NEW ZEALAND Law and Practice Contributed by: Ben Paterson, Cath Shirley-Brown and David Hoare, Russell McVeagh
shareholder group and/or an employee shareholder group holding a minority stake, the private equity owner will generally have substantial control over the company (eg, majority board-appointment rights), and its control will be tempered only by certain minority veto rights set out in the shareholders’ agreement, as noted in 8.5 Minority Protection for Manager Share- holders . However, typically, the private equity owner will have full visibility over every aspect of the portfolio company’s business. 9.2 Shareholder Liability In New Zealand, similar to many other jurisdictions, shareholders of a company will generally not be held liable for the company’s acts and omissions. However, the corporate veil may be pierced in certain situations, such as: • a person or entity is using the relevant company to avoid existing legal or contractual duties, obliga - tions or liabilities; • the company is being used as a sham or façade, masking the real purpose of the relevant corporate controller; and • where the relevant shareholder has acted as a shadow director of the company, and therefore will be subject to the same duties and liabilities as a director of the company (including any duties and liabilities in relation to trading while insolvent). In New Zealand, transaction- and fund-specific pri - vate equity owners typically hold investments for a period of three to six years. Private sales (whether by way of a formal sales pro - cess or a treaty/bilateral process) are the most com - mon form of exit, although private equity-backed IPOs are seen from time to time. Private equity sellers will often consider both a public and private exit; they will usually make a determination as to which route to pursue at a fairly early stage in the process (thus, a true “dual-track” process, whereby 10. Exits 10.1 Types of Exit
an IPO and sale process are run concurrently to con - clusion, is unusual). Potentially, recapitalisation could be considered at the same time, but “triple-track” pro - cesses are uncommon in New Zealand. It is becoming more common for private equity sellers to reinvest upon exit, selling to a larger or more global private equity fund. This is typically achieved by rolling into a minority shareholding position in the new hold - ing company, albeit often through a new fund raised by the fund manager. 10.2 Drag and Tag Rights Almost all shareholders’ agreements relating to invest - ments majority-owned by a private equity fund will include drag rights to enable the private equity fund to sell 100% of the investment. The customary drag right threshold for a sale is 75% (assuming the cor - nerstone private equity fund holds this stake) but can be as low as 50.1%. The inclusion of drag rights is commonly understood and accepted by minority shareholders (eg, manage - ment, co-investors, rolling sellers) on the basis that they understand that they are “along for the ride”, and that the private equity fund must exit at some point in order to generate a return for its investors. However, in practice, drag rights are very rarely relied upon by private equity sellers, demonstrating the high level of trust and co-operation that often develops between the private equity fund manager (and their representa - tives at the portfolio level) and other shareholders. Similarly, almost all shareholders’ agreements relat - ing to investments that are majority-owned by a pri - vate equity fund will feature tag-along rights, although these are only exercisable where the majority private equity fund shareholder has not exercised its drag rights. These tag rights provide the minority share - holders with the right to tag along or “piggy-back” onto a sale of shares by the majority private equity fund shareholder, by requiring the purchaser to buy out their minority shareholding as well. Typically, tag-along rights will only be triggered by a complete exit by the majority private equity fund shareholder, although they can sometimes be triggered on a pro rata basis if a control transaction (ie, at least 50.1% of the shares) is being sold by the majority private
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