An important element of our corporate practice is advising on transactions whereby a company is being sold to a private equity investor. We mostly act for the seller or the buyer, but quite frequently also for the management team of the target company. Such management has different hats on and often finds itself in a squeeze between the parties involved. Suppose you are such a manager (or his advisor), what then to consider?
First and most important is your position as managing director, with fiduciary duties to the company and its stakeholders. However, more interests are at stake and these interests do not always align. You are involved with a private equity company as a majority shareholder, which supervises you and your fellow management team members and which is working on an exit. Perhaps you have a financial interest in the target yourself. Moreover, the new (financial) owner will wish the management team to stay on after its acquisition and to re-invest a portion of their proceeds. How to deal with these conflicted interests sensibly? In such a sale process, management will face all sorts of forces:
- the seller (and yourself) wants the best price possible;
- the buyer (and if you invest, yourself) wants to keep the price as low as possible;
- representations and warranties will have to be provided to the buyer (by whom?);
- the company will be refinanced (will you still be able to realize your plans, even when things do not go as you planned, and what does the works council think of this?);
- you may (have to) invest again ('roll-over') and have to negotiate with the buyer about the financial and legal terms and conditions of your management participation;
- arrangements on a subsequent exit by the new owner may already have to be made;
- how does management provide for its interests, also in case of a premature departure (good leaver/bad leaver) and how is your investment best set up from a tax perspective?
In short, a complicated and time consuming process. We know from experience that an experienced advisor with a practical mentality can save time and money. We therefore recommend that management retains independent legal counsel. This allows them to focus on operational management and to protect them from participating in sometimes tough and difficult negotiations with the new owner.