See Lawyer 2B summer 2012 edition for full feature
The deal story
29 May 2012
Corporate deals are complex and confusing to the uninitiated. Lawyer 2B takes a multimillion-pound acquisition deal between two fictional companies and explains the process
1 Private equity fund Dragon Partners (DP) wants to buy Rojo Loco (RL), a manufacturer of train parts, with operations in the UK, Germany, Spain and France. DP thinks it can buy RL for £950m, improve it and sell it on for £1.3bn.
2 However, DP doesn’t have £950m so this will be a leveraged acquisition. That means DP buys RL by investing £350m in shares and debt financing (borrowing) the remaining £600m from banks. By running RL better, DP will generate higher revenue and use this to service the interest payable on the bank loan until RL is sold on.
3 Selling RL for £1.3bn would allow DP to pay back the £600m loan and see its own stake of £350m double to £700m.
4 Hold on. What about the lawyers? DP will notbuy RL and borrow all that money itself. For that it needs a separate acquisition vehicle to own and run RL for it. This is where the lawyers come in. They need to advise on what kind of company that should be. A limited company? A limited partnership? And where should it be registered to be both tax efficient and do the things that DP wants it to do, which is to access the revenues so it can pay the interest on the debt?
5 This is important because there are differences in how payments to an acquisition vehicle are taxed in different jurisdictions. This is where specialists in tax law are needed. Plus there are differences between jurisdictions in terms of releasing cash from the target group to pay the interest and repay the debt. Germany, for example, has much more restrictive laws than the UK on the extent to which companies can do
this. So international expertise in banking law is also needed.
6 Following legal advice, DP settles on using a limited company in Luxembourg for its acquisition vehicle. But the corporate lawyers better get cracking setting that up, as timing is of the essence in such deals to ensure DP doesn’t lose out.
7 To keep the banks happy the lawyers need to find out exactly what it is DP is buying. A train parts manufacturer, yes. But what does it own? Does RL own its intellectual property and its brand? What are its liabilities? Who are its contracts with? Which suppliers have provisions in its contracts to pull out or re-price in an event of an acquisition? Is anyone suing it right now? Is anyone about to sue? These and many more questions are what is called ‘due diligence’.
8 What about the people involved? Because when one company buys another, it also buys the people that work there. If DP wants to retain the senior team then employment and benefit lawyers will get to work understanding and migrating the salary packages. At the same time they will have to look at the labour laws in each of those four jurisdictions in which RL operates.
Also, while many private equity funds will restructure a business to make it
more efficient, what employment issues will they encounter? What can they
expect from the unions?
9 And what about the competition lawyers? Is there an anti-trust aspect to this transaction? What other businesses is RL involved in? Will the sale trigger an investigation by the European competition authorities? Perhaps RL will have to divest some assets to level up the playing field. If so, which ones? How much will it cost? And is it worth it for this deal?
If all has gone well the deal moves towards the execution phase with both parties focusing on the sale and purchase agreement (SPA) by which RL’s current owners agree to sell it to DP. The lawyers draft the SPA, negotiate it, redraft it, renegotiate it and finally agree it. There will also have been adjustments to the price as well as negotiations to include provisions for further adjustments to the price once the deal has completed on the basis of the value of assets or level of cash/debt.
When all the commercial points have been agreed, the day will come when the SPA is signed. But then there’s a lot of work for lawyers to do to ensure all the right documents are in the right place to be signed. These can include share certificates, licences, employment contracts, loan agreements and the banks’ conditions for lending. The big day will be a closely choreographed chain of signings and verifications, last-minute negotiations and amendments to contracts.