USA – TEXAS Trends and Developments Contributed by: David Stringer, Kyle Kreshover, Austin Johnson and Shaq R. Taylor, Clifford Chance
and more valuable on its own than the co-investor’s minority stake. Conversely, the sponsor that brought in the co-investor may request a drag-along right on the minority interests held by the co-investor so that it has more flexibility when marketing its interests in the company to potential buyers. Direct lenders will also want to consider what exit scenarios, such as a sale or an IPO of the project or the company, should trigger mandatory repayment of the loan. Hybrid equi - tyholders follow a similar line of thinking to a JV part - ner, and will usually request a tag right in the event of an exit, and will also want to ensure that they have conversion rights that allow them to achieve liquid - ity if other investors or management are exiting at a desired value. In all of these scenarios, the individual transferability of the investment is also a negotiating item, as investors can sometimes be subject to lock- up periods or restrictions on when and how they can conduct a transfer. Pre-emption rights on new issuances of equity are another key variable in these transactions, especially in the area of infrastructure projects where cost overruns are common and subsequent capital contributions and commitments are often required. For example, if a project is anticipated to require additional fund - ing to reach completion, an investor may not be able to have consent over future funding rounds, but may have pre-emption rights regarding the issuance and rights regarding the seniority of the interests created in order to allow the company to continue to obtain fund - ing. In considering these situations, pre-emptive rights must be designed to balance anti-dilution protection with the company’s funding flexibility. When an IPO is a possible exit strategy, advanced planning is required to simplify the capital stack, determine registration rights post-IPO and determine post-IPO governance among the key equityholders. Information rights Robust information rights for non-operational inves - tors are important for visibility to enforce their other rights. It has become common to see information rights beyond basic financial reporting, including reg - ular project updates, copies of material correspond - ence and key operational data, to assist the investor’s monitoring of the assets and operations. Other rights
such as audit rights and board or committee observ - er seats also help investors stay up to date with the
operations of the company or project. Regulatory and tax considerations
Control rights, exit provisions, information sharing and investor composition can trigger antitrust filings or other regulatory approvals. Even though direct lending is less likely to raise such issues, covenant packages may require reporting. Tax structuring should ensure the arrangement delivers the intended economic result without unintended inefficiencies or accounting com - plications. In focusing on the go-forward operations and returns of the investment, parties must be sure to consider these regulatory and tax matters when structuring the transaction at the outset. Practical Tips for Negotiating and Structuring Complex Capital Structures Align early on governance and exit strategy As with all companies and projects, understanding the governance and exit strategies that will be in place is a core component of efficiently negotiating and trans - acting, but these considerations are heightened in a multi-investor structure where each investor is coming in with differing instruments that have varying priority, economic rights and governance rights. As a result, early alignment on the terms of governance and the likely exit strategy helps avoid costly renegotiations and ensures commercial alignment before incurring significant costs and expenses. Integrate commercial roles with governance Unlike a full buyout transaction, relationships in these ventures will carry on long after closing. Vague let - ters of intent or exhibits that attach high-level terms for commercial understandings to be fully negotiated later may unlock the ability to document the trans - action, but fully negotiating any required commercial terms (such as supply agreements, service contracts or other contracts where one partner will be provid - ing some sort of commercial product or service to the company, the project or other investors) in par - allel to the negotiation of the partnership agreement will resolve material issues on the front end and help avoid subsequent misalignment and disputes after the project is already under way.
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