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LPC Law Notes Private Acquisitions Notes

Management Buyouts And Private Equity Funds Notes

Updated Management Buyouts And Private Equity Funds Notes

Private Acquisitions Notes

Private Acquisitions

Approximately 339 pages

A collection of the best Mergers and Acquisitions* notes the director of Oxbridge Notes (an Oxford law graduate) could find after combing through dozens of LPC samples from outstanding students with the highest results in England and carefully evaluating each on accuracy, formatting, logical structure, spelling/grammar, conciseness and "wow-factor".

In short, these are what we believe to be the strongest set of Mergers and Acquisitions notes available in the UK this year. This collection is f...

The following is a more accessible plain text extract of the PDF sample above, taken from our Private Acquisitions Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

Management Buy-Outs and Private Equity

Ads and disads for M of participating in an MBO



  • potential for really big capital growth

  • less restrictive/more flexibility than floating (basically private co. flexibility)

  • incentivisation - personal efforts go towards their rewards

  • not restricted by listing co procedure

  • fund likely to leave in 3-7 yrs - could be a pro - on secondary b/o M often given chance to buy more equity

  • PEF offers skill/expertise

  • PEF often revise e’ee contracts and cull pointless staff - leaving more of the profits for M

  • usually have to use personal wealth (as M) to buy in - take out loan/debt fin against their personal assets

  • dilution of equity thr/ratchet provision if IRR [Internal Rate of Return - ideal profit calculated by PEF] not made

  • PEF might restrain M in the form of covs and in the form of good leaver/bad leaver cl’s

  • maximum potential equity for M is set out @ beginning -> no potential to exceed as ratchets only ever work downwards

  • Ws - although mainly for flushing out info re T - d’ors are still made personally liable (usually capped @ 3 yr’s salary)

  • fees involved (eg. lawyers) will need money to cover this as well

  • PEF takes control - can appoint/remove d’or, reserve right to appoint chairman and execs and negative covs (saying what T can’t do)

Types of PEF activity

  1. Venture capital - funding of new business

  2. Development capital - funding of existing, more mature businesses

  3. B/o -funding of purchases of established businesses

Return of investment/Exit

  1. flotation of Newco1 on a recognised exchange

  2. sale of N1 to trade B

  3. secondary b/o

Position of M and their Duties and Obligations to be borne in mind during the Negotiations

Position of M, Duties and Obligations to be borne in mind during negotiation

  • Directors’ Duties: M have d’ors’ duty to act in a way that will promote success of co for existing s’ers (s.172 CA) as well as duty to declare interest (s.177)

  • M must therefore make sure they obtain highest price for T and to obtain lowest Ws (but they themselves are the B!)

  • Duty to exercise r’able care and skill and diligence (s.174 as well as fiduciary duty in e’ent contract).

  • E’ent contract: as e’ers they owe T good faith = unlikely that interest of both co’s will be the same: eg. time, confidentiality (M will get a confidentiality letter from T giving permission to avoid breach of their duty)

  • Action? in practice, d’ors who are part of MBO will not participate, any retiring/independent d’ors will act as S or if none existing, T will appoint independent d’ors to do the job. M who participating in MBO must retire [cf. board mins] to avoid this conflict of interest

  • What to do before approach to PEF?

  • DD to reduce risk/liability

  • PEF will ask M For Ws (not as contractual redress but) to flush out info



Internal Rate of Return - level of return PEF want to achieve via capital and income

What is exit?

time when PEF want to achieve their capital gain thr/selling their shares

What is purpose of ratchet and how goes it work?

  • used to incentivise M, usually set @ something attainable

  • To work out - take the current number of shares [X] as 20% so divide by 20 then multiply by 100 to work out what new number of shares post ratchet would be

  • Then minus X as number of shares M already hold will never chance so new M s’ing = Y

  • Minus however many shares M already own (X) and the remaining number will need to be converted to ord shares on a successful ratchet

Tax issues on a PEF MBO

BVCA MOU conditions

BVCA Memorandum of Understanding conditions:

- BVCA is optional but if you sign up for BVCA Memo it’s a safe haven for ensuring shares for M are taxed under CGT not income by HMRC when the shares are sold by M to achieve their capital gain so in practice everyone does it

Where shares are not subject to ratchet arrangments

  1. M’s shares must be ord share capital

  2. where leverage is provided (eg. pref shares or LNs) by any other ord share cap holder (usually PEF), this must be on commercial terms

  3. the price paid by M for their ord shares mustn’t be less that price paid by PEF for its ord shares

  4. M must acquire their shares @ same time as PEF

  5. M’s shares must not have any features that give them rights not available for other ord share capital s’ers

  6. M must be fully remunerated for the work they do by salary and bonuses thr/ a separate e’ent contract (ie. shares can’t be used as remuneration)

Wheres shares are subject to a ratchet arrangement

Conditions (1), (2), (4) and (6) from above apply, plus:

  1. the ratchet agreements must vary according to performance of the co and not of individual s’ers (in the other words they can’t act as a quasi bonus scheme)

  2. ratchet arrangement must exist @ same time PEF acquires its ord shares; and

  3. M must pay a price for share that reflects maximum economic entitlement they could achieve under ratchet (basically ensuring ratchet works to decrease M’s entitlement if IRR isn’t met, ensuring ratcheting up doesn’t happen)

Interest Relief on Borrowing by M

2 x perspectives

  • M - interest relief on M borrowing

  • PEF - interest relief on Newco’s borrowing

The amount M is required to invest in N1 is likely to be large in proportion to their personal wealth so they want to ensure they can set off interest that pay on this borrowing against their income. This is permitted providing:

  1. there must be a loan to an individual applied in acquiring shares which must be ord shares w/in meaning of s.160 Corporation Tax Act 2010

  2. @ times shares are acquired, the co in which they buy the shares (ie. N1) must be a close co (ie. under the control of 5 or fewer participators or by s’ers who are also d’ors of the co). It doesn’t matter if it ceases to be a close co soon after investment made

  3. thr/out accounting period in which investment is made by M and subsequently in all periods in which interest in paid on loan, the co must exist for...

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