INTRODUCTION Contributed by: Markus Paul, Freshfields
buyer. This is often achieved by structuring an exit so that it takes place at a level of the investment struc - ture where the investor has sole control over the sold entity. If that is not possible, the investor will want to rely on drag-along rights – whereby it can force minority shareholders to sell at the same terms. Drag- along rights are common in private equity transactions globally. Sometimes, these are subject to economic protection for the minority shareholders, such as in the form of minimum price or return thresholds. In some jurisdictions, there are specific conditions that must be satisfied for a drag to be enforceable. It is common in many markets for co-shareholders that are subject to a drag to also have a tag-along right under certain circumstances. Terms of sale In most cases, a private equity seller will prefer a locked-box consideration mechanism in the sale and purchase agreement, as this entails far-reaching pro - tection on price. In addition, and subject to what market practice (and buyers) allow, private equity sellers usually seek to limit the conditionality of transactions so that they enjoy completion certainty. In all markets, the excep - tions are conditions in respect of suspensory regula - tory clearance requirements. Private equity sellers are very focused on minimising post-closing liability to maximise flexibility of a swift repatriation of proceeds to fund investors. Typically, therefore, they aim not to provide business warranties or indemnities, and try not to have to hold back pro - ceeds in escrow or similar mechanisms. In all markets, remaining warranty protection is subject to limitations, such as caps, thresholds and de minimis provisions. If indemnities cannot be avoided, they tend to be nar - rowly tailored and have bespoke limitations. One of the reasons why W&I insurance has risen to previously unknown levels of popularity in many jurisdictions is that it is an effective bridge-building tool, allowing pri - vate equity sellers a clean exit while at the same time providing buyers with insurance protection. In some jurisdictions, such as the UK, it is not unu - sual for members of management to provide warran -
ties, particularly if they are themselves shareholders. Sometimes, management warranties are used in com - bination with W&I insurance to cover the substantive risk. Public Deals and IPOs Public-to-private transactions represent a small por - tion of all private equity transactions. They are com - monly seen for example in the USA, Germany and the UK. Public deals are often voluminous and yield an attractive differential between the public and private market valuations of the target business. However, in many markets, the likelihood of the successful execu - tion of public deals tends to be lower than that of pri - vate deals. Also, there are legal barriers to public-to- private transactions in some jurisdictions, such as in China. Most public takeover regimes have mandatory offer thresholds, pricing rules and a disclosure regime for significant shareholdings (and, in some jurisdic - tions, there are broad concepts of attribution of target shareholdings between funds and investment/portfo - lio companies). The popularity and frequency of private equity exits by IPO varies as a function of the volatility of capital markets more generally. In Europe in particular, dual- track exits (ie, where a sale and an IPO are pursued in parallel) are common for larger portfolio businesses, in times where the capital markets are receptive. Management Equity and Other Incentives The alignment of interests between the private equity investor and the portfolio company management is a key feature of private equity transactions globally. The approach to management incentivisation varies from jurisdiction to jurisdiction. The structuring of man - agement incentives is often tax-led. In many jurisdic - tions, equity investments by management are frequent and the easiest way of ensuring “skin in the game”. Sometimes, management equity is combined with a management co-investment, which further increases alignment. Alternative approaches such as options, participation in investor proceeds, virtual share pro - grammes and exit bonus arrangements are also com - mon in some jurisdictions. Management incentive schemes typically include mechanisms that allow the investor to call or forfeit
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