mac from IBP’s disap-               A buyer requesting a clearly defined Mac
     pointing performance in 2001 and that IBP’s encouragement of Tyson to enter the                 seems disingenuous, but it is not.
     agreement was based on fraud.                                                                   “Importantly, a court will always try to
           In June 2001, the judge forced the $4.7 billion acquisition because Tyson had no          anticipate what was in the buyer’s mind
     grounds to terminate the acquisition other than buyer’s remorse.                                when the clause was negotiated.” says
     Counsel:                                                                                        Robert Ashworth, head of Freshfields’ cor-
     Tyson                                                                                           porate practice in Asia.
     Skadden Arps Slate Meagher & Flom                                                                  So demands on the performance of the
     IBP                                                                                             target can be high, but they need to be
     In-house team                                                                                   transparent to hold up in court. Common
     Dakota Dunes, South Dakota                                                                      court laws don’t favour the seller by
                                                                                                     default necessarily, but if a party is trying
     Frontier Oil v Holly Corp                                                                       to invoke an exclusion provision, the bur-
     Refinery corporations Holly and Frontier entered a merger agreement in 2003 for $450            den of proof will fall upon that party. A
     million. Frontier sued Holly, and Holly countersued over a renegotiated merger agreement        woolly Mac will reflect badly on both par-
     since Holly learned that a Frontier subsidiary was involved in a pollution lawsuit in           ties but is likely to damage the buyer’s
     California. The lawsuit was taken to the Delaware Court of Chancery, where in 2005, Holly       claim more.
     won since Frontier breached the merger agreement.                                                  These theories, until now largely hypo-
     Counsel:                                                                                        thetical, will be put into practice as
     Frontier                                                                                        litigation over failed deals increases. Only a
     Richards Layton & Finger                                                                        handful of disputes have so far reached the
     Bouchard Margules & Friedlander                                                                 Delaware Chancery Court in the US, and
     Andrews Kurth                                                                                   fewer still have come to court in Asia. But
     Holly                                                                                           this will change now that the credit
     Morris Nichols Arsht & Tunnell                                                                  squeeze has set in. Europe is also likely to
     Young Conaway Stargatt & Taylor                                                                 see more cases.
     McKool Smith
                                                                                                     Macs in Asia
     Genesco v Finish Line                                                                           That Mac clauses are burgeoning in Asia is
     Genesco filed a lawsuit against Finish Line because it didn’t complete its acquisition,         surprising, given that it’s the only region
     valued at $1.5 billion. In December 2007, the judge ordered Finish Line to complete the         where potential targets have remained large-
     deal. The issue raised was that Genesco didn’t reveal that it declined financially. The judge   ly unscathed by the financial crisis. A study
     said that the decline was due to economic issues and did not fail compared to others in the     carried out by Lee Suet Fern, director at
     industry, which would be in line with the Mac clause carved out in the agreement.               Stamford Law in Singapore, examined the
     Counsel:                                                                                        frequency of Macs in takeovers of publicly
     Genesco                                                                                         listed companies in Singapore, Malaysia,
     Bass Berry & Sims                                                                               Hong Kong and Australia (see box-outs).
     Boies Schiller & Flexner                                                                        The survey found that although Mac claus-
     Finish Line                                                                                     es aren’t common in Singaporean,
     Walker Tipps & Malone                                                                           Malaysian and Hong Kong M&A they are
                                                                                                     on the rise, especially in Hong Kong –
                                                                                                     where three out of five public M&A deals
                                                                                                     included such a clause in 2007.
                                                                                                        “I didn’t see any on term sheets in Hong
                                                                                                     Kong deals three years ago but we’ve been
                                                                                                     recommending them to private equity buy-
                                                                                                     ers for most of 2007 onwards,” says
     “I didn’t see any Mac clauses on term                                                           Ashworth.
                                                                                                        Chinese sellers are also getting used to the
     sheets in Hong Kong three years ago but                                                         concept of Macs, and understandably so. “If
                                                                                                     you’re investing large amounts of money
     we’ve been recommending them to private                                                         into a relatively young Chinese company,
     equity buyers from most of 2007 onwards                                                   ”     you’ll want a Mac,” says Ashworth. On the
                                                                                                     face of it, this seems counter-intuitive, con-
                                                                                                     sidering the number of private equity
                                                                                                     buyers and the scarcity of good targets in
                                                                                                     China. But when it comes to actual deal
                                                                                                     making the Chinese may be willing to con-                                                                                                             PEVCR from IFLR 10

     The prevalence of Mac clauses across Asia
                                 Singapore                    Australia                   Malaysia                    Hong Kong
     Are Mac clauses             Mandatory offer: No          Off–market bids: Yes        Mandatory offer: No         Mandatory offer: No
     allowed as conditions in
     an M&A transaction?         Voluntary offer: Yes, but    Market bids: No             Voluntary offer: Yes, but   Voluntary offer: Yes, but
                                 based on objective terms                                 based on objective terms    based on objective terms

                                 Partial offer: Yes, but                                  Partial offer: Yes, but     Partial offer: Yes, but
                                 based on objective terms                                 based on objective terms    based on objective terms

     Have Mac clauses been       Increasingly yes             Yes                         No                          Increasingly yes
     frequently featured in
     recent takeover offers?

     Prominent incidents         2 incidents:                 2 incidents:                Nil                         Nil
     where the possibility of                                 - Macquarie Office Trust
     using Mac clauses to        - Banta Corp and Mentor      and Principal America
     terminate a takeover        Media (2003)                 Office Trust (2004)
     agreement was invoked
     or explored                 - M-Flex and MFS             - Bruandwo and
                                 Technology (2006)            Australian Leisure and
                                                              Hospitality Group (2004)

     Number of incidents         Nil                          Nil                         Nil                         Nil
     where there have been
     successful use of Mac
     clauses to terminate an

    cede a Mac in exchange for similar sell-side        But to talk of the pendulum swinging back    Here, vagueness would have suited only
    protection, such as a break-fee.                 to buyers (as many are) misses the point.       the seller, by showing up the acquirer and
      Asian companies may be one step                Anaemic markets don’t justify a vague, catch-   its counsel as cynical during the drafting.
    removed from the turmoil of the west, but        all Mac being stamped on the seller.               Mac clauses will almost certainly change.
    the rise of the Mac in the region underscores       They do, however, make a failed bid and      No one argues that that is not the case.
    a general trend: Macs now matter.                exercising of a Mac more likely. And            But, most importantly, buyers’ counsel will
                                                     because courts have traditionally put the       now have one eye on the courts when they
    Narrow is the new wide                           burden of proof on buyers, their counsel        negotiate. The days of woolly, catch-all
    In seminars and forums everywhere, Macs          will need to keep Macs specific. The            drafting are over; a new tighter, narrow
    are being discussed with the same fero-          expected wave of litigation will see more       clause will emerge.
    ciousness as they are negotiated. Counsel        failed M&A deals going to court.
    know that the clauses are more important         Cerberus/United Rentals (see box out) and       With additional reporting from Lynann
    now than ever.                                   Clear Channel’s saga are prime examples.        Butkiewicz and Nicholas Pettifer

                                                                    “A court will always try to antici-
                                                                    pate what was in the buyer’s mind
                                                                    when the clause was negotiated                                              ”
                                                                    Robert Ashworth, Freshfields                                                                                                            PEVCR from IFLR 11

    Reverse break-up                                                                                     acquisition agreement. When the acquisi-
                                                                                                         tion takes place, the fund provides the
                                                                                                         acquisition company with the money it
                                                                                                         needs to complete the purchase. However,

    fees aren’t working                                                                                  until an acquisition company is funded,
                                                                                                         which usually doesn’t happen until the day
                                                                                                         the transaction is completed, it has no
                                                                                                         assets. So if it breaches the acquisition
                                                                                                         agreement by refusing to complete the
    Damage limitation as an effective break-up fee failed in                                             transaction, the seller may be awarded a
    three US cases. Their acquisition agreements should have                                             judgment against the acquisition company.
                                                                                                         But there are no assets from which it can
    included plain termination options with set fees                                                     collect the sum awarded.

           t has become increasingly common for        Further, in most instances, the stockholders      Walking away
           purchasers of companies to insist that      have to approve a sale of a publicly-traded       Sellers became increasingly conscious that
           acquisition agreements include so-          corporation, and they are not likely to do        they had no effective remedy here. They
           called reverse break-up provisions,         so if they learn that a higher payment is         began to insist that the private equity firm,
    particularly if the purchasers are private equi-   available.                                        or one or more of its funds, guarantee to
    ty groups. The provisions in theory give the          The solution if a higher bidder comes          provide the money that the acquisition com-
    purchaser the right to walk away from an           along after a sale contract has been signed       pany would need to satisfy a judgment for
    acquisition agreement by paying the seller a       was to include in the contract a provision        breach of the acquisition agreement.
    specified sum, and until recently they went        giving the board of the company being sold           A number of private equity firms were
    relatively unnoticed.                              the right to terminate the sale contract and      willing to agree to provide money with
       As the credit crisis hit the US and pur-        to accept the better proposal but to do that      which acquisition companies could satisfy
    chasers began to have difficulty obtaining         the company must make a payment (the              breach-of-contract judgments, but insisted
    the financing to complete transactions, or         break-up fee) to the original purchaser. The      that the amounts to which they were
    began to view the prices to which they had         Delaware courts accepted this concept, but        exposed be limited. That seemed to give the
    agreed as being too high, reverse break-up         made it clear that the break-up fee could         acquisition company the option to walk
    provisions became a critical part of their         not be so high that it would make it too          away from the acquisition agreement if its
    efforts to terminate transactions. But the         difficult for there to be a superior bid – a      private equity firm sponsor was willing to
    reverse break-up provisions did not work as        higher bid will be superior only if it is         pay the specified maximum damages for
    had been contemplated. Instead, they led           greater than the amount the original pur-         breach of contract. In other words, it was
    to several highly-publicised and hotly-con-        chaser agreed to pay plus the amount that         viewed as making the maximum damage
    tested litigations. The explanation lies both      must be paid to terminate the original con-       amount into a buyer’s break-up fee (that is,
    in the concept of reverse break-up provi-          tract. Courts have usually accepted               a reverse break-up fee).
    sions and in the way they were drafted.            break-up fees of between 2% and 3%. They             Not surprisingly, private equity buyers
                                                       have sometimes permitted fees and expense         insisted that the maximum damages be sim-
    Break-up fees                                      reimbursement totalling as much as 5% of          ilar to the amount the sellers would have to
    In many respects, the idea of a reverse break-     the sale price.                                   pay if the board of the company being sold
    up provision parallels the fiduciary out and                                                         terminated the purchase agreement to accept
    break-up fee provisions, which for years have      No funding                                        a better proposal. Agreements including sell-
    been inserted in US agreements on the sale         As sellers’ termination right and break-up fee    er termination rights and limitations on the
    of publicly-traded corporations.                   provisions became standard in US agree-           damages the acquisition company and its
       Fiduciary out/break-up fee provisions           ments for sales of publicly-traded                sponsors could be required to pay seemed to
    were a response to Delaware court decisions        companies, it is not surprising that buyers,      give both the seller and the purchaser the
    that said if a company is put up for sale, its     and particularly private-equity funds man-        option to walk away from the transaction on
    board of directors must obtain the terms           aged by investment professionals, would           payment of a fee.
    most favourable to the corporation’s stock-        want a similar ability to terminate acquisi-         But a provision limiting damages is not
    holders. This doctrine is not a problem if         tion agreements on the payment of                 the same as an option to terminate a con-
    the sale agreement is the product of an            reasonable sums. But reverse break-up fees        tract. The difference became critically
    actively-conducted auction process, but it         did not emerge to enable purchasers to ter-       apparent in three recent situations in which
    is if the sale follows an approach by a single     minate contracts. Instead, what are now           private equity firms walked away from
    potential purchaser – the board of directors       referred to as reverse break-up fees arose        agreements to make major acquisitions.
    of the company being sold cannot be sure           when sellers began to insist that private equi-      The first involved the failure of JC
    when it approves the sale that somebody            ty firms ensure the ability of the acquiring      Flowers to complete a $26 billion acquisi-
    else would not pay a higher price.                 companies they form to respond in damages         tion of SLM Corporation, better known as
       The problem becomes acute if another            if they breach their contracts.                   Sallie Mae. The acquisition agreement lim-
    potential buyer does offer a higher price. If         In a typical private equity purchase, the      ited Flowers’ damages for failure to
    that occurs, it indicates that the board of        equity portion of the purchase price comes        complete to $900 million. But instead of
    the company being sold probably did not            from a fund managed by the private equity         paying the $900 million when it terminat-
    fulfil its fiduciary obligation to obtain the      firm. The private equity firm forms an            ed the agreement, Flowers argued that an
    terms most favourable to stockholders.             acquisition company that enters into the          event had had a material adverse effect on                                                                                                                PEVCR from IFLR 12

    Sallie Mae, so Flowers was not obliged to         Rentals could specifically enforce the contract   that was not obtained.
    complete the deal. Flowers said it was not        (that is, get a court order requiring Cerberus
    breaching the contract and was not obliged        to complete the transaction). The Court           Simplest is best
    to pay the $900 million or any other sum as       resolved the issue in favour of the purchaser     The striking thing is that none of the three dis-
    damages.                                          (Cerberus), not because of the express words      putes would have arisen if a reverse break-up
       Flowers’ argument was based on a very          of the agreement, but because of a finding        arrangement had given the purchaser the
    narrow reading of a bargained-for excep-          that during the negotiations the purchaser’s      option to terminate the acquisition agreement
    tion that limited the definition of what          lawyer had made it clear that the purchaser       on payment of an option-exercise fee.
    constituted a material adverse effect.            thought the right to specific performance            In the Sallie Mae situation, Flowers
    Flowers had nothing to lose by arguing that       would be eliminated by paying $100 million        could have argued it was not required to
    it was not required to complete the deal. If      and United Rentals did not disagree.              complete the transaction or could have
    it won, it would not have to pay anything.                                                          exercised the termination option. But it
    If it lost, its damages would be limited to       The drop-dead date                                could not have had its cake and eaten it.
    the $900 million originally agreed.               The third situation involved an agreement by      Flowers would either have had to pay the
    Eventually, Flowers paid a lesser amount          a company formed by Blackstone Group to           option-exercise fee, or rely on its argument
    and litigation over the failure to complete       acquire Alliance Data Systems for $7.8 bil-       that a condition to its obligation had not
    the transaction was settled.                      lion. The purchaser agreed to pay a $170          been fulfilled – and be faced with unlimit-
       The second situation involved the deci-        million business interruption fee if it           ed potential damages.
    sion of a company formed by Cerberus              breached the agreement. One of the invest-           In the Cerberus case, United Rentals
    Capital Management to terminate its agree-
    ment to purchase United Rentals for $7
    billion. Section 8.2e of that agreement said
    that the right to terminate the agreement
    and to receive a $100 million parent termi-
    nation fee was “the sole and exclusive
                                                      “None of the disputes would have arisen
    remedy” of the company against the pur-
                                                      if the purchaser had the option to terminate
    chaser or any parties related to it. Section
    8.2e went on: “In no event, whether or not
    this Agreement has been terminated pur-
                                                      the acquisition agreement for a fee                                          ”
    suant to any provision hereof, shall [the
    purchaser or any persons related to it], either
    individually or in the aggregate, be subject      ment funds Blackstone manages guaranteed          could not have argued that it could obtain
    to any liability in excess of the Parent          the obligation to pay that fee and to provide     specific enforcement of the contract. If
    Termination Fee”. Finally: “In no event shall     the $1.8 billion of the purchase price that was   Cerberus had exercised a termination
    the Company seek equitable relief or seek to      expected to be an equity investment.              option and paid a $100 million fee, the
    recover any money damages in excess of such       Allegedly because of pressure from its banks      contract would have been over. Nothing
    amount from [the purchaser or any persons         not to complete the transaction so they would     would have been available to be specifically
    related to it]”.                                  not have to provide $6.6 billion of debt          enforced.
       The problem arose because another pro-         financing, Blackstone refused to agree to a          In the Blackstone situation, as in the
    vision, Section 9.10, said: “In addition to       requirement imposed by a governmental             Flowers situation, Blackstone would have
    any other remedy to which such party is           agency as a condition for necessary approval      had to choose between exercising the termi-
    entitled at law or in equity,” United Rentals     of the deal, even though Alliance suggested       nation option and paying the $170 million
    “shall be entitled to seek an injunction or       several ways by which its shareholders would      fee, or arguing that it had the right to ter-
    injunctions to prevent breaches of this           bear what Alliance claimed was the full cost of   minate the agreement after the drop-dead
    Agreement ... or to enforce specifically the      complying.                                        date because the required governmental
    terms and provisions of this Agreement and           Blackstone did not have the right to end       approval had not been obtained, but it
    the Guarantee to prevent breaches of or           the agreement because the governmental            would have faced unlimited damages if it
    enforce compliance with those covenants of        approval was not obtained, but either party       lost.
    [the purchaser and its parent] that require       could terminate it if the transaction was            The business logic of a buyer, and partic-
    [the purchaser or its parent] ... to consum-      not completed by a specified date, referred       ularly a private equity firm buyer wishing
    mate the transactions contemplated by this        to in the US as the drop-dead date. Because       to limit its exposure if it does not complete
    Agreement”. But Section 9.10 also said:           the transaction could not be completed            an acquisition is not unreasonable.
    “The provisions of this Section 9.10 shall        without governmental approval, and that           However, if a buyer wants an option to ter-
    be subject in all respects to Section 8.2e        approval was not forthcoming without              minate an agreement on paying a specified
    hereof [the provision making the right to a       Blackstone’s agreement, the transaction was       amount, it should insert that termination
    $100 million Parent Termination Fee               not completed by the drop-dead date.              option in the agreement. The three situa-
    United Rentals’ sole and exclusive remedy],       Blackstone terminated the agreement the           tions described above show that using a
    which Section shall govern the rights and         next day. Alliance sued, claiming                 limitation-on-damages for breaching a con-
    obligations of the parties hereto ... under       Blackstone had breached the agreement by          tract as a termination option does not
    the circumstances provided therein”.              not fulfilling its contractual obligation to      work.
       The Delaware Chancery Court thought            use its reasonable best efforts to consum-           Sometimes the direct and simple way of
    the juxtaposition of Sections 8.2e and 9.10       mate the transaction and “to obtain any           doing business is the best way.
    was ambiguous about whether United                requisite approvals,” including the approval         By David Bernstein of Clifford Chance                                                                                                                 PEVCR from IFLR 13

Keep corporate                                                                                               That is good news, but it does not go very
                                                                                                          far as a practical matter. There is no express
                                                                                                          recognition for preferred shares with all of the
                                                                                                          other bells and whistles commonly seen in off-

structures simple                                                                                         shore structures (for example liquidation
                                                                                                          distributions are still based on relative share-
                                                                                                          holdings), and there is no reference to
                                                                                                          warrants, options or other convertible securi-
In reality, the new Company Law does not enable dual                                                      ties (other than convertible bonds) in the new
                                                                                                          Company Law.
levels of shares                                                                                             Consequently preferred shares are still
                                                                                                          extremely rare in China. Domestic investors

                    ith the adoption in             tion of the articles of association providing for     tend not to be familiar with the concept and
                    September 2006 of the new       different classes of shares with the local branch     so do not seek to push for preferential rights or
                    public company takeover         of the Administration of Industry and                 protections. The basic analysis seems to be
                    and cross-border M&A reg-       Commerce (AIC) added a certain level of               that, without more detailed implementing
ulations, Chinese government officials              comfort, as it was seen as a form of official         regulations, there is more to lose than there is
congratulated themselves on completing a set        sanction. Whether as a practical matter the rel-      to gain from being among the first test cases.
of world-class corporate laws. The centrepiece      evant local AIC would register articles of               There are even more fundamental impedi-
of this suite of legislation was the new PRC        association providing for preferred shares was        ments for foreign investors. First and
Company Law, which took effect on January           an open question and depended on how liber-           foremost, the default vehicle for the majority
1 2007.                                             al or conservative the local AIC officials were.      of foreign investments, including FIEs created
   Judging from the response of foreign ven-        Even if the local AIC did register the articles,      by way of cross-border acquisition of a domes-
ture capital and private equity investors in        the general view was that this was a small fig        tic target, will take the form of an equity joint
China, such self-congratulations are prema-         leaf to cover such a fundamental structuring          venture (EJV), wholly foreign-owned enter-
ture. Foreign financial investors continue to       element.                                              prise (WFOE) or (less common in recent
set up their primary investment vehicles off-          More conservative PRC legal practitioners          years) cooperative or contractual joint venture
shore where available structures are both more      took the view that under the Chinese legal            (CJV). None of these FIE vehicles issues
flexible and more stable, and thus better suit-     principle of tong gu tong li (literally “same ben-    shares, so there is no possibility to create dif-
ed to support multiple rounds of debt and           efit for same shares”), different classes of shares   ferent classes of shares (a CJV can be designed
equity financings. The new Company Law              were not permitted. However, a strict interpre-       to achieve dividend, voting and liquidation
makes a weak attempt to open the door to            tation of this principle would not preclude the       preferences, but equity interests in a CJV do
more complex corporate structuring onshore.         existence of preferred shares so long as each         not take the form of shares).
But against the backdrop of a cumbersome            class of shares was treated equally within its           There is a foreign investment vehicle that
and relatively simplistic legal infrastructure,     class.                                                appears to promise a share-issuing entity
onshore structuring options overall remain             The new Company Law appeared to                    incorporated with foreign capital. The for-
unattractive to most investors.                     remove much of this legal uncertainty by pro-         eign-invested company limited by shares
   The corporate structuring requirements of        viding for the first time a legal basis for           (FICLS) does, as the name implies, issue
foreign financial investors are relatively          preferred shares. Under the Law, limited liabil-      shares, but approvals for such FICLS entities
straightforward – they expect to be issued pre-     ity companies (LLCs) may, with the                    are all managed on a centralised basis at the
ferred shares with some or all of the following     unanimous consent of the shareholders, adopt          Ministry of Commerce (Mofcom) in Beijing.
preferential rights: dividend preferences, liqui-   a shareholders’ voting scheme and a dividend          This centralised approval requirement has
dation preferences (participating or                distribution plan that is not based on relative       dampened whatever enthusiasm there may
non-participating preferred), redemption            shareholdings. This is a de facto recognition         have been for this investment vehicle. The
rights, conversion rights, anti-dilution adjust-    that LLCs may create different classes of             inclusion in the articles of both ordinary and
ments, special board appointment rights,            shares.                                               preferred shares will probably only compound
enhanced voting rights and other protective                                                               the problem, since central Mofcom may
provisions such as registration rights, drag-                                                             decline to take action on the submission in the
along and tag-along rights.                                                                               absence of clear legislative guidance, particu-
   Prior to the new Company Law there was
no legal basis for different classes of shares.
                                                     “Without more                                        larly if the preferential rights exceed the
                                                                                                          modest scope expressly permitted in the new
There were some limited precedents involving         detailed implement-                                  Company Law.
dual classes of shares, typically in smaller                                                                 Offshore investment vehicles also provide
domestic enterprises in which the investors          ing regulations,                                     more flexibility in tax planning and exit
provided in the articles of association for vot-                                                          options. Since foreign financial investors
ing and non-voting shares. The legal validity        there is more to lose                                understandably prefer the full panoply of
of this arrangement was uncertain at best, and                                                            rights together with additional legal flexibility
the parties proceeded on the presumption that
                                                     than there is to gain                                and certainty provided by offshore investment
in the absence of a clear legal prohibition, the
agreement of the parties would be given effect
                                                     from being among                                     vehicles, the long-standing trend remains
                                                                                                          unchanged. The key to avoiding frustration:
under the general principle of freedom of con-
                                                     the first test cases                       ”         keep it simple onshore and continue to push
                                                                                                          the more complex bits offshore.
   In the eyes of some PRC lawyers, registra-                                                                By Robert Lewis of Lovells Beijing                                                                                                                        PEVCR from IFLR 14

    Easier buyouts                                                                                   Framework for Company Law in Europe
                                                                                                     prepared for the European Commission in
                                                                                                     2002 and the Commission’s acceptance of
                                                                                                     the report’s conclusions indicate that the
                                                                                                     traditional approach is no longer plausible.
    A bill loosening financial assistance rules on joint-stock                                          The Bill does away with the flat prohibi-
    companies should encourage private equity in Poland                                              tion of financial assistance regarding
                                                                                                     joint-stock companies. It expressly allows it

                  ne of the leading private equity   its original wording across Europe, with        under four conditions.
                  (PE) funds in central Europe,      some jurisdictions establishing express            First, the financing is to be provided on
                  Enterprise Investors, invested     exceptions for private companies, and some      “fair market conditions”, especially in rela-
                  €791 million ($1.237 billion)      states allowing LBOs for joint-stock com-       tion to interest received by the company or
    in 96 companies in Poland last year. Some        panies under certain conditions (for            security interest established in its favour.
    suggest the PE market is now mature; the         example, Italy with la società per azioni).     The financial condition of the debtor or
    search for investments with high rates of           In a classic LBO structure, the target       any third party must also be also verified.
    return is becoming more difficult. But then,     company and SPV, which has acquired             Second, the shares are to be purchased or
    on April 18 Advent International completed       shares in the target for borrowed funds,        taken up for a “fair price”. Neither the Bill
    a round of fundraising that resulted in ACEE     merge, and the SPV disappears. The target’s     nor its written justification provides any
    IV, with €1 billion to invest in central and     cashflow can then service the debt original-    guidelines about how this should be inter-
    eastern Europe. Between 20% and 40% of           ly incurred by the SPV. As a result, the        preted. Third, a prior establishment of
    ACEE IV funds will be invested in Poland.        target’s assets are used to collateralise the   reserve capital is required, under the provi-
                                                     debt. One could execute an upstream             sions of the CCC. Fourth, a prior
    Paradoxical                                      merger, with the SPV as a surviving entity,     resolution at the company’s general meet-
    There are two types of corporations in           but it is unlikely that lenders would finance   ing is needed. This will lay down the terms
    Poland. A limited liability company is a         this.                                           of assistance. The resolution will require a
    strictly private entity; joint stock companies      Given the limitations, LBO transactions      qualified majority of two-thirds, or a sim-
    can be either public or private. Leveraged       in Poland have been aimed solely at limited     ple majority if at least half the share capital
    buy-out transactions (LBOs) are not allowed      liability companies. This is paradoxical        is present.
    for joint-stock companies because of provi-      given that in the early eighties in the US,        A written report from the company’s
    sions of the Polish Commercial Companies         where LBO originated, most publicly trad-       board will be the basis for the resolution. It
    Code (CCC). This Code replicates the             ed companies were taken over using LBOs.        will include: i) the purpose of and reasons
    Council’s Article 23 of Directive                In Poland, LBOs of joint-stock companies        for financing; ii) the company’s interest in
    77/91/EEC, dated December 19 1976 and            (whether public or private) are likely to be    it; iii) the terms and how the company will
    commonly referred to as the Capital              challenged as against the provisions of the     be secured; iv) the impact on the company’s
    Directive or Second Directive. The CCC           CCC. Such actions are void under Poland’s       liquidity and solvency; v) the purchase or
    prohibits joint-stock companies from mak-        legal regime. So the market for PE is limit-    taking-up price of the shares and a state-
    ing loans or advance payments and                ed to mid-size private businesses. One          ment that is it fair. The company has to
    establishing security interest, and from         could always transform a joint-stock com-       publish the report and submit it to the
    financing the purchase or taking-up of its       pany into a limited liability company           court where the company is registered.
    own shares, directly or indirectly.              before the LBO, but this is time-consum-
       The CCC provides two exceptions to the        ing and costly. Similarly, if the investor      In the market’s hands
    general prohibition, but given their lack of     chooses an IPO as its exit, the limited lia-    It is good to remove the general prohibition
    economic viability the exceptions have no        bility company will have to become a            of financial assistance. But it won’t necessar-
    practical application. Article 23 of the         joint-stock company.                            ily attract investors. Although the Warsaw
    Second Directive has been implemented in                                                         Stock Exchange is predicted to have a record
                                                     New approach needed                             number of IPOs this year, there is a risk that
                                                     The Polish Parliament is working on amend-      not all securities will find investors. So PE is
                                                     ments to the CCC. The Bill implements           becoming even more attractive for enterpris-
                                                     Directive 2006/68/EC dated September 6          es in search of both capital and managerial
                                                     2006, which amends the 30-year-old Second       skills.

     “The requirement                                Directive. The Directive was to be imple-
                                                     mented by April 15 2008.
                                                                                                        The proposed amendments would seem
                                                                                                     to open the door for private equity. But
     to create reserve                                 The Directive was driven by criticism of
                                                     share capital’s so-called guarantee function
                                                                                                     they add yet another layer of liability for
                                                                                                     boards, and the requirement to create
     capital could                                   and the way it affects company law in           reserve capital could sabotage the whole
                                                     Europe. The traditional approach to pro-        idea. The report of the High Level Group
     sabotage the                                    tecting creditors against corporation           and the Directive leave no doubt that
                                                     insolvency stressed share capital’s guarantee   financial assistance is allowed only as far as
     whole idea            ”                         function, and maintained stiff rules on a
                                                     company’s purchase of its own shares and
                                                                                                     the distributable reserves provide full cover
                                                                                                     of the risks associated with financial assis-
                                                     the financing of that purchase. The report      tance.
                                                     of the High Level Group of Company Law             By Bartosz Karolczyk of Hogan & Hartson,
                                                     Experts on the Modern Regulatory                Warsaw                                                                                                              PEVCR from IFLR 15
 Co-published section: British Virgin Islands

Bric and limited                                                                                    stipulates few requirements. In summary, it
                                                                                                    contains basic details of the limited part-
                                                                                                    nership and the type of business it is to
                                                                                                    carry on. The articles contain the internal

partnerships                                                                                        regulations of the limited partnership and
                                                                                                    the substance of the articles will typically be
                                                                                                    contained in a limited partnership agree-
                                                                                                    ment. Only the memorandum has to be
                                                                                                    submitted to the Financial Services
                                                                                                    Commission (in practice this means the
                                                                                                    Registrar of Corporate Affairs) for registra-
                                                                                                    tion, and so only the memorandum is a
In an earlier article Leonard A Birmingham of Harneys                                               public document that is available for public
discussed using BVI companies for equity and debt deals in                                          inspection. The articles have to be submit-
                                                                                                    ted to the registered agent of the limited
Bric markets. He now explains why its limited partnerships                                          partnership and will not be open to inspec-
also make the BVI a good place for investment vehicles                                              tion by the public.
                                                                                                       Upon payment of the prescribed fee the
                                                                                                    Financial Services Commission registers the

       t is expected that private equity invest-   No separate legal personality                    memorandum of partnership and issues a
       ment in emerging markets through            In keeping with limited partnerships estab-      certificate of limited partnership. The lim-
       limited partnerships and other vehicles     lished pursuant to the Limited Partnership
       established in offshore financial centres   Act 1907 (UK), a limited partnership in the
will continue to grow and accordingly it           BVI, established under the Partnership Act
becomes important to explore some of the           1996 (BVI), does not have a separate legal
factors behind this trend. One group for           personality. This is one of the fundamental
which this is particularly important is the        differences between a partnership and a
Bric economies – Brazil, Russia, India and
China, and similarly placed emerging mar-
                                                   company. It means that if an action is to be
                                                   taken by or against the partnership, it must      “The general
kets.                                              be taken against the general partner(s).          partner has
   Private equity vehicles domiciled in Bric          Two or more persons (the expression
economies tend to be less attractive to
international investors and, as a general
                                                   “persons” having a very wide meaning in
                                                   the Act) may form a limited partnership –
                                                                                                     unlimited liability                  ”
rule, from a tax perspective are not as            a partnership with one or more general
streamlined as vehicles domiciled in some          partners and one or more limited partners.
financial centres. In terms of pull factors,       The limited partners do not typically take
clearly at the top of the list is the fact that    part in the management or control of the
the BVI limited partnership is not subject         partnership business and are not liable for
to tax in the BVI and in common with               the obligations of the limited partnership.      ited partnership is a limited partnership
other jurisdictions like the Cayman Islands,       They have limited liability in that they are     under the name set out in the memoran-
the BVI limited partnership will be seen as        liable to the partnership for the difference     dum from the date shown on the certificate
a look-through vehicle for tax purposes.           between their contribution as actually           of limited partnership.
However, several characteristics of BVI lim-       made, and that stated in the articles of lim-       A limited partnership may be established
ited partnerships merit closer examination         ited partnership as having been made, and        for any object or purpose not prohibited
– for example, these vehicles are flexible,        for any unpaid contribution that the arti-       under the Act or under any law in force in
are quickly and easily formed, and involve         cles stated would be made in the future.         the BVI. The objects and purposes may be
few public filing requirements.                    The general partner on the other hand will,      limited by conditions in the memorandum
                                                   subject to certain parameters, control the       or articles, and by the fact that a limited
                                                   partnership, and has unlimited liability.        partnership may not carry on banking,
                                                                                                    insurance, trust or company management
                                                   International partnerships                       business.
                                                   The procedure that applies in relation to the       An international limited partnership is

“The BVI limited                                   formation of a limited partnership is similar
                                                   to that which applies in the formation of a
                                                                                                    also prohibited from carrying out business
                                                                                                    with persons resident in the BVI and own-
partnership is not                                 company. Both are straightforward. As is the     ing an interest in real property in the BVI
                                                   case with companies incorporated in the          other than a lease for property used as an
subject to tax in the                              BVI, each limited partnership has to have a      office.
                                                   registered agent. The constitution of a limit-
BVI     ”                                          ed partnership consists of a memorandum,
                                                   which has to be subscribed by the registered
                                                                                                    No taxes
                                                                                                    The limited partnership must maintain a
                                                   agent and articles, which are signed by the      register of limited partnership interests. The
                                                   persons forming the limited partnership.         register must contain the names and address-
                                                     In relation to the memorandum the law          es of the limited partners, the amounts and                                                                                                                 PEVCR from IFLR 16
Co-published section: British Virgin Islands

                                                                                                        period after demand an amount calculated
                                                                                                        by reference to the value of a proportionate
                                                                                                        interest in the whole or in a part of the net
     “If all the partners in a BVI limited partner-                                                     assets of the partnership, then the partner-
                                                                                                        ship will not be a fund or mutual fund, and
     ship are companies, it does not create a                                                           will not be regulated for that purpose in the
     requirement for the accounts of the limited                                                          Any member of the public may search
                                                                                                        the file of a limited partnership at the
     partnership to be audited”                                                                         Registry of Corporate Affairs in the BVI on
                                                                                                        payment of a fee during normal office
                                                                                                        hours. The file of a limited partnership will
                                                                                                        contain limited information required by
    dates of their contributions and the amount      a requirement for the accounts of the limit-       the statute.
    and date of any payment representing a           ed partnership to be audited, nor do they
    return of any part of a limited partner’s con-   become open to inspection by the public.           Brics made easy
    tribution. It must be held at the registered        As mentioned above, BVI limited part-           Given economic conditions, brought about,
    office of the limited partnership (and will      nerships are not subject to tax in the BVI,        it is thought, at least in part by the sub-
    not, therefore, be open to public inspec-        and will be regarded as tax transparent, as a      prime crisis and the resulting credit crunch,
    tion).                                           general rule, for income tax and capital           the private equity industry will no doubt
       Other than the register of limited part-      gains tax. This, combined with the limited         focus its attention on the more resilient,
    nership interests, a limited partnership is      liability of the limited partners, is an attrac-   though arguably in some cases the more
    only required to keep such accounts and          tive combination – typically only the              restrictive Bric economies. Special purpose
    records as the partners consider necessary       partners are taxable. The situation can be         vehicles such as BVI limited partnerships
    or desirable to reflect the partnership’s        distinguished from other countries                 and companies, because of their simplicity
    financial position. Accordingly, no audited      (although not the BVI) where, for example,         and flexibility, have a proven record in facil-
    accounts are required by law, and no specif-     the company and dividends are taxable.             itating transactions from early stage venture
    ic accounting standards (UK, US or                                                                  capital to management buyouts or public-
    international Gaap) need be applied.             Regulation                                         to-private transactions and everything in
       BVI companies are not required to audit       The limited partnership will only be regu-         between.
    or file accounts. What is required is that the   lated under the Mutual Funds Act 1996                 And because of this, they provide a sensi-
    company have financial records to reflect        (BVI) if the limited partnership is regarded       ble answer to the push factors inherent in
    the company’s financial position. A related      as a mutual fund or a fund under that legis-       emerging market investments.
    point is that if all of the partners in a BVI    lation. Provided that the interests in the
    limited partnership are companies, whether       partnership do not entitle the holder to   
    BVI incorporated or not, it does not create      receive on demand or within a specified              020 7332 5622                                                                                                                PEVCR from IFLR 17
Co-published section: Cayman Islands

Partnership rules                                                                                        partner may delegate any of the powers
                                                                                                         (including signing authority) granted to it
                                                                                                         under the Law or the partnership agreement to
                                                                                                         a third party manager.
                                                                                                            The general partner and the partnership
Exempted limited partnerships are popular in the Cayman                                                  should enter into a management agreement
Islands. In the second of a series of articles, Iain McMurdo                                             with the manager. This will allow a clear dele-
                                                                                                         gation of the general partner’s powers to the
of Maples and Calder explains how to draft them                                                          manager. The general partner will also grant
                                                                                                         the manager power of attorney to sign part-

                  hen a US fund forms an              any limited partner. It would require the lim-     nership documents on its behalf. The manager
                  alternative investment vehi-        ited partner to present itself as a general        should always disclose its authority and con-
                  cle or a co-investment fund         partner to persons that are not partners and to    tract as the manager. It should ensure that it
                  for certain tax-exempt or           transact business on behalf of the partnership     does not present itself as the general partner of
foreign investors in the Cayman Islands, the          with such persons. The provisions of the part-     the exempted limited partnership or it may be
partnership agreement for the Cayman Islands          nership agreement dealing with advisory            liable as a general partner or under common
exempted limited partnership will usually mir-        boards and conflicts committees will require       law as an undisclosed agent holding itself out
ror the terms of the Delaware limited                 careful review. To ensure that the members of      as principal.
partnership used as the principal onshore fund        these boards and committees do not inadver-           The manager, if it is a Cayman Islands com-
vehicle as far as possible. The commercial            tently breach Section 7(2), it is good practice    pany, will probably be regulated under the
terms of the Cayman Islands law governed              to expressly provide that members of such          Securities Investment Business Law (2004
partnership agreement, the legal protection           boards and committees only communicate             Revision) of the Cayman Islands, and will file
offered to limited partners, and the general          with other limited partners and the general        an exemption from requiring a licence pur-
partner and persons sitting on the advisory           partner, and not with persons who are not          suant to Section 5(4) of SIBL with the
board must be as consistent with the Delaware         general partners, and at no time describe          Cayman Islands Monetary Authority.
limited partnership as possible.                      themselves as a general partner of the partner-
   Where the laws of Cayman Islands and               ship. Provided their roles relate solely to the    Partners in the partnership
Delaware differ, changes must be made to the          partnership’s internal management, limited         The partnership agreement must be executed
Cayman Islands law governed partnership               partners that are members are unlikely to          properly as a matter of Cayman Islands law.
agreement if the draft partnership agreement          breach Section 7(2).                               This can be achieved by one of the following
was based on a Delaware partnership agree-               Section 7(3) of the Law provides safe har-      alternatives: all partners sign identical counter-
ment.                                                 bour provisions like those of Delaware (but        parts that are simultaneously released at
                                                      not as exhaustive). They do not expressly          closing; each limited partner signs a subscrip-
Non-participation                                     include participation on advisory boards or        tion agreement containing a power of attorney
Section 7(1) of the Exempted Limited                  conflicts committees but they state that con-      in favour of a general partner, who signs the
Partnership law (2007 Revision) prohibits a           sulting or advising a general partner, voting as   partnership agreement on behalf of all the lim-
limited partner from taking part in in the con-       a limited partner on the purchase or sale of       ited partners or attaches a signature page to
duct of the business of an exempted limited           assets by, or of, the partnership, or reviewing    the partnership agreement supplied by the
partnership. However, the Law does not                or approving the partnership’s business does       limited partner; or all partners sign the same
define what “taking part in the conduct of the        not constitute taking part in the conduct of       agreement. The subscription and partnership
business” means. Under the Law, no penalty            the business.                                      agreements must be executed as a deed if they
exists for breaching Section 7(1), although                                                              contain a power of attorney as a matter of
Section 7(2) provides that a limited partner          Appointing a manager                               Cayman Islands law.
may lose its limited liability protection in cer-     A manager is sometimes appointed to carry out         Once the partnership agreement has been
tain circumstances.                                   certain functions relating to the investment       executed and delivered by the initial partners,
   Section 7(2) of the Law states: “if a limited      and management of the partnership’s assets.        it constitutes a contract. Unless an incoming
partner takes part in the conduct of the busi-        Because an exempted limited partnership of         partner becomes party to the partnership
ness of an exempted limited partnership in its        the Cayman Islands does not have a separate        agreement, there is no privity of contract
dealings with persons who are not partners,           legal personality, and the general partner is      between the original partners and that incom-
that limited partner shall be liable, in the event    responsible for contracting on behalf of the       ing partner. The general partner (for itself and
of insolvency of the exempted limited partner-        partnership and holding its assets in trust, one   on behalf of all the limited partners pursuant
ship, for all debts and obligations of the            should ensure that the manager is properly         to a power of attorney) must enter into an
exempted limited partnership incurred during          appointed. We recommend that the partner-          agreement with an incoming partner to for-
the period that he so participates in the con-        ship agreement provides that the general           malise its admission.
duct of the business as though he were, for
such period, a general partner, provided always
that he shall only be rendered liable ... to a per-
son who transacts business with the exempted
                                                      “Where the laws of Cayman Islands and
limited partnership during such period with           Delaware differ, changes must be made to
actual knowledge of such participation and
who then reasonably believed such partner to
                                                      the Cayman Islands law governed
be a general partner.”
   It is unlikely that this provision would catch
                                                      partnership agreement                              ”                                                                                                                        PEVCR from IFLR 19
Co-published section: Germany

A European                                                                                         are often instinctively suspected of misuse.
                                                                                                   Therefore, for example, a significant num-
                                                                                                   ber of private equity investors still use a
                                                                                                   GmbH instead of a UK limited structure.

company for PE                                                                                        An SPE may also be an appropriate
                                                                                                   instrument for cross-border joint ventures.
                                                                                                   In the case of cross-border joint ventures,
                                                                                                   one partner (at least) must agree to the use

A standardised company type may reduce costs for firms
                                                                                                   of a legal entity existing under a foreign
                                                                                                   jurisdiction from that partner’s perspective.
                                                                                                   Due to its neutral character, the use of an
                                                                                                   SPE may prevent distrust at an early stage
                                                                                                   of the joint venture.
throughout the EU. Jens Hörmann, Frank Thiäner and                                                    A further advantage of the SPE is its
                                                                                                   enhanced mobility, since an SPE is granted
Heiner Feldhaus of P+P Pöllath + Partners explain                                                  legal personality in all EC member states.
                                                                                                   Though the European Court of Justice

           ecause of massive demand, particu-    explanatory support, creating significant         (ECJ) has held that hurdles to the moving
           larly from small and medium-sized     costs.                                            in of foreign EC-based companies are vio-
           companies,       the     European        The cost reduction potential of an SPE         lations of Article 249 EC Treaty, a couple of
           Commission started the process of     may especially be realised if the SPE, which      EC member states nevertheless still estab-
creating a European Private Company              is equipped with a flexible statute regarding     lish legal traps or hidden obstacles to
(Societas Privata Europaea, SPE) in 2006 in      corporate governance, is used as a standard       foreign companies.
the course of its consultations regarding        legal vehicle in (almost) all European juris-
future action in the field of European corpo-    dictions that are relevant within a private       Practitioner advice
rate law and corporate governance.               equity portfolio. In such an event, many          While the details of the SPE’s statute have
   In December 2006, the legal committee         relevant corporate procedures and opera-          not yet been determined and are still being
of the European Parliament made a propos-        tions related to the corporate governance of      discussed, the legal committee of the
al on the most crucial key points of an SPE,     the companies may be standardised. Private        European Parliament made the following
which were adopted by the plenum on              equity investors may also use an SPE as a         proposals, which were subsequently includ-
February 1 2007. On July 19 2007, the EC         special purpose vehicle in the course of          ed in recommendations to the EC
Commission started the consultation              M&A transactions.                                 Commission by the European Parliament.
process concerning the introduction of an           The existing European company types            • The statute of the European Private
SPE by a public survey, the results of which     are not an alternative. The European                 Company shall be governed by an EC
were discussed at an experts’ meeting on         Economic Interest Grouping (EEIG) does               Regulation to the extent possible in
March 10 2008. Now, the EC Commission            not allow for a limitation of liability, and is      order to prevent gold-plating by nation-
is expected to present a proposal for legisla-   subject to significant restrictions regarding        al legislators. This is based on the
tion in the course of this year.                 its object of business because it must not           assumption that any references to
                                                 gain any distributable profits. The Societas         national company law would seriously
Hidden traps                                     Europaea (SE) is subject to detailed and             jeopardise the aim of a standardised
The SPE is considered to offer numerous          intense regulation, has significant adminis-         European company type. (The term
advantages, not only for small and medium-       tration costs and is specifically designed for       gold-plating describes the negative
sized companies but also for private equity      major groups of companies.                           effects for the establishment of a level
investors, some of which are outlined below.        Furthermore, the SPE is expected to face          playing field arising from the fact that
   As the European law of limited liability      substantially fewer psychological hurdles            the national legislator in the case of EC
companies has not yet been harmonised,           than national company types when used                Directives adds certain provisions which
significant differences still exist among the    abroad. Particularly companies from small-           go beyond the minimum standard of
national types of these companies. The           er or new EC member states are confronted            the respective EC Directive).
management of these different company            with such hurdles because their business          • An SPE may be established by one or
types within the portfolio of a private equi-    partners are not familiar with these entity          more natural persons or legal entities
ty investor requires a substantial amount of     types. Even worse, such foreign companies            and must be registered in a public regis-
                                                                                                      ter; it may also be transformed into an
                                                                                                      SE and transferred to other EC member

“The SPE offers numerous advantages,                                                               • An SPE shall have its own legal person-
                                                                                                      ality and limited liability; while the EC
not only for small and medium-sized                                                                   Parliament has proposed a minimum
                                                                                                      capital of €10,000 ($15,780), the sys-
companies but also for private equity                                                                 tem of creditors’ protection is still being
                                                                                                      intensively discussed. While some voices
investors          ”                                                                                  support the system of minimum capital
                                                                                                      and its protection, certain other voices
                                                                                                      support the alternative of a solvency                                                                                                                PEVCR from IFLR 21
Co-published section: Germany

                                                                                                       Liability Companies, GmbHG). In this
                                                                                                       context, it is currently being discussed
                                                                                                       whether the European legislator shall

     “A couple of EC member states still                                                               create a flexible law that may be waived
                                                                                                       or modified by the shareholders, but
     establish legal traps or hidden obstacles                                                         which applies subsidiarily if the share-
                                                                                                       holders have not agreed on a certain
     to foreign companies                      ”                                                       provision in the articles; or whether the
                                                                                                       European legislator should confine
                                                                                                       itself to requiring the founders of the
                                                                                                       SPE to establish provisions for certain
      test. According to such a test, payouts        SPE is registered shall apply and pro-            topics in the articles.
      and dividends are permissible provided         vide assurance that the rights of             • The accounting of the SPE shall comply
      that the managing director declares that       employees are not derogated in the                with the EC directives on accounting.
      after the payout or dividend distribu-         course of mergers or other transforma-        • The dissolution of the SPE and any
      tion the company is still able to              tions. While the debate on workers’               bankruptcy procedure shall be per-
      compensate all due liabilities for a cer-      co-determination has delayed the leg-             formed in accordance with the national
      tain period of time. If the forecast turns     islative process of the SE for years, it is       provisions of the EC member state in
      out to be incorrect and the managing           foreseeable that the European legislator          which the SPE is registered.
      director has violated his or her duties in     will handle all aspects related to work-         By developing the SPE statute, the EC
      preparing this forecast, the managing          ers’ co-determination in an SPE in a          Commission hereby satisfies an urgent and
      director can be held personally liable.        separate EC directive.                        massive practical need for a standardised
    • With regard to the corporate gover-          • Following the model of certain                and flexible company type, which is
      nance of the SPE, the shareholders shall       European legislators, for example the         accepted throughout Europe. Because the
      have the choice between a one- or two-         UK, it is being considered to provide         SPE will be created along the lines suggest-
      tier system (that is, including a              certain model articles of association to      ed by a significant number of practitioners,
      supervisory board) similar to the              the shareholders of an SPE (note that         it is expected that this company type will
      German GmbH.                                   the German legislator also intends to         be frequently used and highly appreciated
    • The laws of workers’ co-determination          follow the approach of model articles by      not only by small and medium-sized com-
      of the EC member state in which the            amending the German Act on Limited            panies, but also by private equity investors.                                                                                                          PEVCR from IFLR 22
Co-published section: Luxembourg

Family estate                                                                                         the withholding tax under the Council
                                                                                                      Directive 2003/48/EC on taxation of
                                                                                                      savings income in the form of interests
                                                                                                      payments (the EC Savings Directive),

planning                                                                                              unless the name, address and the
                                                                                                      amount of interest is disclosed to the
                                                                                                      Luxembourg tax authorities.
                                                                                                   • Dividends paid by the SPF are not sub-
A new tax efficient vehicle for the management of private                                             ject to withholding tax. Non-residents
                                                                                                      will not be subject to capital gains taxa-
assets. Gérald Origer, partner at Loyens & Loeff, explains                                            tion in Luxembourg upon the sale of
                                                                                                      their interest in the SPF.

             he Luxembourg law of May 14           however, limit its involvement in any such      • Capital contributions to the SPF are
             2007 (the SPF Law) has intro-         companies to the exercise of its sharehold-        subject to capital duty (at a rate of
             duced a new tax-efficient             er rights (voting rights, right to receive         0.5%), unless an exemption applies. It
             vehicle for the management of         dividends). The SPF may not (i) be active-         is however contemplated that the capi-
private assets: the société de gestion de patri-   ly involved in the management of a                 tal duty shall be abolished effective as of
moine familial (SPF). The SPF can                  company or (ii) render services of whatev-         2009.
somehow be considered as the successor of          er nature. An SPF is not allowed to grant       • However the SPF cannot benefit from
the well-known Holding 29, the tax-                interest-bearing loans, even to subsidiaries       double tax treaties concluded by
exempt company Luxembourg introduced               (to a limited extent it may grant interest         Luxembourg.
in 1929.                                           free advance payments to subsidiaries).            An SPF is subject to the control of the
                                                      Shares in an SPF are reserved to individ-    Administration de l’Enregistrement et des
Legal regime                                       uals in the scope of management of their        Domaines (the administration for registra-
The SPF takes the legal form of either a           own assets, estate entities acting for the      tions and state property). Each year, the
société à responsabilité limitée (private limit-   exclusive benefit of private assets of one or   domiciliation agent, or, by default, the
ed liability company), a société anonyme           more individuals (for example, trusts,          auditor or the chartered accountant of the
(public limited liability company), a société      foundations, and stichting adminis-             SPF, has to certify to the Administration de
en commandite par actions (corporate part-         tratiekantoors), and intermediaries acting      l’Enregistrement et des Domaines:
nership limited by shares) or a société            on behalf of such individuals or estate enti-   • That the SPF has fulfilled its obliga-
coopérative organisée sous forme d’une société     ties (through for example, a fiduciary             tions as paying agent under the EC
anonyme (co-operative society organised as         agreement). Shares in an SPF may not be            Savings Directive,
a public limited liability company).               listed on a stock exchange or offered to the    • That the conditions pertaining to the
   The articles of association of the SPF          public.                                            capacity of the investors in the SPF are
have to state explicitly that the company is                                                          fulfilled, and
subject to the provisions of the SPF Law,          Tax regime                                      • That the SPF did not receive more than
and after the legal form of the entity, société    The main characteristics of the SPF from a         5% of its dividends from non-qualify-
de gestion de patrimoine familial, or in           tax perspective are the following:                 ing participations.
short, SPF, is to be mentioned.                    • The SPF is exempt from corporate
   The corporate object of the SPF is exclu-          income tax, municipal tax and net
sively      the     acquisition,      holding,        wealth tax. However such an exemption
management and disposal of :                          will not apply for the fiscal year during    About the firm
   i) Financial assets (as defined in the             which the SPF receives more than 5%          Loyens & Loeff Luxembourg is an integrated
Luxembourg law of August 5 2005 on                    of its total dividends from participa-       tax and corporate law practice, which com-
financial collateral arrangements) – that is,         tions in non-resident and non-listed         prises more than 115 fee-earners and offers
securities in the broadest sense, including           companies that are not subject to a tax      corporate and tax services on a fully integrat-
options, derivatives and structured finan-            equivalent to the Luxembourg corpo-          ed basis. Loyens & Loeff Luxembourg handles
cial products,                                        rate income tax (that is, an effective       all matters relating to corporate and commer-
   ii) Cash (including foreign currencies),           corporate income tax rate of at least        cial law, real estate, investment funds,
and for                                               11% for a comparable taxable basis).         private equity and venture capital, mergers
   iii) Other assets (for example, precious        • The SPF is subject to a yearly capped         and acquisitions, banking and financial law,
metals) held in an account with a profes-             subscription of 0.25%, levied with a         and tax law.
sional financial service provider.                    minimum of €100 ($155) and a maxi-              Loyens & Loeff Luxembourg is affiliated
   An SPF is not allowed to perform com-              mum of €125,000 per year, computed           with Loyens & Loeff, which has more than
mercial activities, such as trading in                on the amount of paid-up share capital,      800 fee-earners in 18 offices in the Benelux
financial instruments, or financial services          share premiums and debts higher than         and the main financial centres of the world.
(as such, an SPF falls out of the scope of            eight times the paid up share capital
the EC state aid rules). An SPF cannot                plus share premiums.                         Contact:
directly hold real estate. Nevertheless,           • Interest paid by the SPF is subject to a      Gérald Origer
holding real estate indirectly, through its           final withholding tax of 10% (if paid to     +352 466 230 425
subsidiaries, is allowed. Although an SPF is          individuals resident in Luxembourg).
allowed to hold shares in other companies             Interest paid to individuals resident in
(even majority shareholdings), it should,             an EU member state may be subject to                                                                                                                PEVCR from IFLR 24
                                                                                Pull quotes:
                                                                                * This type of arrangement would give
                                                                              the secured party a mechanism for repay-
                                                                              ing debts that is almost automatic
Practice areas                                                                  *
Corporate law
                                          Striving for Excellence               ??
‡ Corporate law, Corporate finance,                                                     2
  M&A                                                                                             LONLIB-396652.1
                                          The Luxembourg office of Loyens & Loeff is an integrated tax
‡ Private equity, venture capital,        and coroporate law practice which comprises more than 100
  investment funds                        fee-earners and offers corporate and tax services on a fully
                                          integrated basis.
‡ Banking & finance
‡ Commercial law                          750 fee-earners in 18 offices in the Benelux and the main financial
                                          centers of the world.
‡ Real estate
                                          The Luxembourg office of Loyens & Loeff is committed to offering
Tax law
                                          the highest standard of integrated tax and business law advice.
‡ Tax - international
                                          The office mainly serves large and medium-size corporate clients,
                                          banks and other financial institutions and investment funds,
‡ Tax - Luxembourg                       operating internationally, and handles all matters relating to
                                          corporate and commercial law, real estate, investment funds,
‡ Tax - compliance                        private equity and venture capital, mergers and acquisitions, banking
                                          DQG ILQDQFLDO ODZ DQG WD[ ODZ ,W FRQFHQWUDWHV RQ DOO FRUSRUDWH DQG WD[                        law aspects of international structures, financial products, holding
                                          and financing structures and corporate reorganisations.

                                                          * Under Mexican law, liabilities tax
                                          The firm features one of the strongest vis-à- teams in Luxembourg
                                                       vis professionals focussing on
                                          with over 25 certain creditors are still enforceable if the tax aspects of
                                                        up and maintenance of international structures,
                                          the setting the acquisition of assets involves assets
                                                       essential holding and financing structures, mergers and
                                          financial products, for the conduct of the business
                                          acquisitions and corporate reorganisations.

                                          Organisation and culture
                                          The culture of Loyens & Loeff is characterised by a strong feel
                                          for entrepreneurship, the provision of high quality services and
                                          mutual involvement. A focus on quality, openness, short lines of
                                          communication and a minimum of hierarchy form the foundation
                                          for an informal and inspiring culture. This culture stimulates the
                                          search for pragmatic solutions to complex legal and tax problems.

                                          Luxembourg office
                                          14, rue Edward Steichen
                                          Tel: (352) 466 230

$067(5'$0 ‡ $17:(53 ‡ $51+(0 ‡ %5866(/6 ‡ (,1'+29(1 ‡ /8;(0%285* ‡ 5277(5'$0 ‡ $58%$
&85$d$2 ‡ )5$1.)857 ‡ *(1(9$ ‡ /21'21 ‡ 1(:<25. ‡ 3$5,6 ‡ 6,1*$325( ‡ 72.<2 ‡ =h5,&+ ‡ '8%$,
Co-published section: Mexico

Keeping debt                                                                                         the enforceability of industrial mortgages
                                                                                                     in favour of non-Mexican credit institu-
                                                                                                     tions. They are perceived as being reserved
                                                                                                     for Mexican lending institutions, as

secure                                                                                               opposed to other types of lenders.

                                                                                                     A pledge under Mexican law is only available
Kuri Breña Sánchez Ugarte y Aznar explains how                                                       for personal property. A pledge constitutes a
                                                                                                     right in rem over the subject personal prop-
acquisitions are financed                                                                            erty. Generally, in commercial transactions,
                                                                                                     the pledge requires for its perfection:

       n an acquisition of a company by a pri-      Different types of security interest may         • That the pledged assets remain in the
       vate equity fund, often one of the         be implemented, mostly depending on the                possession of pledgee.
       issues to be addressed at the same time    nature of the asset involved, and sometimes        • That the pledged assets be stored in a
       as or immediately after closing the        on the nature of the creditor. Below is brief          location available to the pledgee or with
transaction is the financing or refinancing of    description of the legal mechanisms avail-             a depository appointed by both parties.
the acquisition. It is also common that pri-      able in Mexico to take lien in the assets of       • In the case of negotiable instruments,
vate equity firms choose to do a combination      the acquired company.                                  delivery by the secured party of the
of equity investment and lending.                                                                        negotiable instruments duly endorsed in
   As a result, the issue of how to structure     Limits on foreign lenders                              the pledge (endoso en garantía).
the security package that will be part of the     In general terms, an industrial mortgage is a      • In the case of other receivables, by deliv-
acquisition financing becomes important.          legal mechanism under which a lender can               ery of the documents evidencing the
Lenders will seek to obtain a lien on the         take a security interest in all the assets com-        debt obligations to pledgee and registra-
entire business to be acquired, sometimes         prising a business, including the industrial           tion of the pledge in any registry kept
referred to as a blanket lien. There are dif-     facilities, equipment, raw materials, work in          for the issuance of such debt obligations,
ferent alternatives in Mexico for structuring     progress, cash and accounts receivable – all           if applicable, or by providing notice to
such security interests.                          of the assets that make up the business as a           the respective obligor.
   The two basic choices when taking secu-        going concern. It is a right in rem that com-         In other words, the traditional pledge
rity in a company involve a decision on           prises all real estate, buildings, equipment       requires actual or virtual possession of the
whether to take a security interest in the        and hard assets, as well as a floating lien on     pledged assets by the lender, therefore lim-
assets of the business or an equity interest      inventories, work in progress, cash and            iting the pledgor’s ability to use such assets
in the company. Under Mexican law, even           receivables. Perfection for this type of lien      in certain cases. However, it is often used to
in the case of a transfer of assets, in certain   requires formalisation before a Mexican            create a security interest in the shares of
specific cases liabilities vis-à-vis certain      Notary Public, and filing with the Public          stock or other equity interests representing
creditors are still enforceable if the acquisi-   Registry of Commerce for this security inter-      the capital of commercial companies.
tion of assets involves assets that are           est to become effective vis-à-vis third parties.      The most important feature of the pledge
essential for the conduct of the business.           Questions have been raised in Mexican           in the pledgor’s possession is the ability for
   In the authors’ experience, financing          legal practice about the availability of this      the pledgor to create this lien for the bene-
entities often prefer to use belt-and-sus-        mechanism for non-Mexican lending insti-           fit of lenders while maintaining the use of
penders, and take a security interest both in     tutions, since the mechanism is provided           the pledged assets. It can be said that this
the stock of the acquired company and its         for in Mexican statutes regulating banks           type of security interest is similar to a secu-
assets. In Mexico, the security interest in       and other lending institutions. However,           rity interest created in the US under Article
the assets presents certain questions about       mortgages with the same purpose and scope          9 of the Uniform Commercial Code.
the best way to achieve the desired result;       as industrial mortgages provided for in such          This new type of security interest may
and some of these issues are related to the       statutes have been created and registered in       cover all types of personal property, includ-
different mechanisms for the perfection of        favour of non-Mexican credit institutions.         ing raw materials, inventories, work in
such security interests.                          There is still little precedent, though, for       progress, and cash and accounts receivable
                                                                                                     from their sales. Implementation of this
                                                                                                     type of collateral would require a written
                                                                                                     agreement, and if certain amounts provided
                                                                                                     by the statute are exceeded, it must be
                                                                                                     notarised and recorded in the public reg-
“Under Mexican law, liabilities vis-à-vis                                                            istry of commerce of the pledgor’s
certain creditors are still enforceable if the                                                          The pledged assets may be transformed and
                                                                                                     even sold in the ordinary course of the pled-
acquisition of assets involves assets                                                                gor’s business. According to the Mexican
essential for the conduct of the business                                                ”           General Law of Negotiable Instruments and
                                                                                                     Credit Transactions, the items covered by the
                                                                                                     pledge do not have to be specifically described
                                                                                                     if the pledge is intended to cover all assets
                                                                                                     involved in a specific business or company.                                                                                                                  PEVCR from IFLR 26
Co-published section: Mexico

                                                                                                           before the Public Registry of Property. If
                                                                                                           the guarantee trust covers only personal
                                                                                                           property, in certain cases it shall also be be

     “Financing entities often prefer to use belt-                                                         notarised, following the same rules dis-
                                                                                                           cussed in connection with the pledge in the
     and-suspenders”                                                                                       pledgor’s possession, and will be recorded
                                                                                                           in the Public Registry of Commerce.

                                                                                                           Debt repayment mechanism
                                                                                                           There are other types of trust agreements
    Mexican law makes it a criminal offence for          trustee for all legal purposes. Once the          that can be used in implementing secured
    the pledgor to create another pledge or secu-        assets have been conveyed into a guarantee        transactions, such as trust agreements for
    rity interest in the same assets without the         trust, the trust constitutes the equivalent of    the administration of cash flows and pay-
    creditor’s consent.                                  a security interest over the assets, and          ment of specific obligations provided for in
       Upon default by the pledgee, the pledgor          would protect the beneficiaries/secured           the trust agreement out of such cash flows.
    can foreclose on the assets without court            parties against other creditors of the settlor.   This type of arrangement would also give
    intervention to the extent the pledgee does             One of the most important features of          the secured party a mechanism for the
    not object to such proceedings.                      the guarantee trust is that it gives the          repayment of debts that is almost automat-
                                                         secured party the option to foreclose on the      ic. In this structure, the trust agreement
    Guarantee trust                                      collateral without resorting to the courts,       typically provides that its purpose is to
    The guarantee trust has been used in                 pursuant to the rules negotiated in the trust     implement a direct mechanism for the pay-
    Mexican practice for many years. Under this          agreement. Nonetheless, disposal of a guar-       ment of certain obligations, which is not
    legal arrangement, the debtor transfers fidu-        antee trust’s assets in the event of default in   contingent on a default by the debtor.
    ciary title to certain assets to a trustee that is   the secured obligations may require certain
    traditionally a Mexican bank. The trustee            procedures to be followed by the trustee,         Foreclosure
    preserves and holds title to such assets and,        including notice to the debtor, an opportu-       The topic of foreclosure with respect to the
    eventually, proceeds with foreclosure for the        nity to remedy and, if the debtor objects to      different types of security interests described
    benefit of the secured party, in the terms           the foreclosure, court approval.                  above is broad enough to be discussed in a
    provided for in the trust agreement to be               A trust agreement would need to be             separate article, but it should be said, for the
    negotiated to that effect.                           negotiated with the trustee, in addition to       purposes of this analysis, that Mexican law
       The guarantee trust allows the flexibility        the debtor, and thus could involve addi-          generally does not provide for self-executing
    of conveying any kind of real or personal            tional expense and timing concerns                liens. With the exceptions mentioned above,
    property and permits the debtor to remain            compared with other alternatives.                 foreclosure requires the filing of a request to
    in possession of and continue using such             Guarantee trusts that include real estate         the relevant court and a court order so that
    assets, while title to them is held by the           property must be notarised and registered         the foreclosure procedures can be initiated.                                                                                                                    PEVCR from IFLR 27
Co-published section: United Kingdom

Going public
                                                                                                              About NWR
                                                                                                              •   A pure play hard-coal-mining and coke
                                                                                                                  production company through its A Shares.
                                                                                                              •   A leading supplier of hard coal in the
                                                                                                                  fastest growing region in Europe.
Partial exits can benefit PE firms, as a £3.5 billion Czech IPO                                               •   Owns five established mines and two
                                                                                                                  coking facilities in northeast Czech
shows. Adam Levin and Claudine Ang of Dechert explain                                                             Republic. It is pursuing opportunities in

        n May 2008, the shares of New World           cant minority stake, following which RPG                    Poland and elsewhere.
        Resources NV (NWR), a Dutch-incor-            Industries acquired that majority investor (in          •   One of the largest industrial groups in the
        porated company (formerly a                   2004) and took OKD private (in 2005), after                 Czech Republic in terms of assets and
        wholly-owned subsidiary of RPG                a squeeze-out of minority interests. It was one             revenues.
Industries SE) with mining operations in the          of the largest leveraged finance transactions in        •   Second largest private employer in the
Czech Republic, were admitted to trading on           Central Europe at that time.                                country with approximately 18,341
the London, Prague and Warsaw stock                      The restructuring that followed shows the                employees and 3,563 contractors.
exchanges. The offering, after exercise of the        focus that private equity houses can bring to a
greenshoe option, was approximately £1.3              business. This included: the consolidation of the
billion (approximately $2.5 billion) resulting        mining businesses within one entity, OKD,              the Mining Division or its assets. The IPO was
in a market capitalisation of about £3.5 bil-         rather than the five entities within which the         only with respect to the A Shares. RPG
lion, the largest European IPO to date in             assets had been partially held, and the demerger       Industries has retained the B Shares.
2008. Post-IPO, RPG Industries holds                  or sale of the company’s non-mining businesses:
approximately 63.8% of the shares in NWR.             initially demerging OKD’s non-mining proper-           Corporate governance
   RPG Industries is a Cypriot-incorporated           ty portfolio and placing it under the direct           To allay potential concerns about the rela-
company with diversified investments including        ownership of RPG Industries; separating real           tionship between the two classes of shares and
real estate, transportation, and mine and landfill    estate used by the company in its mining activ-        the operation of the separate businesses, the
gas extraction. Its majority shareholders are two     ities from the company’s mining operations             company adopted divisional policy state-
leading private equity players in Europe,             (thus creating two separate divisions and the          ments to ensure that the Mining Division has
Crossroads Capital Investments Inc and Zdenek         tracking stock concept); extracting the compa-         unrestricted access to the Real Estate
Bakala (a Czech financier). Its minority share-       ny’s railway assets into a separate legal entity and   Division’s property, and that the Mining
holders are American Metals & Coal, Inc and           placing them under direct ownership of RPG             Division and Real Estate Division are man-
First Reserve Corporation, both major interna-        Industries; and transferring NWR’s mine and            aged in the best interests of NWR as a whole.
tional private equity investors. The IPO              landfill gas extraction business into a separate          All dealings between the two divisions are to
represents a significant partial exit for all these   company wholly owned by RPG Industries,                occur on arms’ length terms as if they are separate
investors. This article examines the corporate        known as Green Gas International BV. The               companies. To ensure proper corporate gover-
restructure leading up to the IPO, including the      recapitalisation included a €1.1 billion senior        nance procedures are in place, a real estate
use of tracking stock, a tool sometimes used in       facility and €300 million high yield bond.             committee comprised of NWR’s independent
company restructurings, which tracks a division                                                              directors has been established. The committee:
of a company’s business.                              Tracking stock                                         oversees the assets and liabilities of the Real Estate
                                                      Tracking stock is a security issued by a com-          Division; manages the interaction between the
PE firms bring focus                                  pany to track the performance of a division of         divisions in connection with the Real Estate
The company undertook a major restructur-             its business or a subsidiary. It is used in corpo-     Division assets; and reports to, and advises, the
ing and recapitalisation before the IPO.              rate restructurings to track separate businesses       Board regarding the Real Estate Division.
OKD a.s. (NWR’s key operating subsidiary)             of a company which are not, or cannot be,
was previously listed on the Prague Stock             separated. As part of its policy of managing its       Good for investors
Exchange. Its then majority investor acquired         real estate business independently from its            The tracking stock strategy has benefits and
the Czech National Property Fund’s signifi-           mining business, RPG Industries wanted to              disadvantages. The benefits include: investors
                                                      transfer NWR’s property portfolio to a sepa-           can track the performance of a specific part of
 IPO information                                      rate legal entity, which it achieved with              a company’s business; different investor
                                                      respect to the non-mining real estate.                 groups can participate in separate lines of the
 •   Offer priced at top of the price range –            However, mining regulations in the Czech            company’s business; and shared overheads.
     £13.25.                                          Republic would not permit land used in mining             The disadvantages include: no legal separa-
 •   Total offer valued at £1.3 billion,              to be removed before the cessation of mining           tion between the divisions so that each can
     resulting in a market capitalisation of          activities. The mining assets and NWR’s real           suffer from unrelated liabilities in the other;
     about £3.5 billion.                              estate portfolio were partitioned into separate        potential corporate governance conflicts; and
 •   Offer over-subscribed at about 7.3               divisions – the Mining Division and the Real           potential competition between shareholder
     times at the top of the price range,             Estate Division – and operated separately for          groups.
     amounting to about £9.2 billion.                 accounting and reporting purposes. To reflect             The concept of tracking stock is useful for
 •   Strong institutional demand from all             this division, the company’s share capital was re-     diversified companies, or large corporations
     regions in which the shares were                 organised into two separate classes of shares, or      such as NWR which have significant non-core
     offered.                                         tracking stock: the A Shares track the perform-        assets. It is an effective means by which private
 •   Morgan Stanley, Goldman Sachs,                   ance of the Mining Division; the B Shares track        equity and other investors can optimise exits
     JPMorgan Cazenove as joint sponsors,             the performance of the Real Estate Division,           from their investments.
     global co-ordinators and bookrunners.            and have no financial rights or entitlements over         Dechert represented NWR in its recent IPO.                                                                                                                              PEVCR from IFLR 29
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