SWEDEN Law and Practice Contributed by: Niclas Rockborn, Pär Johansson, Daniel Sveen, Arijan Kan and Erik Schwartz, Gernandt & Danielsson Advokatbyrå
at such meeting, which enables the offeror to, in prac - tice, but subject to board members’ fiduciary duties to the target company and all its shareholders, obtain
If the management team or other top performers do not have equity ownership prior to the acquisition by the private equity buyer, it is not uncommon for them to be expected to make cash investments in con - nection with closing to ensure alignment. Given the typically large value of companies acquired through this type of transaction, the level of equity ownership would be small. Generally speaking, the pot for man - agement equity decreases as the deal’s enterprise value increases. 8.2 Management Participation The equity in the management investment vehicle is typically divided into preference shares and ordinary shares. Since the preference shares have a fixed rate of return, often corresponding to the subscription amount of the preference shares plus an annual cou - pon on the subscription amount, the upside of the investment flows through the ordinary shares, which are entitled to all dividends in excess of the return allocated to preference shares. Instead of having typi - cal share structures as just described, hurdle shares are sometimes created. Hurdle shares are instruments similar to stock options – ie, the value of the target company needs to have increased enough for the hurdle shares to be in the money, and are otherwise worthless. Hurdle shares can usually be acquired for a lower purchase price than “normal” shares. Further, if the target group has key US employees, US ISOs (US-style equity stock options) are usually introduced as an incentive for such employees for tax reasons. Additionally, it has become increasingly common with restricted share unit programmes (RSUs). RSUs usu - ally entail a contractual right for the holder to receive a certain number of shares in the future based on differ - ent vesting criteria. These can include both time- and performance-based criteria. Sweet equity typically comprises approximately 80% ordinary shares and 20% preference shares, while the ratio for institutional strip is the opposite – ie, typi - cally approximately 80% preference shares and 20% ordinary shares. It is uncommon for management and key employees to subscribe for 100% ordinary shares. Management typically invests on the same level in the acquisition vehicle structure – ie, in a three-tier hold - ing structure, and the management team owns shares
control over the target company. 7.7 Irrevocable Commitments
It is common to obtain irrevocable commitments from principal shareholders of a target company. Such irrevocable commitments are usually negotiated prior to announcement of an offer (sometimes even prior to the target board being approached by the offeror). It is more common with so-called “soft irrevocables” providing the shareholder an out if a better offer is made (sometimes only where the consideration offered by the competing offeror exceeds certain lev - els), but so-called “hard irrevocables” are sometimes given by shareholders, especially where the bidder has a strong position and/or where principal share - holders are eager to sell their shares and solicit the public offer. 8. Management Incentives 8.1 Equity Incentivisation and Ownership Equity incentivisation of the management team (and sometimes top performers outside of the management team) is a common feature in private equity transac - tions in Sweden, and an important part of aligning interests between owners and managers/employees. The level of equity ownership depends on various fac - tors, including whether the management team owned equity prior to the private equity buyer’s acquisition or not. When acquiring a founder-owned company, it is common for the private equity fund to acquire a small - er majority stake, and for the founders to be expected to reinvest a substantial part of the purchase price, typically from 30% to 50% net of tax and transaction costs. If the private equity fund acquires a business in a secondary sale, the management is also expected to reinvest a significant portion of their proceeds, but unless they originally founded the target, they would typically hold a smaller level of equity, ranging from a total of 5% to 15%.
641 CHAMBERS.COM
Powered by FlippingBook