USA Law and Practice Contributed by: Vijay Sekhon, Brien Wassner, John Godfrey and Justin Macke, Sidley Austin LLP
• Management and minority representation – Often, one or more seats may be allocated to senior management (eg, CEO), rollover sellers (subject to equity thresholds and ongoing employment) and/or large co-investors. • Observer rights – The sponsor may also appoint non-voting board observers, particularly in situa - tions involving co-investors, minority LPs or large strategic partners. Board composition is a primary mechanism by which private equity funds drive strategic direction, oversee performance, approve budgets and manage exits. Reserved Matters (Shareholder Approval Rights) In addition to board control, private equity sponsors typically require shareholder-level consent for key actions, often called “major decisions” or “reserved matters”. These may include: • capital structure changes – -issuance of new equity, debt instruments or securities with senior rights; • M&A activity – acquisitions, divestitures, joint ven - tures or changes in control; • liquidity events – IPOs, sales or recapitalisations; • budget and strategic plan approvals; • amendments to organisational documents (eg,
• pre-exit data (eg, quality of earnings reports, banker engagement). These rights are typically built into the equity hold - ers’ agreement or LLC agreement and are designed to allow the private equity sponsor to monitor portfolio performance and prepare for exits or refinancings. 9.2 Shareholder Liability Sponsors are generally not liable for portfolio company actions, provided corporate formalities are respected. Exceptions exist in limited cases. Veil Piercing If the sponsor fails to observe separateness (eg, com - mingling, undercapitalisation, inadequate records), courts may pierce the corporate veil. Joint Employer and ERISA Risk In rare cases, private equity funds may be deemed joint employers or face ERISA exposure if they control employee matters or pension obligations directly. Regulatory Liability Sponsors may be liable under successor liability doc - trines (eg, FCPA) or as controlling persons for disclo - sure obligations in securities law. Environmental liabil - ity may also attach under CERCLA if the sponsor is deemed an operator of contaminated sites. Beyond classic sales and IPOs, US private equity exits now frequently include dual- and triple-track processes, recaps and GP-led secondary solutions, allowing sponsors to optimise timing, valuation and liquidity. Rollover equity remains common for man - agement, while sponsor reinvestment is selectively used to support transition, de-risk timing or share in long-term value creation. The flexibility of these struc - tures reflects a more strategic, multi-path approach to exit planning in today’s market. 10. Exits 10.1 Types of Exit
charter, by-laws, LLC agreement); • equity incentive plans and grants; • affiliate transactions; and • material litigation or settlements.
These rights are typically exercised by the fund acting in its capacity as majority shareholder, or by approval of a supermajority of voting shareholders (where mul - tiple equity classes or co-investors are involved). Information Rights Private equity funds receive robust information and inspection rights, often more extensive than those required by law:
• monthly or quarterly financial reporting; • annual budgets and business plans; • board packages and minutes; • access to management and facilities; • audit rights and tax reporting; and
702 CHAMBERS.COM
Powered by FlippingBook