5 Legal Things You Should Know Before Doing an MBO

Tony Edwards, Partner, Stephenson Harwood

January 2010

Law firm of the year

Route map

Introduction to Stephenson Harwood

Be prepared!

Choose the right financial backer

Key issues to consider

Risks

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About Stephenson Harwood

A full service international law firm with some 100 partners and over

500 staff worldwide.

We have a leading corporate finance practice with strength in numerous

markets including TMT, financial services, real estate, hotels & leisure,

natural resources, FMCG and transportation.

Recent accolades include:

–Law firm of the year (British Legal Awards 2009)

–Finalist for mid-market corporate team of the year (The Lawyer 2008)

Proud to be preferred legal partner of AngelNews!

The kind of top client service that is hard to find

Our Private Equity Expertise

Anglia Maltings

Advised MBI team on acquisition of a UK maltings producer with backing from a consortium of high net worth investors

LoveFilm

Advised on the merger of LoveFilm and Video Island and the restructuring of underlying shareholdings

Morgan Grenfell Private Equity

Exit of funds managed by MGPE, the private equity division of Deutsche Bank, from Grifols SA, the Spanish pharmaceuticals company

Bank of Scotland

Advised BoS on MBO of United Income Benefit Holdings Ltd. a leading provider of employment related insurance products

Premier Asset Management Limited PLC

MBO and subsequent take-private of AIM listed Premier Asset Management Limited PLC

Seera Investment Bank

Secondary buy-out of BWA Water Additives from Close Brothers Private Equity Limited. Voted deal of the year by the FT’s ‘The Banker’

Smiths Flour Mills

Advising Longmynd Industrial on the MBI of Smiths Flour Mills from Vision Capital

Uberior (PE business of Bank of Scotland)

JVs with Warner Estate Holdings Plc to fund acquisitions involving senior and mezzanine debt and equity in excess of £540 million

Welsh Power Group

£125m MBO of Welsh Power Group (formerly Carron Energy) principally financed by Deutsche Bank

The Cloud Networks Limited

Advising the Cloud on several rounds of expansion capital funding including mezzanine finance from EVP and Noble

Be prepared!

Educate yourself upfront

Negotiate a detailed term sheet: don’t let the PE house hide behind terms like “definitive agreements to contain the usual investor protections”

Get proper professional advice

Choose the right financial backer

Don’t just go for fattest wallet

–value added expertise is key

–investor who understands your industry and won’t panic at the first deviation from the budget

–you must have a rapport with the investor’s representative/director

Shared expectations on exit timetable

The right PE house is more likely to secure debt financing element

Will the investor syndicate its position – i.e. who are you dealing with tomorrow?

Some key areas to consider

Good leaver/bad leaver

–Conflict: PE house’s position may only become profitable after a number of years but you may be rolling sale proceeds/equity into Newco

–Consider applying bad leaver provisions only to growth shares

–Consider tapering bad leaver provisions

What level of control are you prepared to concede to the investor?

–Some investors are very hands on

–Long list of investor consents?

–Operational v. strategic matters

5. More key areas to consider (contd)

“Step-in” rights

–Limit to insolvency style events?

–Extend to failure to meet budgets?

–Can the PE firm sack management unilaterally for underperformance?

Exit

–Can they force an early sale which makes it hard to achieve ratchet targets?

–Are the veto rights of the PE house on exit by way of IPO realistic (e.g. minimum valuation, ability to place all its shares on IPO)

Ratchets

–Don’t accept downward ratchets

–Upward ratchets are only valuable if realistic

Risks

Inevitably we hear more about the deals that succeed than those that fail!

At the very least the investor will want warranties from management that the forecasts are reasonable

–be realistic therefore

–typical liability cap of 2/3 x salary under these warranties

If you own equity in the company already you will be required to give warranties in your capacity as a seller up to 100% of your consideration

Complex process which distracts management from running the business

Can you afford to finance your equity or afford to lose your equity?