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GUIDE TO: PRIVATE EQUITY 2023/2024

9TH EDITION

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Table of Contents

Expert Analysis Chapter

2023 and Beyond: Private Equity Outlook for 2024
1 Siew Kam Boon, Sarah Kupferman & Sam Whittaker, Dechert LLP

Q&A Chapters
Australia Japan
4 MinterEllison: Kimberley Low, Michael Wallin & 105 Tokyo International Law Office: Dai Iwasaki,
Nick Kipriotis Yusuke Takeuchi & Tomo Greer

Austria Korea
14 Schindler Attorneys: Florian Philipp Cvak & 113 Barun Law LLC: Min Hoon Yi & Si Yoon Lee
Clemens Philipp Schindler
Luxembourg
Brazil 121 Eversheds Sutherland (Luxembourg) S.C.S.:
25 Mello Torres Advogados: Carlos José Rolim de Mello, Holger Holle, José Pascual & Rafael Moll de Alba
Roberto Panucci & Rafael Biondi Sanchez
Mexico
Canada 130 González Calvillo, S.C.: Jorge Cervantes Trejo,
33 McMillan LLP: Michael P. Whitcombe, Brett Stewart, Bernardo Reyes Retana Krieger, Daniel Guaida Azar &
Enda Wong & Bruce Chapple Jerónimo Ramos Arozarena

Cayman Islands Nigeria

42 Maples Group: Julian Ashworth, Patrick Rosenfeld, 138 Banwo & Ighodalo: Ayodele Adeyemi-Faboya,
Lee Davis & Stef Dimitriou Mavis Abada & Ibiyemi Ajiboye

China Norway
50 Han Kun Law Offices LLP: Charles Wu & 149 Aabø-Evensen & Co: Ole Kristian Aabø-Evensen
Hanpeng (Patrick) Hu
Singapore
France 173 Allen & Gledhill LLP: Christian Chin & Lee Kee Yeng
57 Vivien & Associés AARPI: Lisa Becker, Julie Tchaglass,
Marine Pelletier-Capes & Julien Koch Spain
182 Garrigues: Ferran Escayola & María Fernández-Picazo
Germany
65 Weil, Gotshal & Manges LLP: Andreas Fogel & Switzerland
192 Bär & Karrer Ltd.: Dr. Christoph Neeracher &
Benjamin Rapp
Dr. Luca Jagmetti
Hungary
73 Moore Legal Kovács: Dr. Márton Kovács, United Kingdom
201 Dechert LLP: Mark Evans & Sam Whittaker
Dr. Áron Kanti & Dr. Zsigmond Tóth

India USA
83 213 Dechert LLP: Allie Misner Wasserman,
Shardul Amarchand Mangaldas & Co.: Iqbal Khan &
Devika Menon Dr. Markus P. Bolsinger, Soo-ah Nah & Marie Mast

Italy
91 Legance: Marco Gubitosi & Lorenzo De Rosa
 Welcome

Preface
We are delighted to have been invited to once again introduce the 2023 edition of ICLG
– Private Equity, one of the most comprehensive comparative guides to the legal aspects
of private equity transactions available today. The Guide is now in its ninth edition,
which is itself a testament to its value to practitioners and clients alike. Dechert LLP
continues to serve as the Guide’s contributing editor.
In a world of higher interest rates and other macroeconomic, social and political devel-
opments, it is critical to maintain an up-to-date guide regarding legislation and prac-
tice across a variety of jurisdictions. This 2023 edition accomplishes that objective
by providing global businesses leaders, in-house counsel, and international legal prac-
titioners with ready access to essential information regarding the current legislative
framework and evolving practice for private equity transactions in 22 different jurisdic-
tions, each written by experienced practitioners. This edition also includes one expert
analysis chapter, which discusses pertinent issues affecting the private equity industry,
transactions and legislation.

Dr. Markus P. Bolsinger & Christopher Field

Dechert LLP
 Chapter 1 1

2023 and Beyond: Private

Equity Outlook for 2024
Siew Kam Boon

Sarah Kupferman

Dechert LLP Sam Whittaker

are in a better position, but those that cannot pass along such costs
Introduction may benefit from a restructuring that deleverages their balance
The global private equity (PE) industry, after enjoying record- sheets. For this reason, some PE sponsors that focus primarily
setting years in 2021 and 2022, is now facing macroeconomic on restructuring and distressed businesses have sought more
headwinds. Inflation and related rising interest rates, a tight control opportunities in operationally sound businesses, particu-
labour market in the case of the United States, more robust anti- larly in sectors with higher cost structures, that struggle to pass
trust enforcement in various jurisdictions, as well as geopolitical costs related to wage pressures and inflation to end-consumers.
uncertainty, and valuation expectations that do not yet reflect the PE sponsors operating in this space have focused particularly
economic realities of the moment have together served to slow on the healthcare industry, due to the continuous pressure from
PE deal activity. Through the first half of the year, 2023 PE deal increasing wages, lower reimbursement rate and regulatory uncer-
activity in the United States, Europe, and Asia lags behind that of tainty. Other sector focuses have included packaging businesses,
2021 and 2022 in terms of deal count and deal value. Similarly, airlines, real estate, and industrial businesses. In pursuing these
fundraising activity is down overall in 2023 so far. However, opportunities, PE sponsors anticipate that, through the head-
even as the deal environment is proving challenging, PE spon- winds, these businesses have solid operational and manage-
sors continue to hold record amounts of dry powder to deploy. ment expertise and ample liquidity and resources to go through a
In this environment, PE sponsors have increasingly focused restructuring process that will help ensure that the balance sheet
on platform balance sheets and more distressed sectors and and capital structure are set up for success. With the opportunities
companies, made use of consideration-deferment methods that distressed businesses present to PE sponsors, what will remain
and more frequently turned to alternative sources of capital a challenge throughout 2023 and into 2024 is distinguishing which
to complete transactions. In 2024, creativity and agility will businesses present a successful opportunity and which will simply
continue to be key for PE sponsors to identify and win invest- need to be managed, while ensuring that management can adapt to
ments and to realise value. these new environments.

Trends in the PE Market Bridging valuation gaps

The PE market focuses on restructurings One of the features of the present deal environment is buyer
and seller disagreement on valuation. PE sponsors can try to
As a result of the current deal environment, PE sponsors have resolve these disagreements by deferring some of the considera-
sharpened their focus on the liquidity of their existing port- tion offered. This deferment can take the form of an earnout or,
folio companies. Higher borrowing and labour costs have left somewhat more rarely, seller financing.
companies with floating interest rates and borrowing arrange- In transactions involving earnouts, sellers accept a mix of
ments unprepared for the levels of cash-burn that we are pres- consideration that includes a contingent right to receive consid-
ently seeing, forcing PE sponsors to concentrate their efforts eration in the future based on the performance of the acquired
on portfolio assets that can meet their capital requirements company. By contrast, in transactions involving seller financing,
during this period of expensive debt. An increased demand for buyers issue promissory notes to the seller to cover a portion of
liquidity has in turn led to the question of how much support the transaction consideration. In each case, part of the consid-
PE sponsors will give portfolio companies through capital injec- eration is deferred. However, in the case of an earnout, the
tions (and if they will be willing to do so without a short-term deferred consideration is typically contingent on the achieve-
positive return). Increasingly in some cases, restructuring is ment of specific levels of performance by the acquired company,
being seen as a viable alternative solution. while seller financing is typically not conditioned in this way.
Businesses in sectors that have pricing power, and which are Seller financing has an additional potential benefit, particu-
able to pass on increased costs of inflation to their customers, larly in the context of sales of distressed assets, in that should

Private Equity 2023

2 2023 and Beyond: Private Equity Outlook for 2024

the acquired business fall into bankruptcy, the seller as a creditor This general growth trend was confirmed by the respondents
stands in line to collect the proceeds of any liquidation (where the to a recent Dechert survey, the majority of whom said that their
seller stands in the line depends on whether its note is subordi- firms’ use of private credit financing has increased in the past
nated and/or secured (and if secured, on the nature of the lien)). three years. Other industry surveys also indicate that 2022 saw
Between 2016 and 2019 (i.e., before the economic impact of an 89% year-over-year increase in private credit investment in
COVID-19), roughly 16% of private sales of U.S. companies or emerging markets, while private credit fundraising managed to
businesses publicly disclosed in SEC filings included an earnout, avoid following other asset classes into decline in 2022, posting
rising to 21% during the high-inflation period beginning in about 2% growth for the year.
2022 to the present. While not as common, from the beginning Notwithstanding recent PE deal volume contraction, the
of 2022 to date, roughly a dozen deals publicly disclosed in SEC historic levels of dry powder in the private credit industry are
filings have included some seller financing, usually in the form poised to be deployed. This strong position for private credit
of a promissory note. lenders is coupled with the unexpected bank weakness in the
By pushing payment of some consideration into the future, higher interest rate environment as evidenced by the bank fail-
buyers and sellers are able to bridge valuation gaps and navi- ures of early 2023. If the uncertain time for banks makes tradi-
gate rough financing waters. This can help PE sponsors acting tional lenders more cautious as the recovery in deal flow picks
as buyers to decrease their capital costs in this less-attractive up pace, private credit should have an opportunity to take even
financing environment. Sellers, for their part, can enjoy higher more market share in the PE debt-financing space. That said,
valuations and a chance for more overall consideration. However, the optimism for private credit is checked in the short term
these tools, especially earnouts, increase the likelihood of post- by some unease among investors about how this yet-untested
closing disputes, so the deal parties – sellers in particular – have industry would handle an economic downturn if one does ulti-
an interest in setting earnout targets, calculation methodologies mately materialise in the broader economy and brings with it
and related efforts standards as clearly and unambiguously as borrower defaults and credit downgrades.
possible in the deal documentation.
Outlook
Private credit still growing Notwithstanding the slower first half of 2023 in terms of global
deal count and, to a greater extent, deal value, the combination
While the uncertain availability of debt financing was one of main of historic amounts of PE sponsor dry powder, the dynamism
factors leading to reduced deal flow in the PE industry in 2022, of credit markets and availability of strong operating businesses
private credit’s impact on PE continued to grow, modestly in abso- with challenged balance sheets creates capacity for investment
lute terms but significantly as a share of the overall debt market in through the rest of 2023 and beyond. By focusing on strong, if
the context of the aggressive pullback by traditional lenders. The distressed, platforms and other businesses, deploying consider-
flexibility and relative speed of private credit had already proved ation-deferment methods, and innovatively sourcing capital, PE
its value to PE sponsors in the middle market over the last several sponsors can realise value and secure attractive returns for their
years, leaving private credit uniquely positioned to compete with limited partners.
traditional lenders and make a push into the larger-cap deal space
as larger deals faced financing headwinds in the credit crunch of Acknowledgments
2022 and rising interest rates. With more streamlined facilities
that do not depend on syndication (though private credit group Mihai Morar, Remington Shepard, Yasmin Yavari, associ-
deals are also a growing trend), private credit has been an attrac- ates at Dechert LLP and Daniel Rubin, professional support
tive solution for PE sponsors in the uncertain deal ecosystem of lawyer, at Dechert LLP, all contributed to this chapter.
2022 and early 2023, even for deals of sizes that historically were
the exclusive purview of large banks.

Private Equity 2023

 Dechert LLP 3

Siew Kam Boon, co-head of Dechert’s private equity group, practises in the areas of mergers and acquisitions, private equity and emerging
growth and venture capital, with significant experience in the technology, healthcare and life sciences, outsourcing, media, telecommunica-
tions, FMCG, energy, infrastructure, and resources industries. Ms. Boon represents corporate clients, including private equity and venture
capital funds, sovereign wealth funds and special situations groups.

Dechert (Singapore) Pte. Ltd. Tel: +65 6730 6980

One George Street, #16-03 Fax: +65 6730 6979
049145 Email: siewkam.boon@dechert.com
Singapore URL: www.dechert.com

Sarah Kupferman focuses her practice on corporate and securities matters, counselling PE and strategic clients on a wide range of domestic
and international transactions, M&A, large and middle-market financing transactions, the formation of domestic and offshore investment enti-
ties and general corporate advice across a variety of industries. Ms. Kupferman was recognised for her transactional expertise by The Deal in
its Top Rising Stars: Class of 2021 list. In addition, she was recently named as an “Up and Coming” lawyer in New York for Corporate/M&A
by Chambers USA, a legal directory based on the opinions of clients and peers.

Dechert LLP Tel: +1 212 698 3664

Three Bryant Park, 1095 Avenue of the Americas Fax: +1 212 698 3599
New York, NY, 10036-6797 Email: sarah.kupferman@dechert.com
USA URL: www.dechert.com

Sam Whittaker advises PE clients on a range of complex corporate matters. Mr. Whittaker’s practice includes M&A, divestments, co-investments,
joint ventures, management equity arrangements and a variety of portfolio transactions. He regularly advises prominent global PE firms, sover-
eign wealth funds, alternative asset managers and investment firms on their international transactions.

Dechert LLP Tel: +44 20 7184 7584

25 Cannon Street Fax: +44 20 7184 7001
London, EC4M 5UB Email: sam.whittaker@dechert.com
United Kingdom URL: www.dechert.com

Dechert has been at the forefront of advising PE firms for almost 40 years.
With more than 300 PE and private investment clients, we have unique
insights into how the industry has evolved and where it is going next. Our
globally integrated team of more than 350 PE lawyers advises PE, private
credit and other alternative asset managers on flexible solutions at every
phase of the investment life cycle.
www.dechert.com

Private Equity 2023

 4 Chapter 2

Australia
Australia

Kimberley Low

Michael Wallin

MinterEllison Nick Kipriotis

■ decreased investor confidence in the financial projections

12 Overview of businesses, particularly where there are supply-chain
challenges in Australia – this can lessen the likelihood of
1.1 What are the most common types of private equity reaching an agreement on valuation.
transactions in your jurisdiction? What is the current
state of the market for these transactions?
1.3 Are you seeing any types of investors other
than traditional private equity firms executing private
The most common types of private equity (“PE”) transactions
equity-style transactions in your jurisdiction? If so,
in Australia are leveraged buy-outs and take-private transactions. please explain which investors, and briefly identify any
In 2022, 135 PE deals were completed, with take-private deals significant points of difference between the deal terms
accounting for over half of the total deal value for all PE-backed offered, or approach taken, by this type of investor and
transactions. that of traditional private equity firms.
Despite ongoing macroeconomic headwinds in 2022, the PE
market in Australia is maturing and generating strong assets Several other types of investors are becoming increasingly active
under management growth thanks to high levels of capital in Australian’s PE market, in particular:
raised – particularly in the mid-market, where there is robust ■ Superannuation Funds: typically have a longer-term
deal flow, attractive valuations, and less reliance on leverage. investment horizon compared to PE firms, focusing on long-
The increasing prevalence of private debt and other alternative term wealth creation, with more moderate return expecta-
lending in Australia has facilitated the financing of PE invest- tions. They have a lower risk appetite, stricter ESG invest-
ments. Notwithstanding this, fund managers and investors are ment criteria and prefer minority or passive investments.
expected to be more discerning when deploying capital in 2023. ■ Family Offices/High-Net-Worth Individuals: tend
to have a longer-term investment horizon and often look
1.2 What are the most significant factors currently for direct investment opportunities in private companies.
encouraging or inhibiting private equity transactions in Their investments will be much less reliant on leverage.
your jurisdiction? ■ Sovereign Wealth Funds: typically invest in a range of
asset classes, including PE, to diversify their portfolios
Encouraging factors include: and maximise returns.
■ strong fundraising – in 2022, PE raised record funds of ■ Private Debt and Credit Funds – see question 8.1 below.
A$9 billion to deploy in investments in Australia; and
■ strong growth in the technology healthcare sector and, 22 Structuring Matters
due to government-backed projects to stimulate economic
growth, the infrastructure sector. 2.1 What are the most common acquisition structures
Inhibiting factors include: adopted for private equity transactions in your
■ high interest rates and inflation, which increase the cost of jurisdiction?
acquisition financing and general volatility;
■ market competition, with many PE firms and several other The most common acquisition structures are – in the case of
types of institutional investors chasing a limited number of private companies – share and asset purchases, and – in the case
high-quality investment opportunities; of public companies – public-to-private acquisitions. Most trans-
■ regulatory developments (e.g., see question 11.1 below); actions are control investments; however, recently there has been
■ increasing focus on environmental, social and govern- more appetite for minority investments or co-investments to help
ance (“ESG”) considerations, which can limit the types of PE investors manage market risk.
companies and sectors that PE firms target; and The holding structure usually involves setting up a multi-
tiered “holding stack” in order to limit liability, manage tax

Private Equity 2023

 MinterEllison 5

implications and facilitate financing arrangements. The selling more than 50% of its holding and/or of the total equity in
acquiring entity in the holding stack is typically an Australian the company), tag-along rights for management (either exercis-
corporation or special purpose vehicle incorporated in Australia, able only where the PE investor sells more than 50%, or (more
for tax reasons and to help ensure compliance with local regu- favourable to management) pro rata) and other exit event mecha-
lations. The intermediate entities in the holding stack may be nisms (including an initial public offering (“IPO”)).
incorporated in offshore jurisdictions, depending on the tax and
regulatory considerations of the PE investor and the structure
2.6 For what reasons is a management equity holder
of the investment. usually treated as a good leaver or a bad leaver in your
jurisdiction?
2.2 What are the main drivers for these acquisition
structures? Usually, good leavers will be limited to managers who retire at
the usual retirement age, die, become permanently disabled, or
The choice of acquisition structure depends on factors such as are made redundant. Bad leavers will usually be leavers who are
(i) tax considerations of the PE firm, sellers and/or management not good leavers, and so will include managers who voluntarily
team (see section 10 below); (ii) requirements of the lenders resign, are terminated for cause, or are in breach of the share-
financing the transaction (e.g., structural subordination); and holders’ agreement. The target company’s board will typically
(iii) the target company’s size, industry, assets and liabilities (e.g., have the overarching discretion to determine that a leaver is to
an asset sale structure allows a buyer to “cherry pick” which be treated as a good leaver.
assets and liabilities are to be acquired).
32 Governance Matters
2.3 How is the equity commonly structured in private
equity transactions in your jurisdiction (including 3.1 What are the typical governance arrangements
institutional, management and carried interests)? for private equity portfolio companies? Are such
arrangements required to be made publicly available in
your jurisdiction?
The PE investor will typically subscribe for a combination of
ordinary equity and coupon-accruing preferred securities.
Re-investing/rolling management or the founder will invest in Typical governance arrangements comprise a shareholders’
the same combination (albeit sometimes of a separate class) on agreement, the company’s constitution and management equity
a pari passu basis. The remaining management shareholders will plan rules. None of these arrangements are required to be made
be issued with (usually non-voting) ordinary equity, which vests publicly available in Australia.
over time and/or by reference to certain performance thresholds
pursuant to a management equity incentive plan. 3.2 Do private equity investors and/or their director
Carried interest is structured at fund level and usually ranges nominees typically enjoy veto rights over major
between 20% and 25%. The hurdle rate (minimum annual corporate actions (such as acquisitions and disposals,
return that the limited partners must receive before the general business plans, related party transactions, etc.)? If a
partners are entitled to carried interest) is often set between 6% private equity investor takes a minority position, what
and 10%. veto rights would they typically enjoy?

Yes, the majority of PE investors typically have veto rights over

2.4 If a private equity investor is taking a minority
position, are there different structuring considerations?
all material and/or non-ordinary course matters in relation to
the business.
Where a PE investor takes a minority position, its veto rights
The same drivers listed in question 2.2 above are expected to will be limited to more critical decisions affecting the company,
apply; however, if a PE investor is taking a minority position it and those which protect the value of its investment – e.g., changes
will likely have less control over the choice of acquisition struc- to share capital, fundamental M&A, changes to the company’
ture. The investor might also consider co-investment or consor- dividend policy, changes to key management and changes to the
tium structures with one or more other institutional investors. budget or business plan.

2.5 In relation to management equity, what is the 3.3 Are there any limitations on the effectiveness of
typical range of equity allocated to the management, and veto arrangements: (i) at the shareholder level; and (ii) at
what are the typical vesting and compulsory acquisition the director nominee level? If so, how are these typically
provisions? addressed?

The equity allocated to the management team typically ranges Shareholder Level:
from 5% to 20% of the target company’s total equity – this will ■ Enforceability: Courts may choose not to enforce a
usually be on the higher end of that range where the manage- contractual veto right under a shareholders’ agreement if it
ment team is key to the business’s growth and success. Time- is deemed to be against public policy or if it unreasonably
based vesting is often a feature, with the vesting period usually restrains trade. Any such provisions should be drafted care-
ranging from two to five years. Performance-based vesting can fully considering Australian and common law principles.
also be used, usually linked to financial targets, such as revenue ■ Conflicting Interests: Shareholder veto rights can lead to
or EBITDA growth, or operational milestones. a deadlock. This can be addressed by including alternative
Customary compulsory acquisition provisions include good dispute resolution provisions in the shareholders’ agree-
leaver and bad leaver events (further described in question 2.6 ment, such as mediation, arbitration, or the appointment
below), drag-along rights for the PE investor (exercisable if it is of an independent expert.

Private Equity 2023

6 Australia

Director Nominee Level: 3.6 Are there any legal restrictions or other
■ Fiduciary Duties: Directors must act in the best inter- requirements that a private equity investor should
ests of the company and all of its shareholders. A govern- be aware of in appointing its nominees to boards of
ance protocol should be agreed by shareholders to monitor portfolio companies? What are the key potential risks
and ensure director nominees still act in the best inter- and liabilities for (i) directors nominated by private
ests of the company when exercising any veto rights. A equity investors to portfolio company boards, and (ii)
private equity investors that nominate directors to
nominee director is able to communicate and consult with
boards of portfolio companies?
the nominating shareholder and the shareholders’ agree-
ment typically provides for this.
■ Board Decision-Making: Board decisions will usually Legal requirements include:
require a majority of board members to agree. An indi- ■ a director must be at least 18 years’ old and not be disqual-
vidual director nominee will therefore rarely be able to ified from managing a corporation due to bankruptcy or
unilaterally block decisions at board level. The nomi- previous breaches of the Corporations Act;
nating PE investor will often therefore instead rely on its ■ consent to act as a director, obtain a director identi-
contractual veto rights under the shareholders’ agreement. fication number from the Australian Taxation Office
■ Conflicts of Interest – see question 3.7 below. (“ATO”) prior to notifying the Australian Securities and
Investments Commission (“ASIC”) and subsequently
notifying ASIC of the appointment; and
3.4 Are there any duties owed by a private equity ■ compliance with directors’ duties under the Corporations
investor to minority shareholders such as management
Act and common law.
shareholders (or vice versa)? If so, how are these
typically addressed? Key potential risks and liabilities for:
(i) Nominee directors:
■ Breach of directors’ duties: can lead to civil and
PE investors (as shareholders) generally do not owe direct fidu- criminal penalties, compensation orders, and disquali-
ciary duties to other shareholders, including management share- fication from managing corporations.
holders, and vice versa. However, there are certain situations ■ Insolvent trading: directors may be personally liable
where duties or responsibilities may arise: for debts incurred by the company if they allow it to
■ Director Fiduciary Duties: PE investor or management trade while insolvent. Liability for insolvent trading
shareholder representatives appointed to the board, as cannot be indemnified or insured against under
directors, owe fiduciary duties to the company and must Australian law.
act in the best interests of the company as a whole, which ■ Tax, environmental and occupational health and
includes considering the interests of all other shareholders. safety liabilities: directors can be personally liable for
■ Oppression Remedy: Although it does not create a direct certain liabilities (e.g., unpaid superannuation contri-
duty owed by the PE investor to minority shareholders, butions and workplace incidents).
under the Corporations Act 2001 (Cth) (“Corporations (ii) PE investors that nominate directors to portfolio
Act”), minority shareholders can seek relief if the conduct company boards:
of a company’s affairs, including actions taken by majority ■ Shadow director liability: PE investors who exercise
shareholders, is oppressive, unfairly prejudicial, or unfairly significant control or influence over a company’s board
discriminatory against them. may be deemed a “shadow director” and be subject to
■ Shareholders’ Agreement: This outlines the rights and the same duties and liabilities as a formally appointed
obligations of the shareholders, including vis-à-vis one director.
another.

3.7 How do directors nominated by private equity

3.5 Are there any limitations or restrictions on the investors deal with actual and potential conflicts of
contents or enforceability of shareholder agreements interest arising from (i) their relationship with the party
(including (i) governing law and jurisdiction, and (ii) nominating them, and (ii) positions as directors of other
non-compete and non-solicit provisions)? portfolio companies?

■ Governing Law and Jurisdiction: While parties can Directors must deal with conflicts of interest in compliance with
contractually choose the law and jurisdiction, it is common the Corporations Act and common law fiduciary duties. Ways
for shareholders’ agreements to be governed by the laws to address such conflicts include: (i) disclosure to the board and,
of the relevant Australian state or territory where the in some cases, to shareholders; (ii) abstaining from voting; (iii)
company is incorporated or has its principal place of busi- obtaining board approval of the conflict of interest; and (iv)
ness. This ensures compliance with mandatory local laws establishing independent board committees.
and regulations and simplifies dispute resolution.
■ Non-compete and non-solicit: These provisions must not
42 Transaction Terms: General
unreasonably restrain trade and must therefore (i) be reason-
able, (ii) be designed to protect a legitimate business interest,
and (iii) not be against public interest. Australian courts 4.1 What are the major issues impacting the timetable
for transactions in your jurisdiction, including antitrust,
have the power to “read down” overly broad non-compete foreign direct investment and other regulatory approval
or non-solicitation provisions to make them enforceable. requirements, disclosure obligations and financing
■ Shareholders’ agreements: Shareholders’ agreements issues?
must also comply with general principles of contract law,
such as certainty of terms.
■ ACCC (Australian Competition and Consumer
Commission) approval – a notification to the ACCC

Private Equity 2023

 MinterEllison 7

is voluntary with no minimum threshold requirements. 5.2 What deal protections are available to private
An exemption will generally take the ACCC 21 days to equity investors in your jurisdiction in relation to public
consider and approve. acquisitions?
■ FIRB (Foreign Investment Review Board) approval –
FIRB generally has 30 days from the receipt of the rele- Established deal protection mechanisms available to PE inves-
vant application fee to consider an application for clear- tors include:
ance. This period is often extended by FIRB. ■ exclusivity undertakings by the target, including: (i) a
■ Due diligence – PE investors are increasingly willing to “no-shop”, “no-talk”, “no due diligence” suite of clauses
incur more upfront time and cost to carry out extensive due designed to stop interactions with rival bidders; and
diligence on potential investments, including most recently (ii) matching and notification rights (should a rival bid
with respect to ESG, compliance and cybersecurity. emerge);
■ break fees (limited to 1% of equity value if payable by the
target);
4.2 Have there been any discernible trends in
transaction terms over recent years? ■ accumulation of pre-bid stakes;
■ obtaining a call option over the shares held by one or more
existing shareholders of the target; and
Notable recent trends in the Australian PE market include: ■ public shareholder intention statements, which seek to
■ increased use of warranty and indemnity insurance, often bind other shareholders to taking certain actions in rela-
with limited residual seller liability; tion to a PE sponsor’s bid.
■ fewer conditions precedent to completion or walkaway The target board will generally ensure it retains a “fiduciary
rights in order to maximise deal certainty – usually limited carve-out” so it can pursue superior proposals should they arise.
to mandatory and suspensory regulatory approvals; It may be possible for the PE investor to negotiate a reimburse-
■ increased use of earn-outs and deferred consideration to ment of a proportion of diligence costs incurred in that scenario.
bridge valuation gaps or to mitigate prevailing market PE acquirers should have an incisive deal strategy to respond
uncertainty and/or volatility (including by the use of effectively to shareholder activist tactics. This could include
convertible securities, where conversion ratios are contin- adopting a dual-track structure (i.e., proposing both a scheme
gent on performance criteria); and of arrangement and a takeover bid concurrently) to prevent loss
■ return to structures providing preferred equity with a of momentum, deter the accumulation of blocking stakes and
liquidation preference, as a means of managing volatility minimise interloper risk.
and down-side risk.
62 Transaction Terms: Private Acquisitions
52 Transaction Terms: Public Acquisitions
6.1 What consideration structures are typically
5.1 What particular features and/or challenges apply preferred by private equity investors (i) on the sell-side,
to private equity investors involved in public-to-private and (ii) on the buy-side, in your jurisdiction?
transactions (and their financing) and how are these
commonly dealt with? PE funds typically prefer locked-box consideration structures
(i.e., the consideration is fixed pre-completion by reference to
Public-to-private transactions involve much greater regula- the target’s most recent accounts, subject to protections around
tion, complex strategy and more variables impacting successful value leakage after that reference date), both on the sell-side and
execution than private company transactions. Deal success and the buy-side. This is because PE funds tend to favour price
associated corporate reputations may be influenced by various certainty and simplicity over precision. There is therefore no
factors, including the ability to secure a pre-acquisition interest post-completion adjustment or true-up of funds (as is the case
and to secure exclusivity during due diligence. with the US-style completion accounts consideration structure).
PE transactions will generally be structured as a “friendly”/ In Australia, the locked-box structure is therefore becoming
board-endorsed public takeover bid or scheme of arrangement. increasingly common on PE transactions, particularly exits.
Schemes of arrangement can provide greater flexibility in deal
structures and certainty of outcome; however, the process takes 6.2 What is the typical package of warranties /
around four months (ignoring regulatory requirements). The indemnities offered by (i) a private equity seller, and (ii)
scheme process facilitates the financing required and resulting the management team to a buyer?
security structures, as the outcome is all or nothing and, if
required, a “whitewash” process can be undertaken as part of A PE seller will typically offer a limited set of warranties in rela-
the acquisition process to enable assets of the target can be used tion to title and capacity, solvency, share capital and compliance
as security for the acquisition funding. The cost, availability and with laws. In buyer-friendly transactions, a buyer will ask for
terms of funding these transactions remain a challenge due to warranties relating to the information provided by the seller in
rising inflation and interest rates. the due diligence phase.
A “firm” indicative bid price is usually enough for a target In addition to the above warranties, management sellers will
board to grant access to due diligence. A PE sponsor can obtain provide an extensive suite of business warranties covering, e.g.,
exclusivity, but generally only for a short period to allow the financials, tax, assets and liabilities, IP, data protection, and
PE sponsor to complete due diligence and finalise its bid docu- disputes.
ments (e.g., of up to four weeks). Warranties are given at signing and repeated at completion.
The sale agreement usually includes a general indemnity for
any loss associated with a breach of warranty and a tax indem-
nity covering pre-completion tax liabilities. A buyer may also
negotiate specific indemnities for any known issues identified
in its diligence.

Private Equity 2023

8 Australia

6.3 What is the typical scope of other covenants, 6.6 Do (i) private equity sellers provide security (e.g.,
undertakings and indemnities provided by a private escrow accounts) for any warranties / liabilities, and
equity seller and its management team to a buyer? (ii) private equity buyers insist on any security for
warranties / liabilities (including any obtained from the
management team)?
■ Regulatory covenants: to aid with obtaining the neces-
sary regulatory approvals that are conditions to the
transaction. It is not uncommon for PE sellers to provide security for warran-
■ Gap controls: undertaking not to carry out or consent to ties and liabilities, depending on their relative bargaining power
and perceived risks associated with the transaction. The most
certain non-ordinary course actions being taken in respect
common type of security provided is a holdback of part of the
of the target business between signing and closing.
purchase price (usually 10–25%), typically pursuant to escrow
■ No leakage indemnity (where the transaction is a
arrangements. Sponsor guarantees are uncommon and, if ever
locked-box structure).
given, will be limited in scope (for example, in favour of the
■ Non-compete covenants: for up to five years following
lenders).
completion; however, in the case of a PE seller (as opposed
to the management team), the scope of such non-compete
will typically be narrower and more specific, and of a shorter 6.7 How do private equity buyers typically provide
duration. comfort as to the availability of (i) debt finance, and (ii)
equity finance? What rights of enforcement do sellers
typically obtain in the absence of compliance by the
6.4 To what extent is representation & warranty buyer (e.g., equity underwrite of debt funding, right to
insurance used in your jurisdiction? If so, what are the specific performance of obligations under an equity
typical (i) excesses / policy limits, and (ii) carve-outs / commitment letter, damages, etc.)?
exclusions from such insurance policies, and what is the
typical cost of such insurance? Debt finance – PE buyers typically provide financing letters
or term sheets from their lenders as evidence that they have
There has been significant increased use of buy-side W&I insur- secured debt financing for the transaction. Failure to complete
ance on PE deals over recent years. The retention typically due to the inability to secure debt financing will give rise to a
ranges from 0.5% to 1% of the deal value. Policy limits depend damages claim by the seller against the buying entity under the
on the transaction size and parties’ risk appetite, but usually sale agreement. In rarer cases (where there is a high financing
range from 10% to 30% of the deal value. risk and/or on a competitive sale process), the PE seller may
Customary exclusions from the policy include known risks, agree to paying a break fee in that scenario.
fraud, purchase price adjustments and earn-outs, secondary tax Equity finance – PE buyers often provide equity commit-
liabilities, environmental liabilities, underfunded pension plans, ment letters from their fund or investors whereby the funds
and employee underpayments. The policy period is usually undertake to provide the necessary equity financing for the
for up to seven years for title and capacity warranties and tax transaction. The letters are typically addressed to the buying
warranties and three years for other warranties. entity and not the sellers directly, meaning in the event of a
Pricing is usually broken down into: (i) premium – usually breach the seller’s recourse will be limited to the remedies avail-
1% to 3% of the policy limit; (ii) underwriting fees – ranging able under the sale agreement against the buying entity (e.g., a
damages claim or seeking specific performance).
from A$25,000 to A$50,000 or more for larger or more complex
transactions; (iii) broker fees – ranging from 0.5% to 1.5% of the
policy limit; and (iv) GST (10%). 6.8 Are reverse break fees prevalent in private equity
transactions to limit private equity buyers’ exposure? If
so, what terms are typical?
6.5 What limitations will typically apply to the liability
of a private equity seller and management team under
warranties, covenants, indemnities and undertakings? Reverse break fees are not common in PE transactions, espe-
cially compared to public M&A transactions. If employed, the
trigger events will typically be limited (e.g., only if the buyer is
A seller’s liability will typically be limited to the purchase price unable to obtain financing or obtain the necessary regulatory
(in the case of title and capacity warranties) or a percentage of approvals), and the fee amount will be a percentage of the trans-
the purchase price (in the case of business warranties or other action value. The reverse break fee will usually be stipulated to
undertakings – usually between 20% and 60%). Where W&I be the buyer’s exclusive remedy under the sale agreement.
insurance is being taken out, the management team’s residual
liability (if any) can be capped at a much lower amount. The
72 Transaction Terms: IPOs
business warranties will also be subject to disclosure prior to
signing, but not between signing and completion.
Liability under a no leakage indemnity, tax indemnity or 7.1 What particular features and/or challenges should
a private equity seller be aware of in considering an IPO
specific indemnity will typically not be capped. A de minimis and exit?
basket on claims (other than in relation to fundamental warran-
ties, leakage claims or indemnities) are common, ranging between
0.05% to 0.1% and 0.5% to 1% of enterprise value, respectively. Challenges a PE seller may face include:
Time limitations on claims will typically be seven years for ■ An IPO may not immediately lead to a full exit of the PE
fundamental and tax warranties, 24–36 months for business seller’s interest in the portfolio company. Depending on
the circumstances, a PE shareholder may need to retain
warranties, and three to 12 months for leakage warranties.
a stake and be subject to market risk and escrow restric-
No limitations will apply in the case of fraud.
tions (see question 7.2 below). Shares subject to voluntary
escrow are not counted towards the minimum 20% free
float required for admission to the ASX.

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 MinterEllison 9

■ A PE seller’s ongoing interests and any associated transac- Acquisition financing packages traditionally feature an amor-
tions or arrangements will be subject to prospectus disclo- tising term loan A, bullet term loan B, a revolving facility (for
sure and public scrutiny. working capital) and sometimes as needed, capital expenditure/
■ Volatility in market conditions can create significant risk acquisition facilities. Where loans are of a sufficient size, they
to a successful exit through an IPO. There exist certain will most commonly be provided by a syndicate of financiers.
“windows” in market conditions where sponsoring The syndicated loan market reached a new high in 2022 with
brokers/underwriters will support floats to occur, and so $140 billion in loans, as Australian sponsors relied significantly
timing a business to be ready for exit in a manner that more on syndicated loans than corporate bond issuances.
aligns with an ECM window can be difficult. On larger acquisition financing packages, mezzanine loans
■ Heightened regulatory scrutiny may create greater uncer- are often also included, with a trend for that mezzanine funding
tainty on the IPO exit. to be at a level higher than the borrower or obligor group for
■ Ensuring adequate insurances are in place to help mitigate the senior loans.
IPO risks is vital (e.g., D&O cover). The private credit market has also become a vital source of
■ Pricing and post IPO share price performance are key debt financing due to its flexibility and customisation, with loans
reputational matters for sponsors. from private lenders often providing greater quantum and more
flexible terms than the syndicated bank market. The growth
7.2 What customary lock-ups would be imposed on of private credit has also given rise to other forms of financing
private equity sellers on an IPO exit? packages, with unitranche loans (being a hybrid of a senior and
subordinated loan as a single loan) increasing in popularity.
Increased demand has resulted in alternative lenders, institu-
PE sellers may be subject to escrow arrangements that are ASX
tional investors and credit funds allocating capital to private
imposed or voluntarily agreed with the company (to make the
debt strategies and contributing to growth in the acquisition
IPO more attractive to investors). Voluntary escrow may be
financing market.
required by underwriters or sponsoring brokers as a condition
While corporate bond issuances are also available to finance
to their involvement in the IPO.
PE transactions (primarily through international high-yield
If shares are subject to mandatory escrow, restriction agree-
markets), they remain a small proportion of the financing pack-
ments are signed by the shareholder, subject to an escrow period
ages used by Australian sponsors and companies for acquisition
of up to 24 months from the date of quotation. The terms and
financings.
period of escrow under voluntary escrow arrangements are
negotiated between the relevant parties.
8.2 Are there any relevant legal requirements or
restrictions impacting the nature or structure of the debt
7.3 Do private equity sellers generally pursue a dual- financing (or any particular type of debt financing) of
track exit process? If so, (i) how late in the process are
private equity transactions?
private equity sellers continuing to run the dual-track,
and (ii) were more dual-track deals ultimately realised
through a sale or IPO? Relevant legal requirements or restrictions include:
■ the general prohibition under the Corporations Act on
The dual-track process is utilised by PE sellers with the aim of companies providing financial assistance for acquiring
maintaining competitive tensions and maximising the exit price their own shares or shares in a holding company, subject
for their investment, and because it is difficult to predict whether to specific exceptions (e.g., if it does not materially preju-
the IPO “window” will be open when it is ready to launch. The dice the company’s interests, is part of an employee share
final exit route will then depend on market volatility and other scheme, or is provided by a company without subsidiaries
circumstances but is more commonly through a private sale and not a holding company);
process where valuations are acceptable and to avoid the risks ■ the Australian Foreign Acquisitions and Takeovers Act
and uncertainty associated with launching an IPO process. 1975 (Cth), which regulates the making of investments by
How long PE sellers continue to run a dual-track exit process foreign persons in Australian companies and assets. In
will depend on the point at which the PE seller receives an particular, the provisions can impact the security package
acceptable private offer. The dual-track process and timetable (particularly where it involves real property) and the iden-
will be structured for tactical considerations and to co-ordinate tity of the lending entity; and
specific milestones, and typically end upon signing a sale agree- ■ Australia’s insolvency regime (including ipso facto provisions),
ment with the selected purchaser or an IPO underwriting agree- “administration risk” and corporate benefit requirements.
ment with the underwriter/sponsoring broker.
8.3 What recent trends have there been in the debt-
82 Financing financing market in your jurisdiction?

8.1 Please outline the most common sources of debt We anticipate economic headwinds that will continue to impact
finance used to fund private equity transactions in your the leveraged finance market over the next 12 months, and
jurisdiction and provide an overview of the current state
tighter lending conditions from major banks.
of the finance market in your jurisdiction for such debt
(including the syndicated loan market, private credit
The growing prominence of ESG factors coincides with the
market and the high-yield bond market). rise of sustainability-linked loans, where borrowers are incentiv-
ised to achieve predetermined ESG-related targets for improved
pricing or other benefits. See question 8.1 above for other
The most common sources of debt finance used to fund PE
notable recent trends.
transactions in Australia are the international and domestic
banks and, more recently, private credit, non-bank and institu-
tional lenders.

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10 Australia

There are also several common investment structures used

92 Alternative Liquidity Solutions in PE that may provide additional flexibility or tax concessions
(e.g., unit trusts or venture capital limited partnerships).
9.1 How prevalent is the use of continuation fund
vehicles or GP-led secondary transactions as a deal type
in your jurisdiction? 10.2 What are the key tax-efficient arrangements that
are typically considered by management teams in private
equity acquisitions (such as growth shares, incentive
Continuation fund deals have become more prevalent in shares, deferred / vesting arrangements)?
Australia over the last 12 months, following long-term trends
in Europe and the US. Secondary transactions led by general
In Australia, management teams are commonly incentivised
partners have become an integral feature of Australia’s second-
through an “employee share scheme”, which provides for the
aries market, representing almost half of all secondary transac-
issue of shares or options to acquire shares in a target entity.
tions. Now that some of the largest domestic PE firms (as well
While participants in an “employee share scheme” are generally
as international PE firms) have successfully implemented such
taxed on revenue account on the discount to market value of their
transactions in Australia, we expect familiarity with and the use
options or shares, where certain conditions are met the tax liability
of such vehicles to significantly increase in the market in the
may be deferred to a later date. Generally, the income tax conse-
short to medium term.
quences are borne by the participant and no withholding applies.
Other structures such as “loan funded shares” or “premium
9.2 Are there any particular legal requirements or priced options” are commonly used in PE as, where structured
restrictions impacting their use? correctly, the “employee share scheme” rules should not apply to
those interests, and those interests will be held on capital account.
There are no specific legal requirements or restrictions that Phantom equity is not commonly used in Australia, as
directly impact their use in Australia. However, their use will payments under a phantom equity plan are generally treated as
indirectly be impacted by: (i) regulations under the Corpora- salary and wages and have associated withholding and superan-
tions Act (regarding reporting, disclosure and fiduciary duties); nuation obligations.
and (ii) provisions under the relevant fund constitutions or
limited partnership agreements, e.g., specific approval require- 10.3 What are the key tax considerations for
ments and dealing with conflicts of interest. management teams that are selling and/or rolling over
part of their investment into a new acquisition structure?
102 Tax Matters
A key tax consideration for management who are rolling over into
10.1 What are the key tax considerations for private a new structure will be whether capital gains tax “rollover relief ”
equity investors and transactions in your jurisdiction? (for example, “scrip for scrip rollover relief ”) is available. Where
Are off-shore structures common? the conditions for “rollover relief ” are met, managers can defer
paying tax on the disposal of their interest in the original entity
The tax treatment of payments from an investee company to the until they dispose of the interest received in the new structure.
investor will depend on whether the investment has been made Where the interests held by managers are subject to the
by way of debt or equity: Australian “employee share scheme” rules, additional specific
■ In the case of equity, dividends sourced from Australian “rollover relief ” provisions, which are more prescriptive than the
profits that have been subject to tax in Australia can gener- usual “scrip for scrip” conditions, can apply.
ally be franked (i.e., sourced only from profits that have Managers will want to ensure the transaction does not
been subject to tax) such that no dividend withholding tax inadvertently trigger an unfunded Australian tax liability for
applies on the payment of that dividend to a shareholder managers, particularly where there is no cash component to the
that is a non-resident of Australia. rollover available to fund any such liability.
■ Where the investment is structured as debt, assuming the Where managers sell their interests and do not reinvest into
debt deductions are not denied (e.g., under the applicable a new structure, relevant Australian tax considerations include
thin capitalisation, transfer pricing and anti-hybrid rules), whether the gain is taxable on capital or revenue account, and
the tax rate would be limited to interest withholding tax of whether a capital gains tax discount is available (for interests
10% (subject to any relevant tax treaty). held by Australian residents, the taxable gain can be reduced
Off-shore structures are relatively common as capital gains by up to 50% where an interest has been held in an individual
capacity for at least 12 months).
and losses made by a non-resident are not assessable where the
disposal does not relate to taxable Australian property.
However, the ATO generally considers the disposal of invest- 10.4 Have there been any significant changes in tax
ments by PE investors to be on revenue account. Where this legislation or the practices of tax authorities (including
is the case, a key consideration is whether the gain made on in relation to tax rulings or clearances) impacting private
disposal has an Australian source. Where a tax treaty applies, equity investors, management teams or private equity
transactions and are any anticipated?
usually the gain will only be taxable in Australia where it is
derived through a permanent establishment that the investor
has in Australia. Significant changes are proposed to be made to Australia’s thin
Depending on the assets held by an investee company, an capitalisation rules. If implemented, the new measures will
Australian buying entity may be attractive as it may be possible apply (with retrospective effect) to income years commencing
to elect to form an income tax consolidated group and reset the on or after 1 July 2023 and broadly:
tax cost bases of certain underlying assets, which may give rise ■ limit an entity’s net debt deductions to 30% of its tax
to additional depreciation deductions or provide benefits in the BITDA. Any denied deductions under this new test can
context of a future asset sale. be carried forward subject to a carry forward regime;

Private Equity 2023

 MinterEllison 11

■ allow debt deductions where those deductions relate to 11.2 Are private equity investors or particular
expenditure attributable to genuine third-party debt, transactions subject to enhanced regulatory scrutiny in
subject to satisfying certain conditions; your jurisdiction (e.g., on national security grounds)?
■ allow an entity in a group to claim debt-related deductions
up to the level of the worldwide group’s net third-party Yes, foreign investment approval to transactions will be required
interest expense as a share of earnings; and for PE investors who are:
■ disallow deductions of an entity that are incurred in rela- ■ “private foreign investors”;
tion to a “debt creation scheme”. ■ “foreign government investors”;
In June 2018, the ATO issued guidance in relation to the ■ investing in a “national security business” or in a “national
corporate tax residency tests such that a foreign incorporated security land”, regardless of the value of the relevant asset;
company that has its Central Management and Control in and/or
Australia is considered to be an Australian tax resident, even if ■ investing in certain other businesses (e.g., an “Australian
it does not carry on any other business in Australia. The tran- Media Business” or land transactions of different catego-
sitional period ends on 30 June 2023, following which ATO ries), subject to a range of specific thresholds and approval
compliance activity in respect of foreign incorporated entities requirements.
with Australian management is likely to increase.
Other recent measures that may impact the PE industry include:
■ the hybrid mismatch rules that apply from 1 January 2019; 11.3 Are impact investments subject to any additional
■ the announcement of a 15% global minimum tax and legal or regulatory requirements?
domestic minimum tax, intended to apply for income years
starting on or after 1 January 2024; and There are no additional legal/regulatory requirements that apply
■ the announcement of a specific measure to prevent a specifically to impact investments as yet. However, the following
company from attaching franking credits to distributions general regulations may be relevant to impact investments:
made outside of the company’s normal dividend cycle, where ■ green and social washing can result in Australian regu-
the distributions are funded by a capital raising that results in lators pursuing pecuniary penalties and/or strategic liti-
the issue of new shares, to apply from 15 September 2022. gants bringing a claim against a portfolio company for
misleading or deceptive conduct;
112 Legal and Regulatory Matters ■ the Australian Financial Services Licensing (“AFSL”)
provisions in the Corporations Act can be relevant to the
issue of and dealing in impact investments that constitute
11.1 Have there been any significant legal and/or
regulatory developments over recent years impacting “financial products”, which may require the obtaining of a
private equity investors or transactions and are any licence or use of licensed advisors in relation to an issue of
anticipated? an impact investment. Issues are often structured as offers
to sophisticated or wholesale investors to avoid the higher
Yes, the most significant recent developments relate to the regulatory burdens associated with retail issues; and
expansion of Australia’s foreign investment review regime and ■ structuring sustainability-themed or impact-labelled finan-
the transactions that have become subject to it, including: cial products will require adherence to relevant design,
■ the introduction of a new national security test, the disclosure and assurance frameworks, such as Global Impact
concepts of “national security business” and “national Investing Network (“GIIN”) or the IFC’s Operating
security land” and the call in and last resort powers for the Principles for Impact Management.
Australian Treasurer ( January 2021); The Australian Federal Government has also committed
■ expansion of the definitions of “critical infrastructure asset” to introduce standardised, internationally aligned reporting
and “national security business” and, in turn, the scope of requirements for businesses to make disclosures regarding
transactions requiring FIRB approval (December 2021); climate-related governance, strategy, risk management, targets
■ changes to the threshold interest in an Australian media and metrics. The key requirements, timing and consequences of
business that requires mandatory approval (first half of non-compliance are yet to be confirmed by Treasury.
2022);
■ the doubling of filing fees for applications for foreign 11.4 How detailed is the legal due diligence (including
investment approval, increasing the maximum fee payable compliance) conducted by private equity investors prior
for a single action from A$522,500 to A$1,045,000 ( July to any acquisitions (e.g., typical timeframes, materiality,
2022); and scope, etc.)?
■ the indexing of the monetary screening thresholds on 1
January 2023 (as done on 1 January of each year). The level of due diligence conducted by PE investors in Australia
Anticipated developments include: is usually comprehensive and undertaken by external advisers,
■ increased reporting obligations for foreign persons on or comprising reporting on legal, tax, financial/accounting, tech-
after 1 July 2023 by notification to the ATO of certain nical, commercial, IT systems, cyber, business risk and (increas-
events (whether or not such events are subject to FIRB ingly) ESG. Due diligence investigations commonly last
approval) in connection with the proposed new Register between 30 and 60 days. On competitive processes, the time-
of Foreign Ownership of Australian Assets; and span is much shorter and dictated by bid deadlines.
■ the Treasury’s increased focus on non-compliance by The scope of legal due diligence in Australia will commonly
foreign persons with their statutory reporting obliga- cover:
tions that may result in the increased issue of infringement ■ group structure and share/asset ownership;
notices and pursuit of civil penalties for contraventions. ■ financial obligations/liabilities and security;
■ key terms of material contracts and employment contracts,
and compliance with superannuation obligations;

Private Equity 2023

12 Australia

■ real property; ■ PE investors may be subject to certain environmental

■ intellectual property; and tax liabilities, if they have contributed to or been
■ IT, cybersecurity and data privacy; involved in such breaches and/or tax avoidance; and
■ material litigation; and ■ PE investors may be liable for insolvent trading by a
■ regulatory and compliance. company if they have breached their duties as directors
Diligence will almost always be conducted on a “red flag” and/or allowed the company to trade while insolvent.
or “exceptions only” basis. Materiality thresholds can be quan- (ii) In general, one portfolio company cannot be held liable for
titative (set by reference to a percentage of the target’s annual the liabilities of another portfolio company, as each company
revenue or EBITDA) as well as qualitative (otherwise likely to operates as a separate legal entity with limited liability.
impact on the target’s operations or reputation, or the PE inves- However, there are limited (and rare) exceptions to this:
tor’s decision to proceed with the transaction). Where W&I ■ piercing the corporate veil, certain environmental
insurance is being taken out, quantitative materiality thresholds liabilities and occupational health and safety matters,
are typically set to be in line with the proposed de minimis on and insolvent trading (see point (i) above);
claims under the policy. ■ cross-guarantees between portfolio companies;
■ joint ventures or partnerships entered into between
one or more portfolio companies; and
11.5 Has anti-bribery or anti-corruption legislation
impacted private equity investment and/or investors’ ■ it is common for wholly owned Australian port-
approach to private equity transactions (e.g., diligence, folio companies to form a consolidated group for tax
contractual protection, etc.)? purposes; therefore, each member is liable for each
other member’s tax liability by virtue of being a member
of the consolidated group.
Each of Australia’s jurisdictions has anti-corruption legislation
under statute and common law that address bribery and corrup-
tion. It is therefore common for PE investors to require warran- 122 Other Useful Facts
ties in sale agreements covering bribery and corruption-related
risk. PE investors will also often conduct due diligence inves- 12.1 What other factors commonly give rise to concerns
tigations to identify any issues and/or the policies and proce- for private equity investors in your jurisdiction or should
dures that a target entity has in place to ensure its officers or such investors otherwise be aware of in considering an
employees do not engage in bribery or corruption, and how any investment in your jurisdiction?
identified issues are addressed. The level of due diligence inves-
tigations conducted will vary depending on the nature and of Overall, Australia’s stable political and economic environment,
the business and how likely the risk of bribery and corruption is strong financial sector, rich natural resources, proximity to Asia,
in the target’s industry and geography. and diversified economy make it an attractive market for inves-
tors looking for stable and long-term investment opportuni-
ties across numerous asset classes such as healthcare, mining,
11.6 Are there any circumstances in which: (i) a private
equity investor may be held liable for the liabilities of
finance, technology property, and infrastructure. Australia
the underlying portfolio companies (including due to also has strong trade and investment links with the rest of the
breach of applicable laws by the portfolio companies); Asia-Pacific region, and its close ties with countries such as
and (ii) one portfolio company may be held liable for the China and Japan have led to significant investment flows.
liabilities of another portfolio company?
Acknowledgments
(i) In general, shareholders are not liable for the liabilities of
Geoff Earle, a corporate and acquisition finance partner at
the company to which their shares relate. However:
MinterEllison, Michael Scarf, a corporate M&A partner at
■ courts may “pierce the corporate veil” where there
MinterEllison, Ron Forster, a corporate M&A partner at
has been fraud or improper conduct, e.g., a company
MinterEllison, Adrian Varrasso, a tax partner at MinterEllison,
is established as a sham and not for trading purposes,
and Keith Rovers, head of sustainable finance at MinterEllison,
but to avoid fulfilling its legal obligations;
all contributed to this chapter.

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 MinterEllison 13

Kimberley Low is a Corporate and M&A Partner and Head of the PE practice at MinterEllison. She has extensive experience acting as lead
adviser to both global and domestic financial sponsors and their portfolio companies on a broad range of complex cross-border M&A trans-
actions, particularly in the technology, consumer and services sectors. Prior to joining MinterEllison, Kimberley was a lead member of the PE
team at “Magic Circle” law firm Linklaters in London, and also Hong Kong. She is qualified to practise in both England and Wales and New
South Wales (University of Sydney).

MinterEllison Tel: +61 403 164 863

40 Governor Macquarie Tower Email: kimberley.low@minterellison.com
1 Farrer Pl URL: www.minterellison.com
Sydney NSW 2000
Australia

Michael Wallin leads the MinterEllison London Corporate practice, advising UK, European and US clients on a wide range of Australian
related corporate law matters, focusing particularly on Foreign Direct Investment in Australia, including cross-border mergers, acquisitions
and disposals, PE investments, financial services and securities law-related matters. Minter Ellison are the leading Australian independent
law firm advising international investors, businesses and financial institutions on their investment activities in Australia. His longstanding
experience of the London and European markets enables him to help clients navigate the different legal systems and market practices that
often arise in multi-jurisdiction transactions.

MinterEllison Tel: +44 207 429 2784

6 Dowgate Hill Email: michael.wallin@minterellison.com
London EC4R 2SU URL: www.minterellison.com
United Kingdom

Nick Kipriotis is an M&A Partner at MinterEllison, based in Sydney. He has advised domestic and international sponsors and their portfolio
companies, as well as corporates and strategics, on M&A transactions, joint ventures and other equity investments. Key sectors in which
Nick has significant experience include construction & engineering, consumer & retail and services. He is qualified to practise in New South
Wales, Australia.

MinterEllison Tel: +61 2 9921 4533

40 Governor Macquarie Tower Email: nick.kipriotis@minterellison.com
1 Farrer Pl URL: www.minterellison.com
Sydney NSW 2000
Australia

MinterEllison is a top-tier, full-service multinational legal and consulting solutions that assist clients in achieving their business objectives. The
firm. It is regarded as one of Asia-Pacific’s leading law firms and is known firm won M&A National Law Firm of the Year at the IFLR Asia-Pacific
as one of the Big Six law firms in Australia. With nearly 200 years in busi- Awards in 2022.
ness, MinterEllison has a proud history of creating lasting impacts with its www.minterellison.com
clients, its people and its communities. The firm’s clients include PE firms,
government departments and agencies, private and publicly listed compa-
nies, and small and large businesses, both in Australia and overseas. The
firm has 13 offices in five countries, being Australia, New Zealand, London,
China and Hong Kong. With more than 250 partners and 1,200 legal staff,
by number of lawyers it is the largest law firm in Australia. MinterEllison
has been independently recognised amongst the world’s best for the firm’s
strong technical skills, as well as its ability to deliver commercially practical

Private Equity 2023

 14 Chapter 3

Austria
Austria

Florian Philipp Cvak

Schindler Attorneys Clemens Philipp Schindler

12 Overview 1.3 Are you seeing any types of investors other

than traditional private equity firms executing private
equity-style transactions in your jurisdiction? If so,
1.1 What are the most common types of private equity please explain which investors, and briefly identify any
transactions in your jurisdiction? What is the current significant points of difference between the deal terms
state of the market for these transactions? offered, or approach taken, by this type of investor and
that of traditional private equity firms.
Austria has seen the full spectrum of private equity transactions.
In the large-cap (buyout) segment (deal values of EUR 100 We have seen a significant increase in investment holding
million and above) the main trend over the last few years was the activity over the last two to three years, which mainly comes
increased use of vendor due diligence and warranty and indem- from Germany. Investment holdings tend to have an entrepre-
nity insurance as well as the increased interest of debt funds neurial background and their capital is usually sourced from
to finance the term loan facilities in leveraged buyout trans- entrepreneurial families only. The main difference to tradi-
actions (“LBO”). In terms of sectors, there was no discern- tional private equity is their evergreen structure, which allows
ible trend. This is mainly due to the limited number of trans- them to remain invested for the long term and puts less focus
actions within that segment. In the mid-cap (buyout) segment on drag and exit provisions. Their entrepreneurial background
(comprising deals with values between EUR 10 million and often gives them a competitive advantage in auctions where
EUR 100 million, which make up the vast majority of Austrian family-owned businesses are up for sale.
deals) and typically target family- or founder-owned businesses,
tax-optimised roll-over structures were often used, which allow 22 Structuring Matters
founders or other sellers to reinvest part of the sale proceeds. In
terms of sectors, technology, healthcare, industrials and business
2.1 What are the most common acquisition structures
services accounted for most of the deal flow in this segment. adopted for private equity transactions in your
Another trend that continued is increased activity in the growth jurisdiction?
capital segment and the venture capital segment, where corpo-
rate accelerator and venture capital funds are becoming increas-
The typical onshore acquisition structure involves one or more
ingly active, causing significant competition for traditional
holding companies (“HoldCos”) and an acquisition vehicle
venture capital funds. Investors from Asia (in particular, China
(“BidCo”), which then enters into the purchase agreement and
and India) are also regularly playing significant roles.
acquires the shares. From a tax perspective, this multi-layer
On the debt side, debt funds have become increasingly
holding structure is no longer necessary (see question 2.2). In lever-
active over the last years, offering a wide array of instruments,
aged transactions, interim holding companies are, however, often
ranging from growth capital, stressed financing, and acquisition
still needed as senior lenders typically insist that junior lenders lend
financing to bridge loans and DIP loans.
a level higher in the structure to achieve structural subordination.
Private equity funds will usually try to maximise debt in the
1.2 What are the most significant factors currently financing structure for a transaction. The difference between
encouraging or inhibiting private equity transactions in available debt and the purchase price is financed by the fund
your jurisdiction? through a combination of debt (so-called “institutional debt”) and
equity. How much institutional debt can be employed is deter-
Austrian companies often have substantial CEE exposure, which mined by “thin cap” rules. While there are no statutory rules,
is perceived as an opportunity by some private equity funds, but debt-to-equity ratios of 3:1 to 4:1 are generally accepted.
it is an issue for other funds who must not invest in targets in Where bank debt is employed, the target company is usually
the CEE, or with considerable CEE exposure, pursuant to their required to accede to the financing documents on an exclusive
investment mandate. With the CEE markets maturing, we have lender basis (to avoid structural subordination to existing lenders)
seen this becoming a lesser issue over the last couple of years and to grant guarantees and security interests securing acquisition
for most funds. However, due to the latest political uncertain- debt, as well as the refinanced target company debt on or shortly
ties and the war in Ukraine there is a change in momentum and after completion. To the extent that guarantees and security inter-
investors are putting more emphasis on country risk and poten- ests secure acquisition debt, capital maintenance and, where a
tial related sanctions. joint-stock company (“JSC”) is involved, financial assistance rules
are a concern. Transactions violating capital maintenance rules

Private Equity 2023

 Schindler Attorneys 15

are null and void between the parties as well as any third party upon termination of the manager, with consideration varying
(e.g. the financing bank) if that third party knew, or should have depending on the reason for termination (a “good” or a “bad”
known, of the violation. In addition, the members of the manage- leaver), although structures have become less aggressive in that
ment and supervisory board who approved the transaction may regard due to recent developments in Austrian labour and tax
be subject to liability. Transactions violating financial assistance law. In addition, the private equity fund will require a right to
rules, on the other hand, are not void but may result in the liability drag-along the management shares upon an exit and will often
of the members of the management and supervisory board who insist on pooling of the management shares in a pooling vehicle
approved the transaction. Both issues are usually addressed in (often a partnership).
the financing documents by “limitation language”, which limits
the obligations of Austrian obligors to an amount and terms
compliant with capital maintenance and financial assistance rules. 2.6 For what reasons is a management equity holder
usually treated as a good leaver or a bad leaver in your
jurisdiction?
2.2 What are the main drivers for these acquisition
structures?
In their simplest form, good and bad leaver provisions refer
to employment law and treat a manager as a bad leaver if he
The main drivers for the acquisition structures described under is dismissed (entlassen) by the company for good cause or if he
question 2.1 are onshore tax groups and structural subordina- resigns on his own initiative without cause (ohne wichtigen Grund).
tion of junior lenders (see above). Any Austrian HoldCos and More sophisticated provisions specifically define good leaver and
BidCos can enter into a tax group with the target company bad leaver cases (this includes dismissal for pre-defined “causes”,
allowing for a set-off of interest expenses at the HoldCo (or which covers felonies against the company, such as fraud or
BidCo) levels with the taxable profits of the target company (for embezzlement, and breaches of material obligations). Resigna-
a more detailed discussion, please see questions 10.1 and 10.4). tion without cause is typically seen as a bad leaver case unless the
manager has “good reasons” for his resignation (e.g. health, relo-
2.3 How is the equity commonly structured in private cation). Attaining retirement age, death or permanent incapacity
equity transactions in your jurisdiction (including or disability are typically seen as good leaver case.
institutional, management and carried interests)?
32 Governance Matters
Institutional equity is usually given offshore and passed onto the
Austrian HoldCo and BidCo structure through (direct or indi- 3.1 What are the typical governance arrangements
rect) capital contributions or shareholder loans. for private equity portfolio companies? Are such
Management equity is often given in the form of actual shares, arrangements required to be made publicly available in
either in the target company itself (or the entity in which the exit your jurisdiction?
is expected to occur) or shares in entities further above. From
a tax perspective, actual shares (and certain other equity inter-
The governance documents typically include:
ests) may have benefits relative to phantom stock and contrac-
■ a shareholders’ agreement;
tual bonus scheme arrangements, as gains realised upon an exit
■ new articles of association; and
may be eligible for capital gains taxation.
■ by-laws for the management board and supervisory board
(if any).
2.4 If a private equity investor is taking a minority The main areas of concern in the governance documents are
position, are there different structuring considerations? the private equity fund’s rights to appoint sponsor representa-
tives (and/or observers) to the supervisory board (if any) or advi-
Private equity investors taking a minority position typically insist sory board (if any), sponsor representative liability, D&O and
on new governance documents (for a description, see question 3.1). conflicts of interest, veto rights of the fund (and/or the sponsor
Where that request is rejected, the investor must carefully analyse representative) (see question 3.2), dilution protection for the
what rights are available to him following completion under the fund, a liquidation preference or exit waterfall, restrictions on
existing governance documents and, where necessary, request dealings with shares (typically including a lock-up, rights of first
amendments. In that process, it is important to become familiar refusal, tag-along, and drag-along rights), exit rights for the fund
with the minority protections already available under the law, (via a trade sale, an initial public offering (“IPO”) or a shotgun
which of them are mandatory, which of them can be amended to mechanism) as well as reporting, information and access rights.
the benefit of minority shareholders only, and which of them can On platform deals, it is also important to secure that the deci-
be amended without restriction. The types of available minority sion on if and when acquisitions are made rests with the fund
protections differ, but, generally, protection includes informa- and that this cannot be blocked by the other shareholders.
tion rights, rights to call a shareholders’ meeting, quorum, and In the majority of cases, the fund will also insist that senior
voting requirements for major corporate actions (such as corpo- management signs up to an incentive scheme (see question 2.3)
rate restructurings, a change of the company’s purpose, changes and that all of the management team (and sometimes also certain
to the articles of association, dealings involving all or substantially other key personnel) enter into new employment agreements.
all of the business or assets, and squeeze-outs of shareholders). To the extent the above arrangements are included in the arti-
cles of association (which has some benefits for some (but not
2.5 In relation to management equity, what is the all) of them from an enforcement perspective (see question 3.3)),
typical range of equity allocated to the management, and they are publicly accessible through the companies register. In
what are the typical vesting and compulsory acquisition addition, certain arrangements may have to be disclosed under
provisions? Securities Law requirements.

Management equity is typically subject to vesting over a period

of three to five years. Compulsory transfer provisions apply

Private Equity 2023

16 Austria

3.2 Do private equity investors and/or their director 3.5 Are there any limitations or restrictions on the
nominees typically enjoy veto rights over major contents or enforceability of shareholder agreements
corporate actions (such as acquisitions and disposals, (including (i) governing law and jurisdiction, and (ii)
business plans, related party transactions, etc.)? If a non-compete and non-solicit provisions)?
private equity investor takes a minority position, what
veto rights would they typically enjoy?
Shareholders’ agreements are typically governed by Austrian
law and the competent courts at the seat of the company typi-
The governance documents will typically include veto rights of the cally have jurisdiction. This is mainly because disputes related
private equity fund (and/or a sponsor representative on a super- to shareholders’ agreements are usually supported by arguments
visory board or advisory board) over major corporate actions and based on Austrian corporate law and corporate law disputes
strategic decisions (such as acquisitions and disposals, major liti- must be brought before the courts at the seat of the company.
gation, indebtedness, changing the nature of the business, busi- However, where Austrian court judgments are not enforce-
ness plans and strategy), although the specific requirements vary able in the jurisdiction of a particular shareholder, arbitration is
widely from fund to fund and deal to deal. Usually, such veto sometimes agreed as an option.
rights are structured to fall away if the relevant fund’s interest is Non-compete and non-solicitation provisions are generally
reduced below a certain threshold. Where multiple private equity enforceable for the period of the shareholding (for that period,
funds invest, they will generally insist that all investors agree and contractual restrictions compete with the corporate law-based
vote on a set of veto matters, with quorum and majority voting duty of loyalty (see question 3.4)), and for up to two (in excep-
requirements varying widely from deal to deal. tional cases, three) years thereafter. Where a shareholder was
also an employee (which could be the case for management
3.3 Are there any limitations on the effectiveness of shareholders), the restriction will also be scrutinised under
veto arrangements: (i) at the shareholder level; and (ii) at employment law and is generally only valid for a period of up to
the director nominee level? If so, how are these typically one year and to the extent that the restriction does not unduly
addressed? limit the employee’s future prospects. If backed up by a contrac-
tual penalty, only its payment can be requested (but not the
If a veto (or majority) requirement is included in the articles of employee’s compliance).
association (and/or by-laws), resolutions violating the arrange-
ment can be challenged. In contrast, if a veto right (or majority 3.6 Are there any legal restrictions or other
requirement) set forth in the shareholders’ agreement is violated, requirements that a private equity investor should
only actions for damages and cease and desist orders are avail- be aware of in appointing its nominees to boards of
able. It should be noted, however, that in one decision the portfolio companies? What are the key potential risks
Austrian Supreme Court also accepted a challenge of a share- and liabilities for (i) directors nominated by private
holders’ resolution in breach of a majority requirement set equity investors to portfolio company boards, and (ii)
private equity investors that nominate directors to
forth in a shareholders’ agreement, where all shareholders were
boards of portfolio companies?
party to the agreement. This will usually be the case in private
equity transactions where the shareholders’ agreement typically
provides for a mandatory accession clause. Regarding manage- Austria has a two-tier board structure. The management board
ment board member actions, it must be noted that, towards third is responsible for the day-to-day management of the company,
parties, the power of representation cannot be limited in the while the supervisory board is responsible for monitoring and
shareholders’ agreement, the articles of association, the by-laws resolving the matters brought before the supervisory board for
or elsewhere in such a way that the company is not bound if a a vote (which is a matter for the governing documents). Spon-
member transacts in violation of a contractually agreed veto (or sors usually request rights to nominate one (or more) members
majority) requirement. of the supervisory board (Aufsichtsrat) or observers to the super-
visory board, but are hardly ever involved in management. For
that reason, the answers under questions 3.6 and 3.7 will focus
3.4 Are there any duties owed by a private equity on supervisory board nominees.
investor to minority shareholders such as management
shareholders (or vice versa)? If so, how are these
typically addressed? Restrictions
Restrictions with respect to the aggregate number of super-
visory board positions and provisions aimed at preventing
Austrian courts have consistently held that shareholders owe a conflicts of interest exist: supervisory board members must not
duty of loyalty (Treuepflicht) towards one another, requiring them be managing directors of the portfolio company or of a subsid-
to consider the interests of their fellow shareholders in good iary, or employees of the portfolio company (employee repre-
faith (Treu und Glauben) and in line with bonos mores (gute Sitten). sentatives are exempt from that restriction). They must not hold
That duty is more pronounced for closely held companies than more than 10 (eight for a listed JSC) supervisory board posi-
for widely held companies and differs from shareholder to share- tions (with chairman positions counting double and exceptions
holder, depending on their ability to cause a certain action to be for group positions), or be appointed a managing director of a
taken or not to be taken. A majority shareholder may there- subsidiary or of another company to whose supervisory board a
fore be exposed to liability in circumstances where a minority member of the management board of the portfolio company is
shareholder is not (because his appearance or vote would not appointed (unless that company belongs to a group (Konzern)).
have mattered in the circumstances anyway). A violation of the
duty of loyalty may result in claims for damages, cease and desist Requirements
orders, or a challenge (Anfechtung) of shareholder resolutions. Corporate law does not require a specific qualification or expe-
rience for supervisory board members. Such requirements can
be introduced in the articles of association. However, every

Private Equity 2023

 Schindler Attorneys 17

supervisory board member must be able to meet its duty of care concerning any matter, he must inform the chairman of the
(Sorg falspflicht) requiring the relevant member to exercise the supervisory board accordingly. It is then the responsibility of the
level of care of a proper and diligent supervisory board member chairman of the supervisory board to make sure that the sponsor
of the particular company (that is, a supervisory board member nominee director does not vote with respect to the matter in
of a biotech company will have to have different knowledge and question and does not participate in any related meetings.
skills from a supervisory board member of a company that is
in the retail business). In general terms, a supervisory board 42 Transaction Terms: General
member must have at least a basic understanding of the busi-
ness brought before the supervisory board, understand finan-
4.1 What are the major issues impacting the timetable
cial statements and be able to assess when an expert opinion is
for transactions in your jurisdiction, including antitrust,
required and to devote sufficient time. foreign direct investment and other regulatory approval
requirements, disclosure obligations and financing
Risks and liability issues?
Members of the supervisory board owe to the portfolio company
(and not to the private equity investor appointing them or to any
other constituents): The following clearance requirements are typically a factor for
■ a duty of care (Sorg faltspflicht) (see above – which includes the timetable:
an obligation to be reasonably informed and to articulate ■ Antitrust clearance (which takes four weeks if cleared in
any concerns he may have); Phase I proceedings (if no exemption is granted) and up to
■ a duty of loyalty (Treuepflicht) (requiring the member to act five months if cleared in Phase II proceedings).
in the best interest of the company and its shareholders ■ Regulatory clearance (e.g. the acquisition of a qualified or
and not in his own interest); and controlling interest in the banking, insurance, utilities,
■ a duty of confidentiality. gambling, telecoms or aviation sector is subject to advance
A supervisory board member is not prohibited to compete with notification or advance approval of the competent regula-
the business of the portfolio company, as long as there is no breach tory authority).
of the duty of loyalty. Absent a breach of their corporate duty of ■ Real estate transfer clearance (the acquisition of title and
care, supervisory board members can generally not be held liable certain other interests in real estate by non-EEA nationals,
for a portfolio company’s breach of administrative law or criminal or control over companies holding such interests, is subject
law. A supervisory board member may, however, become liable for to advance notification or advance approval (depending on
his own conduct, including, without limitation: for fraud (Betrug) state law)).
(e.g. by entering or approving a transaction intended to mislead ■ Foreign direct investment (“FDI”) clearance (please see
another); for breach of trust (Untreue) (e.g. by entering or approving the discussion under question 11.1 for further details).
a transaction that is adverse to the interests of shareholders); for ■ FSR clearance (please see the discussion under question
misrepresentation (e.g. with regard to the portfolio company’s 11.1 for further details).
assets, financial or earning position or related information in the With regard to timing aspects related to public-to-private
financial statements or in a public invitation to acquire shares, transactions, see question 5.1.
statements in a shareholders’ meeting, statements to the company’s
auditors, in companies register filings); or breach of anti-bribery
4.2 Have there been any discernible trends in
legislation (see question 11.5). transaction terms over recent years?
A private equity investor will generally not be held respon-
sible for an act or a failure to act as a member of the supervisory
board just because that member was nominated by that investor. Vendor due diligence is becoming increasingly common in auctions
However, whenever there is involvement beyond that, the investor (sometimes coupled with reliance and/or warranties given by the
could face criminal law penalties and civil law liability for damages seller or the management on the vendor due diligence report,
(e.g. where the investor has collaborated with the member on a sometimes without). Similarly, warranty and indemnity insurance
transaction intended to mislead another or which is adverse to is employed in most deals, particularly where investors are sellers.
the interests of shareholders (see above)). In addition, in circum- Dedicated debt funds (see question 1.1) have become increas-
stances where a sponsor nominee who, at the same time is a deci- ingly relevant.
sion-maker of the investor within the meaning of the Associa-
tion Responsibility Act (Verbandsverantwortlichkeitsgesetz – “VbVG”), 52 Transaction Terms: Public Acquisitions
commits a criminal offence for the benefit of the investor, the
private equity investor may face criminal law penalties and civil 5.1 What particular features and/or challenges apply
law liability for damages. Further, the private equity investor could to private equity investors involved in public-to-private
face civil law liability based on corporate law for trying to influ- transactions (and their financing) and how are these
ence members of the management or supervisory board to his commonly dealt with?
own benefit or the benefit of another (e.g. requiring the company’s
management to pay the fund’s transaction costs, or influencing
A typical going-private transaction involves a voluntary takeover
management so that a business opportunity is not pursued and
offer aimed at control ( freiwilliges Angebot zur Kontrollerlangung),
remains available for another portfolio company of the investor).
subject to the condition that 90% of the outstanding shares are
tendered, followed by a squeeze-out pursuant to the Shareholders
3.7 How do directors nominated by private equity Exclusion Act (Gesellschafterausschluss-Gesetz ) and the delisting.
investors deal with actual and potential conflicts of A regular delisting pursuant to the Stock Exchange Act (BörseG)
interest arising from (i) their relationship with the party requires that the securities were listed for at least three years, that
nominating them, and (ii) positions as directors of other a takeover bid was published no earlier than six months ahead of
portfolio companies?
the request and a shareholder resolution with at least 75% majority
or a request of a qualified shareholder majority.
Where a sponsor nominee director has a conflict of interest

Private Equity 2023

18 Austria

In the context of the takeover offer, the private equity 6.3 What is the typical scope of other covenants,
investor must ensure that the necessary funds are secured prior undertakings and indemnities provided by a private
to the announcement of the takeover offer. The latter must be equity seller and its management team to a buyer?
confirmed by an independent expert pursuant to the Austrian
Takeover Code (Übernahmegesetz ). The expert will typically Private equity sellers will try to limit post-closing covenants to
require (i) a copy of the equity commitment letter from the fund, access to books and records and sometimes assistance in relation
and (ii) copies of the definitive finance agreements, together to pre-closing affairs. Usually, buyers will insist on non-compete
with documents evidencing that all conditions precedent (other and non-solicitation covenants (which private equity sellers will
than those within the private equity investor’s sole control) have typically try to resist). Other post-closing covenants will depend
been satisfied, to satisfy itself that the necessary funds require- on the particular case and may include covenants on de-branding,
ment has been complied with. migration, transitional services and group security interests and
guarantees.
5.2 What deal protections are available to private
equity investors in your jurisdiction in relation to public
6.4 To what extent is representation & warranty
acquisitions?
insurance used in your jurisdiction? If so, what are the
typical (i) excesses / policy limits, and (ii) carve-outs /
Break-up fees and cost cover arrangements are quite common in exclusions from such insurance policies, and what is the
private transactions (that is, transactions not involving a public typical cost of such insurance?
takeover bid).
In public acquisitions (that is, transactions involving a public Seller policies (which protect the seller from its own inno-
takeover bid) where the target company would have to pay, they cent misrepresentation) are sometimes used but this is fairly
are sometimes discussed but they are not common as there uncommon. Buy-side policies (which protect the buyer from
is little guidance as to what extent they would be valid. The the seller’s misrepresentation (innocent or otherwise)) or flip-
common opinion is that this should primarily depend on two ping policies (that is a policy organised by the seller as part of
factors: (i) the amount of the fee (a break-up fee in an amount the auction process that flips into a buyer’s policy) are more
that will keep management from considering competing bids common, particularly in auctions.
or deter others from considering a competing bid will probably The typical excess is around 1% of the policy limit. Policy
not be valid); and (ii) the circumstances in which it is triggered limits vary between seller policies (usually they match the overall
(a break-up fee that is solely triggered upon active solicitation cap under the purchase agreement) and buyer policies (usually
of competing bids should be valid, whereas a break-up fee trig- they start at around 20% of the enterprise value but can also
gered because a bid is not supported for good reason, or because cover the full enterprise value). The premium will depend on the
a better competing bid is supported, is probably not valid). transaction but tends to be in the range of 1%–3% of the cover
purchased. Typical carve-outs and exclusions include fraud,
62 Transaction Terms: Private Acquisitions matters disclosed, matters the insured was aware of, pension
underfunding and forward-looking warranties (e.g. the ability to
6.1 What consideration structures are typically collect accounts receivables). Indemnities for risks identified in
preferred by private equity investors (i) on the sell-side, the course of the due diligence can usually be insured as well,
and (ii) on the buy-side, in your jurisdiction? provided that materialisation risk and quantum can be assessed.

Private equity investors tend to prefer locked box structures, 6.5 What limitations will typically apply to the liability
particularly when they are on the sell-side. Where the gap between of a private equity seller and management team under
signing and the anticipated date of closing is long (e.g. because of warranties, covenants, indemnities and undertakings?
antitrust or other clearance requirements), closing adjustments are
the norm. Which parameters are included in a closing adjustment Common limitations on warranties include:
depends on the target business, with the most common combina- ■ Time limitation for bringing claims:
tion being adjustments for net debt, working capital, and (some- ■ title and capacity: three to 10 years;
times) capex. Equity adjustments are the exception. ■ business warranties: 12 to 24 months;
■ tax warranties: relative (three to six months plus) or
6.2 What is the typical package of warranties / fixed at seven years; and
indemnities offered by (i) a private equity seller, and (ii) ■ environmental warranties: five to 10 years.
the management team to a buyer? ■ Financial limits, including:
■ a cap on the total liability and a sub-cap for warranty
Experienced private equity sellers will try to avoid business claims;
warranties and indemnities (and instead just provide warranties on ■ an aggregate claims threshold (“basket” or “deduct-
title and capacity). In addition, experienced private equity sellers ible”); and
will be very keen to limit recourse for warranty claims (e.g. to an ■ an exclusion of de minimis claims.
amount paid into escrow) as well as any other post-closing liability. ■ Limitation to direct loss (as opposed to indirect and conse-
Where private equity sellers must give business warranties, quential loss).
they often seek back-to-back warranties from management and ■ Exclusion of claims to the extent caused by:
underwrite warranty and indemnity insurance or offer the buyer ■ agreed matters;
management warranties instead (then usually linked to buyer’s ■ acts of the purchaser (outside of the ordinary course of
warranty and indemnity insurance). The latter option has the business);
benefit that the private equity fund need not concern itself with ■ change of law or interpretation of law; or
post-closing warranty litigation. ■ change of tax or accounting policies.

Private Equity 2023

 Schindler Attorneys 19

■ No liability for contingent liabilities. financing agreements are not in place at signing, experienced
■ No liability if the purchaser knew or could have known. sellers will insist on an equity underwrite, particularly in auctions.
■ No liability for mere timing differences (Phasenverschiebung).
■ No liability if covered by insurance.
6.8 Are reverse break fees prevalent in private equity
■ Obligation to mitigate loss. transactions to limit private equity buyers’ exposure? If
■ No double recovery under warranties, indemnities and so, what terms are typical?
insurance policies.
Reverse break fees as a means to limit a private equity buyer’s
Qualifying warranties by disclosure
exposure in case the necessary financing is not available at
Warranties are usually qualified by matters that have been
closing are not very common in Austria. If they are agreed, they
disclosed (in a certain manner) or are deemed disclosed by
are typically linked to a financing condition (that is where the
operation of the provisions of the acquisition agreement or the
financing is not available at closing, the private equity buyer can
disclosure letter (e.g. information that can be obtained from
withdraw from the contract but has to pay the reverse break fee
publicly accessible registers). The seller will always push for
to the seller). If structured that way (i.e. a condition linked to a
general disclosure (i.e. everything disclosed to the purchaser
withdrawal right), the amount of the fee should not be subject to
and its advisors at whatever occasion qualifies all warranties)
judicial review. Conversely, if the reverse break fee is structured
while the purchaser will push for specific disclosure (i.e. sepa-
as a contractual penalty for failure to close, the amount of the
rate disclosure for each warranty) and try to introduce a disclo-
fee would be subject to judicial review.
sure threshold requiring that a matter must be “fully and fairly”
disclosed. This is usually heavily negotiated.
72 Transaction Terms: IPOs
Limitations on indemnities
Indemnities are generally not qualified by disclosure or knowl- 7.1 What particular features and/or challenges should
edge. The tax indemnity is usually only subject to a specific tax a private equity seller be aware of in considering an IPO
conduct provision, a direct loss limitation and the overall cap. exit?
Other limitations are a matter of negotiation. If other indem-
nities (e.g. for contamination and environmental compliance An IPO exit requires that the articles of association and by-laws
or specific due diligence findings) are accepted, limitations are be adjusted, due diligence performed and a prospectus prepared.
usually heavily negotiated. In addition, the company will have to enter into an underwriting
agreement and management will have to participate in road
6.6 Do (i) private equity sellers provide security (e.g.,
shows. All of that requires the cooperation of the company and
escrow accounts) for any warranties / liabilities, and (at least) where no new shares are issued, the management will
(ii) private equity buyers insist on any security for typically ask the private equity seller to bear most of the associ-
warranties / liabilities (including any obtained from the ated costs (based on an argument related to capital maintenance
management team)? rules). Any new shares issued in the IPO will naturally limit the
number of shares the private equity seller can sell into the IPO.
Private equity sellers are generally prepared to provide security In addition, the underwriting agreement will usually provide
but will, in turn, often require that the buyer’s recourse is limited for lock-up restrictions (see question 7.2) that limit the private
to such security (see question 6.2). Whether or not private equity equity seller’s ability to sell any shares it has retained following
buyers insist on security depends on various factors, including the IPO. Finally, the private equity seller will usually be asked to
the set of agreed warranties and the credit of the seller (that is, give warranties in the underwriting agreement. In most cases,
where the seller is a listed corporate there is less need for security the private equity seller will be able to limit those warranties to
than in the case of a secondary transaction where the seller is an matters relating to the private equity fund and the shares it sells
SPV or where business warranties come from management only). into the IPO. Sometimes, director nominees are also required
to give warranties in the underwriting agreement.

6.7 How do private equity buyers typically provide

comfort as to the availability of (i) debt finance, and (ii) 7.2 What customary lock-ups would be imposed on
equity finance? What rights of enforcement do sellers private equity sellers on an IPO exit?
typically obtain in the absence of compliance by the
buyer (e.g., equity underwrite of debt funding, right to
The underwriting banks will usually expect some of the private
specific performance of obligations under an equity
commitment letter, damages, etc.)?
equity seller’s shares to be locked up for a period of about 180
days after the IPO. In addition, lock-up requirements may
already be included in the shareholders’ agreement, but this is
Private equity buyers will typically be willing to provide a copy of rather the exception.
the executed equity commitment letter from the fund and copies
of the definitive financing agreements together with documents
evidencing that all conditions precedent (other than those within 7.3 Do private equity sellers generally pursue a dual-
the private equity investor’s sole control) have been satisfied on track exit process? If so, (i) how late in the process are
private equity sellers continuing to run the dual-track,
or around the signing date, to provide comfort that the neces-
and (ii) were more dual-track deals ultimately realised
sary funds will be available at closing. If those financing commit- through a sale or IPO?
ments are not complied with, sellers are typically limited to claims
for damages. An equity underwrite of the debt component of
the purchase price is rather the exception but, where definitive Dual-track processes are rare in Austria. As far as we are aware,
there have only been a few attempts in the last couple of years,
all of which ultimately resulted in a trade sale.

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20 Austria

82 Financing 9.2 Are there any particular legal requirements or

restrictions impacting their use?

8.1 Please outline the most common sources of debt

finance used to fund private equity transactions in your There are no particular legal requirements or restrictions.
jurisdiction and provide an overview of the current state
of the finance market in your jurisdiction for such debt 102 Tax Matters
(including the syndicated loan market, private credit
market and the high-yield bond market).
10.1 What are the key tax considerations for private
equity investors and transactions in your jurisdiction?
Sources of debt finance for private equity transactions differ Are off-shore structures common?
substantially for domestic private equity funds (which usually
finance all equity or seek debt finance from domestic banks), and
Usually, the private equity fund will seek to implement a tax
international private equity funds, which are able to tap the inter-
offset structure to offset interest expense at the Austrian BidCo
national markets. In mid- and small-cap transactions, there is
level with profit generated at the target company level (however,
usually just one single term loan facility, a working capital facility
see question 10.4 regarding the interest limitation rule). In prin-
and the institutional debt from the fund. In large-cap transac-
ciple, there are two methods to achieve this:
tions, there are usually more term loan facilities with different
(1) The first method is to establish a tax group between an
repayment profiles, a working capital facility and the institu-
Austrian BidCo and the target company. In such tax
tional debt from the fund. Where time is of relevance and the
group, the fiscal result of BidCo and the target company
cost benefit is outweighed by increased complexity, funds have
is consolidated at the BidCo level. If the aggregated fiscal
in the past employed unitranche facilities. Due to the increase
result of the BidCo and the target company is negative, the
of interest rates, there has been a shift towards more traditional
loss can be carried forward by the BidCo to future periods.
structures for total cost reasons. High yield only plays a role in
The formation of such tax group requires a tax allocation
the large-cap segment or post-completion refinancing.
agreement and an application to the tax office. If the tax
Overall, the financing environment remains difficult and
group is collapsed prior to the lapse of three years (which
resilience against political risk, interest rate changes and supply
is the minimum period), the group members are retroac-
chain issues are a top priority for lending desks, which makes
tively taxed on a standalone basis.
it difficult if not impossible to raise debt in certain segments.
(2) A second method, which is sometimes discussed but rarely
Healthcare and tech transactions usually can be financed, albeit
implemented because of the significant risk it involves, is an
not at the same terms as in 2021. In general, banks are still very
upstream merger of the target company into BidCo. Based
cautious, resulting in a shift towards private debt funds.
on past decisions of the Austrian Supreme Court, it is pretty
clear that where the BidCo carries the acquisition debt for
8.2 Are there any relevant legal requirements or the purchase of the shares of the target company, a down-
restrictions impacting the nature or structure of the debt stream merger of the BidCo into the target company will
financing (or any particular type of debt financing) of not be registered. In certain exceptional cases, an upstream
private equity transactions? merger of the target company into BidCo may, however,
be feasible. The result of such upstream merger would be
Lending is regulated by the Austrian Banking Act (“BWG”), that the shares in the target company pass to the BidCo
which requires a lender to have an Austrian or passported EU parent, interest expense on the acquisition debt can be
licence if lending takes place (or is deemed to take place) in offset against profit, and guarantees and security interests
Austria. Private debt funds managed by a licensed AIFM do not granted by the merged entity (holding the cash-generating
require such a licence as long as the lending business is covered assets) are not subject to the limitations under the Austrian
by their AIFM licence. capital maintenance rules (see above) and thus will be of
greater value to the financing banks. In particular, the last
point is of great interest to the financing banks, which is
8.3 What recent trends have there been in the debt-
financing market in your jurisdiction? why this route is sometimes explored when a particular case
supports the necessary arguments.
In addition, please note that, as a general rule, tax authorities
Please see the discussion in question 8.1. may request the disclosure of the eventual recipient (whether
related or non-related) of any expenses deducted and that such
92 Alternative Liquidity Solutions rule also applies to interest expenses. In particular, such disclo-
sure rule may be burdensome to comply with in relation to funds
9.1 How prevalent is the use of continuation fund acting as lenders.
vehicles or GP-led secondary transactions as a deal type Regarding a future exit, it should be taken into account that
in your jurisdiction? double taxation treaties usually assign the right to tax capital
gains to the state of residence of the exiting shareholder. If the
Most transactions are primary transactions. seller is an Austrian tax resident, capital gains taxation applies
The increased use of continuation vehicles and secondary (i.e. no participation exemption is available for Austrian tax resi-
transactions has, however, given rise to additional discussions dents in relation to Austrian target companies).
related to transfer restrictions and Drag and Exit clauses in the Avoidance of withholding taxes on dividends is usually less
shareholders’ agreement as funds want to reserve that exit route of an issue, since pre-exit distributions are very rare. Still, to
while other shareholders tend to have concerns related to the address that issue, EU entities are usually preferred over non-EU
arms’-length nature of the transaction and the impact on their entities and, among the latter, entities from non-EU countries
own exit timeline. with which Austria has concluded a double taxation treaty over
entities from other non-EU countries. In such structures, we

Private Equity 2023

 Schindler Attorneys 21

also see an increased level of substance (in terms of own prem- ■ Up to EUR 3 million of interest surplus is fully deductible.
ises and personnel) in the foreign entities, which then usually The amount exceeding this sum is subject to the interest
provide internal services to related entities. limitation rule. In the case of a tax group, the allowance
applies to the entire group, not per group member.
■ The interest limitation rule does not apply to standalone
10.2 What are the key tax-efficient arrangements that
are typically considered by management teams in private entities. A standalone entity is considered an entity, which
equity acquisitions (such as growth shares, incentive is not (fully) included in consolidated financial statements,
shares, deferred / vesting arrangements)? has no affiliated companies, and has no foreign permanent
establishments.
■ The interest surplus can be fully deducted if the company
There is no specific regime that provides for tax reliefs or other
can prove that the ratio of its equity over its total assets is
tax benefits of substantial nature to management teams. It is
equal to or higher than the equivalent ratio of the corporate
therefore important to ensure that capital gains taxation (27.5%)
group it belongs to (equity-escape clause). A two-percentage
applies as opposed to taxation as employment income (up to
points tolerance exists.
55%) (see question 2.3).
■ For contracts concluded before 17 June 2016, the interest
limitation rule is not applicable until 2025.
10.3 What are the key tax considerations for
management teams that are selling and/or rolling over Tax rulings
part of their investment into a new acquisition structure? Tax rulings are becoming more common, after a new ruling
regime providing for binding tax rulings in the areas of reor-
An exchange of shares is treated in the same way as a sale of ganisations, group taxation and transfer pricing was introduced
shares and thus triggers capital gains taxation. In a typical a couple of years ago. Binding tax rulings are meanwhile also
case, where the management only holds a small stake in the available in the areas of international taxation and for ques-
target company, the only option to roll-over into a new struc- tions in connection with abuse (since 1 January 2019) and value-
ture without triggering capital gains taxation is a contribution added tax (since 1 January 2020). In practice, we increasingly see
(Einbringung) under the Reorganisation Tax Act (UmgrStG) of ruling requests in relation to pre-exit reorganisations, but also in
their shares into a holding, which thereby acquires or enlarges relation to transfer pricing issues.
an already existing majority holding in the target company.
Recently, the rules for individuals applicable to such transac- Anti-hybrid rules
tions in a cross-border context have been adopted to expand the The Tax Reform Act 2020 foresees anti-avoidance rules
options for managers to avoid taxation upon the roll-over. targeting hybrid cross-border structures. Specific structures
leading to a tax deduction in one state without any corre-
sponding taxable income in the other state (deduction/no inclu-
10.4 Have there been any significant changes in tax
legislation or the practices of tax authorities (including sion) as well as structures enabling a double tax deduction in
in relation to tax rulings or clearances) impacting private two different states (double deduction) shall be prevented. The
equity investors, management teams or private equity new provisions shall apply to specific structures defined by law
transactions and are any anticipated? (e.g. hybrid financial instrument, hybrid transfer, hybrid enti-
ties, hybrid private equity and unconsidered private equity) and
Corporate income tax rate shall lead to a tax deduction of expenses failed and/or taxable
As part of the “eco-social” tax reform package, the corporate income in Austria as well as to tax deduction of expenses failed
income tax rate dropped from 25% to 24% for FY 2023 and will in Austria. The new rules for hybrid cross-border structures
drop to 23% for FY 2024 and subsequent years. Tax incentives apply as of 1 January 2020.
for certain ecological investments have also been introduced.
Transfer tax
CFC legislation There have been certain changes in relation to real estate
Since 1 January 2019, CFC rules for “controlled foreign compa- transfer taxation (that is, a lower share consolidation threshold
nies” and permanent establishments have been implemented that (now 95% compared to 100% previously) and full attribution
provide that passive and low-taxed income (e.g. interest payments, of shares held in trust to the trustor) that should be considered
royalty payments, taxable dividend payments and income from the where real estate is involved.
sale of shares, financial leasing income, and activities of insurances
and banks) of controlled foreign subsidiaries can be attributed to, Reporting regime
and included in, the corporate tax base of an Austrian parent. On 1 July 2020, the EU Reporting Obligation Act came into
effect, which requires the reporting of certain cross-border tax
Interest limitation rule arrangements. This act implements an EU directive (DAC 6)
As of 2021, Austria has implemented an interest limitation rule that must also be applied in the other 26 EU Member States.
in order to comply with the EU Anti-Tax-Avoidance Directive A cross-border arrangement is subject to reporting if it
(“ATAD”). The purpose of the interest limitation rule is to involves a potential risk of tax avoidance or circumvention of the
limit the deductibility of loan costs depending on the compa- reporting obligation under the Common Reporting Standard or
ny’s earnings before interest, tax, depreciation and amortisation preventing the identification of the beneficial owner and: (i) its
(“EBITDA”) if the debt leverage is higher in Austria than the first step was implemented between 25 June 2018 and 30 June
average of the whole group. The deductibility of interest surplus 2020 (so-called “old cases”); or (ii) its first step is implemented
(Zinsüberhang) is, in principle, limited to 30% of the tax EBITDA from 1 July 2020 or it is designed, marketed, organised, made
of the respective year. In the case of a tax group, the aforemen- available for implementation, or managed from 1 July 2020. A
tioned generally applies at the level of the group head. There are distinction is made between arrangements that are subject to
four significant exceptions to the interest limitation rule: mandatory reporting and those that are subject to conditional
reporting. In any case, arrangements that are subject to a

Private Equity 2023

22 Austria

mandatory reporting obligation must be reported, regardless of Phase I proceedings take 25 working days from filing. If Phase
whether a potential tax advantage has been obtained. The obliga- II proceedings are initiated, there is an additional review period
tion to report a cross-border tax arrangement is generally imposed of 90 working days. Clearance may be granted subject to condi-
on the so-called intermediary. An intermediary is any person who tions. If the transaction is prohibited, it may not be implemented.
designs, markets, organises, makes available for implementation,
or manages the implementation of an arrangement subject to
11.2 Are private equity investors or particular
reporting requirements. Accordingly, in each transaction, it must transactions subject to enhanced regulatory scrutiny in
be analysed whether such new reporting regime applies or not. your jurisdiction (e.g., on national security grounds)?

112 Legal and Regulatory Matters With regard to regulatory scrutiny over private equity funds, please
see question 11.1. With regard to transactions, there is no private
11.1 Have there been any significant legal and/or equity specific scrutiny. Private equity funds should, however,
regulatory developments over recent years impacting be aware of the general clearance requirements (see question 4.1).
private equity investors or transactions and are any
anticipated?
11.3 Are impact investments subject to any additional
legal or regulatory requirements?
FDI – clearance
In July 2020, the Investment Control Act (“ICA”) came into
force, which requires advance clearance for certain FDIs by There is no regulation specific to Austria.
investors from outside the European Economic Area (“EEA”)
or Switzerland. Direct and indirect acquisitions of: 11.4 How detailed is the legal due diligence (including
■ voting rights of 25% or 50% (in critical sectors 10%); compliance) conducted by private equity investors prior
■ decisive influence in an Austrian company; or to any acquisitions (e.g., typical timeframes, materiality,
■ significant assets, scope, etc.)?
in sensitive sectors such as defence, energy, digital infrastruc-
ture, R&D, but also IT, public transport, health, telecommu- Private equity buyers often split due diligence in different phases
nications, chemicals, robotics, semiconductors, nuclear tech- (particularly in auctions), with the first phase only covering a
nology, biotechnology, food supply, supply of pharmaceuticals, few value-driving items and the latter phases then covering
vaccines, medicinal products and media, which are considered the rest of the scope. The timeframe depends very much on
to be of critical importance, require advance clearance by the whether it is a proprietary situation (in which case the due dili-
Austrian Ministry of Digital and Economic Affairs. gence can take eight to 10 weeks) or an auction (in which case the
Exempt from the approval requirement are FDIs in micro-en- timing is driven by the auction process). Private equity buyers
terprises, including start-ups with less than 10 employees and an usually engage outside counsel to conduct all legal due diligence.
annual turnover or balance sheet total of less than EUR 2 million. Compliance due diligence is sometimes done in-house.
Approval may be granted subject to conditions. An investor
failing to obtain approval before closing may face administrative
11.5 Has anti-bribery or anti-corruption legislation
and even criminal sanctions. In addition, an investment is deemed impacted private equity investment and/or investors’
void until approval is granted. Proceedings take between two-and- approach to private equity transactions (e.g., diligence,
a-half months (in simple cases) and five to six months (in more contractual protection, etc.)?
complex cases). Clearance certificates can be applied for but are
only advisable for clearcut cases. They are generally issued quickly. Anti-bribery and anti-corruption legislation had a significant
impact on private equity transactions in Austria. Since their
FSR – clearance enactment, more emphasis has been placed on those areas in the
On 12 January 2023, the Foreign Subsidies Regulation (EU) due diligence process as well as in the purchase or investment
2022/2560 (“FSR”) came into force to address distortions agreement. Also, private equity funds (in particular, bigger
of competition caused by third-country subsidies in the EU’s international investors) will make sure that a compliance system
internal market. In July 2023, a regulation is due that will is put in place following closing if not already existing at the time
provide further guidance on the application and interpretation of the transaction. Provided such system is appropriately moni-
of the FSR. Under the new rules, transactions must be notified tored, it can serve as a defence for management and portfolio
to and cleared by the European Commission if: company liability in case there is an administrative or criminal
■ either (a) at least one of two (previously independent) offence by any representatives of the portfolio company under
merging undertakings, (b) the acquired undertaking, or Austrian law. In addition, international private equity investors
(c) a JV to be formed is established in the EU and has will be concerned with any additional requirements under the
achieved an EU turnover of at least EUR 500 million in UK Bribery Act and the US Foreign Corrupt Practices Act, as
the last business year; and both of them claim extra-territorial jurisdiction.
■ either (a) the acquiring undertaking and the acquired
undertaking, (b) the merging undertakings, or (c) the
created JV and the undertakings creating the JV have 11.6 Are there any circumstances in which: (i) a private
equity investor may be held liable for the liabilities of
received so called foreign financial contributions (“FFC”)
the underlying portfolio companies (including due to
(that is, financial contributions from non-EU govern- breach of applicable laws by the portfolio companies);
ments) in the last three years prior to the transaction. FFC and (ii) one portfolio company may be held liable for the
is construed broadly and does not only comprise financial liabilities of another portfolio company?
assistance (e.g. (capital injections, loans, guarantees, etc),
but also other types of assistance (e.g. tax reliefs).
In principle, a private equity investor is not liable for the liabili-
ties of an underlying portfolio company. Exceptions apply, inter

Private Equity 2023

 Schindler Attorneys 23

alia, under concepts of piercing the corporate veil, including: (i)

where the private equity investor factually manages, or substan-
122 Other Useful Facts
tially controls the management of, the underlying portfolio
company ( faktische Geschäftsführung); (ii) in cases of undercapital- 12.1 What other factors commonly give rise to concerns
for private equity investors in your jurisdiction or should
isation (only where there is an obvious imbalance between the
such investors otherwise be aware of in considering an
risks of the business and the equity, which is likely to result in a investment in your jurisdiction?
default); (iii) where based on the accounting records, the assets of
the company cannot be separated from the assets of the private
equity investor (Sphärenvermischung); and (iv) in cases of share- In the recent past it was sometimes difficult for private equity
holder action putting the portfolio company at risk (existenzver- investors to access Austrian businesses, particularly where the
nichtender Eingriff ) (where the investor takes action causing insol- business is family owned. That has changed as the market
vency (Insolvenzverursachung), e.g. acceleration of a loan in distress). matured and well-advised sellers meanwhile consider private
In addition, a private equity investor may become liable to equity as a viable and often very attractive option for an exit.
a creditor up to the amount secured where the private equity Still, due to the increased complexity it is important to have the
investor granted a guarantee or security interest securing a loan right advisory teams on both sides of the table.
of a portfolio company in “crisis” (defined in the Company Investors should also be aware that the Austrian Ministry of
Reorganisation Act (“URG”)). In such circumstances, the port- Digital and Economic Affairs is taking a rather strict approach
folio company can request the creditor to claim against the when it comes to FDIs by non-EEA/non-Swiss investors in
private equity investor first (in which case the recourse claim sectors qualifying under the ICA (see question 11.1) and typi-
of the private equity investor against the portfolio company cally requires the transaction to be notified. Clearance typically
is suspended until the crisis is over); in addition, if the port- takes approximately three months, which must be taken into
folio company pays the creditor, the portfolio company can take account in the overall timing. Notifications can be made on the
recourse against the private equity investor. basis of preliminary documentation (e.g. a term sheet).
The above principles apply mutatis mutandis in relation to the In relation to listed target companies, investors should be
risk of potential liability of one portfolio company for the liabil- aware that there is often limited free float and one or two major
ities of another portfolio company. controlling block shareholders.

Private Equity 2023

24 Austria

Florian Philipp Cvak’s practice focuses on corporate and corporate finance work with a particular focus on private equity, venture capital,
M&A, mezzanine and LBO financings. Furthermore, he specialises in US lease and project finance transactions. His practice is comple-
mented by Restructuring, General Corporate and Contracts work.
Florian holds law degrees from the University of Vienna and New York University (“NYU”) School of Law (LL.M.) and attended extra-curricular
classes on private equity, corporate finance, investment banking and accounting at New York University (NYU) Stern School of Business.
He is admitted to the Austrian Bar and the New York Bar. Before establishing the firm as a co-founder, Florian was a partner at Schoenherr,
where he co-headed the private equity practice and was involved in some of the firm’s most prestigious private equity transactions in Austria
as well as the wider CEE region.

Schindler Attorneys Tel: +43 1 512 2613 500

Kohlmarkt 8-10 Email: florian.cvak@schindlerattorneys.com
1010 Vienna URL: www.schindlerattorneys.com
Austria

Clemens Philipp Schindler’s transactional practice is focused on corporate and tax. He is admitted as both a lawyer and a certified public tax
advisor in Austria. Before establishing the firm as a co-founder, Clemens spent six years as a partner at Wolf Theiss, where he led some of
the firm’s most prestigious transactions. Previously, he practised with Haarmann Hemmelrath in Munich and Vienna, as well as with Wachtell
Lipton Rosen & Katz in New York. Clemens’ practice focuses on corporate and tax advice in relation to public and private M&A, private equity
and corporate reorganisations (such as mergers, spin-offs and migrations), most of which have a cross-border element.

Schindler Attorneys Tel: +43 1 512 26 13 205

Kohlmarkt 8-10 Email: clemens.schindler@schindlerattorneys.com
1010 Vienna URL: www.schindlerattorneys.com
Austria

Schindler Attorneys is a leading Austrian law firm focused on transac-

tional work, with a strong focus on private equity. The members have an
impressive private equity track record and an excellent understanding of
the needs of financial sponsors. The firm’s integrated tax practice is a key
differentiator from other firms in the Austrian market and is particularly
appreciated by financial sponsors. The firm usually acts for financial spon-
sors, but also advises banks on LBO transactions.
www.schindlerattorneys.com

Private Equity 2023

 Chapter 4 25

Brazil

Brazil
Carlos José Rolim de Mello

Roberto Panucci

Mello Torres Advogados Rafael Biondi Sanchez

The industries that generated the most private equity deals,

12 Overview both in value and in number, are the following: agribusiness;
education; healthcare/life sciences; industrial facilities; tech-
1.1 What are the most common types of private equity nology; telecom; financial services; and renewable energy.
transactions in your jurisdiction? What is the current
state of the market for these transactions?
1.2 What are the most significant factors currently
encouraging or inhibiting private equity transactions in
Although private equity and venture capital funds have oper-
your jurisdiction?
ated in Brazil since the 1980s, this industry experienced a signif-
icant development after 1994, and exponential growth over the
last decade, resulting in a more sophisticated market. An impor- Private equity fundraising experienced a year-on-year increase in
tant landmark for the industry was the creation of the Fundo de Brazil, which we believe to be due the following reasons: (i) the
Investimento em Participações (FIP) in 2003, which is the main main sectors invested by private equity in Brazil are resilient to
vehicle used by private funds to present day. such factors and the economic crisis; (ii) the Brazilian currency
Private equity investors adopt different investment strategies has depreciated vis-à-vis the US Dollar; (iii) Brazil improved the
and may seek a controlling or significant minority stake in the laws and regulatory framework, being more attractive to private
portfolio companies. In both cases, due to regulatory require- equity and venture capital investments; and (iv) Brazil inflation
ments applicable to FIPs, private equity funds need to exercise is under control and a reduction of interest rates is expected.
effective influence over the invested companies.
In addition, private equity investors may choose to make 1.3 Are you seeing any types of investors other
the investment as a leveraged buy-out or to use a fully funded than traditional private equity firms executing private
strategy. The first alternative is used when the vehicle used by equity-style transactions in your jurisdiction? If so,
the investor contracts a debt to pay the purchase price, and such please explain which investors, and briefly identify any
debt is compensated with the growth generated by the enter- significant points of difference between the deal terms
prise. The fully funded strategy is used when the investor raises offered, or approach taken, by this type of investor and
that of traditional private equity firms.
funds prior to structuring the investment. As described below,
a leveraged buy-out may only happen when the private equity
company structures a holding company, as FIPs are not allowed The respective high return rates in the long term have attracted
to incur in debt before financial institutions. different types of investors to diversify their portfolio with the
In relation to the size of the companies involved in the transac- inclusion of private equity investments. This might be difficult
tions, most private equity investments are directed to the middle for the public as only qualified or professional investors’ FIP
market, in sectors with good consolidation perspectives. Trans- structures are allowed to invest in such funds. However, we are
actions involving larger companies are not uncommon, but these seeing an increase in high-net-worth individuals making private
deals are usually divestments of the private equity investors. equity investments through family offices. In some cases, when
In terms of the divestment strategy, private equity investors the family office has a more sophisticated structure with qualified
will either perform a strategic M&A or initial public offering managers, it may also directly invest in a private equity transaction.
(IPO). The most common divestment strategy used by the The main difference between more traditional firms and such
private equity investor in Brazil is to enter into an M&A trans- investors usually relates to the level of intervention in the compa-
action with a relevant and strategic player in the sector of the ny’s governance. Private equity funds will usually demand more
company. Although the number of IPOs increased in recent veto rights and be directly involved in the daily management of
years, particularly due to capital markets becoming more attrac- the company. Family offices will usually use the private equity
tive due to low interest rates, M&As are still the main divest- investments as a part of its diversification strategy, in which the
ment strategy of private equity investors. main concern is having a positive return on the investment.

Private Equity 2023

26 Brazil

its bylaws), or extend to broader operational issues (e.g., incur-

22 Structuring Matters ring debt or the capital expenditures above certain thresholds).
A private equity fund may negotiate its rights depending on the
2.1 What are the most common acquisition structures fund investment strategy, its confidence on the other share-
adopted for private equity transactions in your
holders of the target company, its investors’ expectations, and
jurisdiction?
the expertise of the general partner.

Due to tax efficiencies, private equity investors in Brazil usually

adopt a structure that involves FIPs. The acquisition structure 2.5 In relation to management equity, what is the
typical range of equity allocated to the management, and
for private equity transactions is usually the acquisition of shares.
what are the typical vesting and compulsory acquisition
Notwithstanding, more complex structures are being adopted provisions?
by private equity, for example: (i) mezzanine capital involving
subordinated debt arrangements; and (ii) private investment in
public equity (PIPE), which involves the investment of private Many companies create employee incentive programmes for the
equity vehicles in publicly traded corporations. strategic management members. The most common types of
programmes used are stock options, phantom shares, and part-
nerships. The amount of equity directed to these programmes
2.2 What are the main drivers for these acquisition is usually in the range of 10–20%, varying according to the
structures? current stage of the company. It is also common to include cliff,
vesting, compulsory sale, cancellation of unvested options/
The main driver for choosing the FIP as the investment vehicle equity and other customary provisions. The vesting is usually
is tax efficiency. FIPs are exempt from income tax, and, there- based on the time that the manager remains in the company, but
fore, income and gains deriving from the portfolio of FIP assets it is not unusual to see it based on the achievement of certain
are not subject to taxation at FIP level. Although profit distri- performance targets. In addition, if the beneficiary of such
butions carried out by FIPs are subject to withholding income programme leaves the company, the company usually has a call
tax at a 15% rate, non-resident investors investing in Brazilian option to acquire the stock, which is subject to good leaver and
financial and capital markets are subject to WHT at a zero rate if bad leaver provisions.
certain requirements are met.
It is also important to mention the recent Economic Freedom
2.6 For what reasons is a management equity holder
Act enacted by the Brazilian Congress in 2019. Among other usually treated as a good leaver or a bad leaver in your
important minimal government intervention rules and princi- jurisdiction?
ples, such law implemented relevant changes to investment funds.
According to the Economic Freedom Act, the Brazilian invest-
Good leaver usually means leaving employment on grounds of
ment funds may (i) limit investors’ liability to their capital, (ii)
involuntary dismissal, mutual agreement, death, or disability.
limit the administrators’ and advisors’ liabilities to their own acts,
On the other hand, bad leaver usually means leaving employ-
and (iii) create different classes of shares with different rights.
ment due to voluntary resignation or dismissal with cause.

2.3 How is the equity commonly structured in private 32 Governance Matters

equity transactions in your jurisdiction (including
institutional, management and carried interests)?
3.1 What are the typical governance arrangements
for private equity portfolio companies? Are such
In general, private equity sponsors organise FIPs and carry out arrangements required to be made publicly available in
fundraising, acting as managers of the fund. After that, FIPs your jurisdiction?
acquire stocks of the portfolio companies.
Prior to private equity investments (or other type of relevant
2.4 If a private equity investor is taking a minority investment), Brazilian companies usually do not have sophis-
position, are there different structuring considerations? ticated governance mechanisms, being managed mostly by the
controlling shareholders and the officers, which are appointed
When the private equity investor takes a minority position, it directly by the controlling shareholders.
generally requires affirmative votes or veto rights on the most Private Equity funds generally require the enhancement of
relevant corporate, finance, business, and employee decisions. target’s governance, including the creation of a Board of Direc-
Such rights can be derived from a necessary affirmative vote tors, which is responsible for: (i) establishing the general orien-
from a specific class of shares held by minority investors, or tation of the company’s business; (ii) electing and dismissing the
a provision that specifies that a certain director appointed by officers of the company and establishing their attributions; or
the minority investor must approve such matter, or a certain (iii) supervising the management of the company by the officers.
percentage of the company. In addition, it is not uncommon for Private Equity funds to
Private equity investor usually prioritises the need of share- nominate the CFO of the target.
holders’ approval, instead of directors’ approvals since the In addition, Private Equity funds require certain modifica-
bylaws and the shareholders’ agreement will provide for such tions to the governance of the target to comply with regulatory
matters and the chairman of the meeting shall not accept any requirements established by the Brazilian Securities Commis-
vote in conflict with the shareholders’ agreement. In addi- sion (CVM) and self-regulatory organisations such as ANBIMA,
tion, the director (even if appointed by a certain shareholder) which requires: (i) the private equity fund to effectively influ-
owes fiduciary duties to the company, not the shareholders. ence the management of the companies; (ii) the Board of Direc-
Minority investors’ rights can either be limited to the most rele- tors to have a unified two-year term of office; (iii) disclosure of
vant matters (e.g., a sale of controlled companies or changes to related party transactions and approval of such transactions by

Private Equity 2023

 Mello Torres Advogados 27

the private equity fund’s shareholders; (iv) independent audit of 3.5 Are there any limitations or restrictions on the
the financial statements; and (v) settlement of corporate disputes contents or enforceability of shareholder agreements
through arbitration chambers. (including (i) governing law and jurisdiction, and (ii)
Documents such as the bylaws or the articles of incorporation non-compete and non-solicit provisions)?
of the portfolio companies, as well as the reference form and
internal policies of the general partner, are publicly available. There are no specific limitations or restrictions to the contents
Nonetheless, the most relevant document for the governance or enforceability of shareholders’ agreements in Brazil, provided
of the portfolio company, which is the shareholders’ agreement, that such agreements do not violate Brazilian national sover-
is not publicly available and it is generally subject to confidenti- eignty, public policy and good morals/ethics and do not violate
ality provisions. structural traits of each type of company (e.g., joint-stock
companies cannot distribute profits disproportionate to the
3.2 Do private equity investors and/or their director equity holdings of each shareholder).
nominees typically enjoy veto rights over major Nonetheless, non-compete provisions are limited by Brazilian
corporate actions (such as acquisitions and disposals, antitrust law and labour law, depending on the scope of the
business plans, related party transactions, etc.)? If a non-compete.
private equity investor takes a minority position, what In addition, shareholders’ agreements without a term of effec-
veto rights would they typically enjoy? tiveness may be terminated at any time by either party with
reasonable prior notice. Brazilian case law also holds that agree-
Private equity investors and the nominated directors typically ment with an unreasonable long term of effectiveness should be
enjoy veto rights over major corporate actions, which are usually treated as agreement without a term of effectiveness and may be
provided by the shareholders’ agreement. Other than the examples terminated anytime.
mentioned above, the vetoes usually include: (i) capital increase or Although shareholders’ agreements of Brazilian companies
issuance of convertible instruments, which may cause dilution of may be governed by foreign law and subject to foreign jurisdic-
the investor; (ii) contracting loans or providing guarantee in finan- tion, this is unusual, given Brazilian law particularities and the
cial transaction above a certain threshold; (iii) sale or acquisition of requirements to enforce foreign decisions in Brazil.
material assets, including the sale of all or substantially all assets of
the company; and (iv) appointment of key managers.
3.6 Are there any legal restrictions or other
The vetoes mentioned above are common in cases where the requirements that a private equity investor should
investors take a minority position to protect the investment; be aware of in appointing its nominees to boards of
however, such vetoes may vary depending on the amount of portfolio companies? What are the key potential risks
stake acquired by the private equity investor. and liabilities for (i) directors nominated by private
equity investors to portfolio company boards, and (ii)
private equity investors that nominate directors to
3.3 Are there any limitations on the effectiveness of boards of portfolio companies?
veto arrangements: (i) at the shareholder level; and (ii) at
the director nominee level? If so, how are these typically
addressed? Brazilian corporate law states that individuals who are impaired
by special laws or have committed certain crimes that would
preclude such individual of accessing public offices, cannot be
Brazilian law does not create any specific limitation to veto
elected as officers or directors. Foreign individuals are eligible
arrangements at shareholders’ and/or directors’ level. The share-
to be appointed as directors and officers if they appoint a
holders’ agreement is binding in relation to both shareholders’
Brazilian resident as an attorney-in-fact.
and directors’ decisions and resolutions, and, in the case of
Directors are, in general, not liable for debts of the company,
someone deciding to vote in disagreement with the shareholders’
except if the director acted beyond the powers provided to them
agreement, the chairman of the meeting shall disregard the vote.
(ultra vires) and/or in violation of fiduciary duties.
Private equity investors that nominate directors to the board
3.4 Are there any duties owed by a private equity of portfolio companies are not subject to any responsibility
investor to minority shareholders such as management in such regard, being subject to the usual responsibilities of
shareholders (or vice versa)? If so, how are these shareholders.
typically addressed?

3.7 How do directors nominated by private equity

In accordance with the Brazilian Corporation Law, where the
investors deal with actual and potential conflicts of
private equity investor is a controlling shareholder, it shall use interest arising from (i) their relationship with the party
its controlling power to fulfil the corporate purpose of the nominating them, and (ii) positions as directors of other
company. The Brazilian Corporation Law also provides that portfolio companies?
controlling shareholders owe fiduciary duties towards minority
shareholders, the company’s employees and other stakeholders
The directors shall act in the company’s interest, regardless of
and is liable for abusive use of its controlling power.
the shareholder who appointed them. Accordingly, the directors
Furthermore, in accordance with the Brazilian Corporation
are not allowed to protect the interest of certain shareholders in
Law, all shareholders, regardless of the amount of stake, must
detriment of the company’s interests and cannot vote in resolu-
exercise their voting rights in the company’s best interest, as
tions in which they have a conflict of interest.
opposed to voting only with considerations to their own inter-
The director may hold position in other portfolio compa-
ests; such vote would otherwise be considered abusive. Any
nies, provided that such companies are not competitors. If the
shareholder may be liable for damages caused by an abusive vote,
companies are competitors, the shareholders should expressly
even if its vote does not prevail.
allow the director to hold such positions.

Private Equity 2023

28 Brazil

42 Transaction Terms: General 62 Transaction Terms: Private Acquisitions

4.1 What are the major issues impacting the timetable 6.1 What consideration structures are typically
for transactions in your jurisdiction, including antitrust, preferred by private equity investors (i) on the sell-side,
foreign direct investment and other regulatory approval and (ii) on the buy-side, in your jurisdiction?
requirements, disclosure obligations and financing
issues?
When private equity investors are on the sell-side of the transac-
tion, they generally look forward to obtaining a clean exit and/
Private equity transactions may be subject to certain approvals or for limited indemnification and/or obligations.
that might impact the foreseen timetable, such as: (i) antitrust On the other hand, buy-side private equity investors prefer
clearance; and (ii) approval of regulators, such as the Central a more flexible indemnification approach, which might include
Bank of Brazil for financial institutions, Private Insurance “my watch-your watch” arrangements and more robust guaran-
Authority for insurance, etc. tees. In addition, private equity buyers may also request for the
retention of key employees.
4.2 Have there been any discernible trends in
transaction terms over recent years? 6.2 What is the typical package of warranties /
indemnities offered by (i) a private equity seller, and (ii)
In recent years, buyers have been less reluctant to accept indem- the management team to a buyer?
nification clauses based on the breach of representations and
warranties instead of “my watch-your watch” arrangements. The typical package of the representations and warranties
offered by the seller and by the management of the portfolio
52 Transaction Terms: Public Acquisitions company are usually focused on fundamental representations
such as: (i) general capacity and authorisation to execute the
5.1 What particular features and/or challenges apply share purchase agreement; (ii) inexistence of violations; (iii)
to private equity investors involved in public-to-private corporate aspects (existence of shareholders’ agreement, subsid-
transactions (and their financing) and how are these iaries, and affiliates); (iv) financial statements; (v) existence of
commonly dealt with? debts; (vi) intellectual property; (vii) labour; (viii) tax; (ix) litiga-
tion; (x) real estate; (xi) material agreements; (xii) related parties
Most listed companies in Brazil have a controlling shareholder transactions; (xiii) insurance; (xiv) licences and regulatory
and true corporations are still an exception. Acquisitions of aspects; (xv) environmental aspects; and (xvi) data protection.
controlling interest in companies with controlling shareholders It is also common for the share purchase agreement to
are usually conducted as private transactions between the provide for special indemnification clauses. The agreement will
controlling shareholder and the buyer followed by a mandatory usually provide that the indemnification should also encompass
tender offer launched by the buyer to acquire all common shares unknown liabilities, and certain contingencies (e.g., fiscal and
held by minority shareholders. Depending on the listing segment labour) may be subject to special indemnification mechanisms.
of the portfolio company, the mandatory tender offer may be
extended to all shares held by the minority shareholders. 6.3 What is the typical scope of other covenants,
In true corporations, the acquisition of controlling interest is undertakings and indemnities provided by a private
usually executed through a voluntary tender offer launched by the equity seller and its management team to a buyer?
buyer to acquire the controlling interests. To secure the success of
the tender offer, the buyer may convince relevant shareholders to Traditionally, private equity sellers do not accept restrictive
commit to sell a certain number of shares under the tender offer. covenants to ensure a clean exit. Non-competition and non-so-
licitation provisions will likely not be present in transactions
5.2 What deal protections are available to private involving private equity sellers, or such covenants are limited
equity investors in your jurisdiction in relation to public as much as possible and, if strictly necessary, are focused on the
acquisitions? general partner of the fund. In some cases, the buyer will insist
on restrictive covenants, which will usually cause the private
In most cases, private equity investors enter into a private deal equity seller to request for a significant increase in the valuation.
with controlling shareholders of public companies and seek the Moreover, if the buyer considerers that the management team
same protections they would have in a private acquisition. The of the private equity seller have acquired material informa-
private deal executed between the controlling shareholder, as the tion on the company’s business, restrictive covenants might be
seller, and the private equity investor, as the buyer, will usually imposed to such individuals. Private equity sellers will usually
include “my watch-your watch” provisions. On the other hand, offer little resistance to the inclusion of such covenants.
if the acquisition involves a tender offer, there is no protection
or assurance to the private equity investor. 6.4 To what extent is representation & warranty
Publicly traded companies are subject to a stricter regulation insurance used in your jurisdiction? If so, what are the
on the disclosure of information. Therefore, private equity inves- typical (i) excesses / policy limits, and (ii) carve-outs /
tors can rely on different documents to assess the investment on exclusions from such insurance policies, and what is the
a publicly traded company, such as reference form, audited finan- typical cost of such insurance?
cial statements and material facts issued by the company.
In recent years, insurance companies started offering representa-
tions and warranties insurance. However, this insurance only
covers undisclosed liabilities and does not apply to known

Private Equity 2023

 Mello Torres Advogados 29

liabilities mentioned in the representations and warranties or

discovered on a due diligence report or the company’s reference
72 Transaction Terms: IPOs
form.
If the private equity investor is on the sell-side, the agreement 7.1 What particular features and/or challenges should
a private equity seller be aware of in considering an IPO
may be construed based on breaches of representations and
exit?
warranties; in this case, an insurance policy might be contracted.
In these cases, the parties will usually establish special indemni-
fication provisions for fundamental representations and warranties In recent years, IPO exits became a viable alternative for private
and focus more on undisclosed liabilities covered by the insurance. equity investments in Brazil. One of the main reasons for the
recent increase on the Brazilian IPO markets was the strong
decrease of the interest rates, which started in 2017 and encour-
6.5 What limitations will typically apply to the liability aged investors to search for riskier investments to guarantee
of a private equity seller and management team under better returns. However, since 2022, high interest rates have
warranties, covenants, indemnities and undertakings?
reduced IPO exits in Brazil – we expect this scenario to change
with a reduction in interest rates.
Representations and warranties typically survive for five years
post-closing, with tax representations and warranties surviving
7.2 What customary lock-ups would be imposed on
up to six years after closing, due to the longer statute of limita- private equity sellers on an IPO exit?
tions of such liabilities.
The indemnification cap typically ranges from 5–20% of
the purchase price and liability for breaches of fundamental It is customary that the underwriters of the IPO impose a
representations and warranties, breach of covenants, fraud and lock-up period for relevant or controlling shareholders. The
special liabilities is often uncapped. lock-up period is usually negotiated for around six months, but
There has been a tendency of indemnity provisions to depart there may also be established certain milestones that would
from the “my watch-your watch” construct to a more interna- release the lock-up.
tional and restrictive approach of breach of representations and/
or covenants. 7.3 Do private equity sellers generally pursue a dual-
track exit process? If so, (i) how late in the process are
private equity sellers continuing to run the dual-track,
6.6 Do (i) private equity sellers provide security (e.g., and (ii) were more dual-track deals ultimately realised
escrow accounts) for any warranties / liabilities, and through a sale or IPO?
(ii) private equity buyers insist on any security for
warranties / liabilities (including any obtained from the
management team)? Yes, due to the uncertainty relating to the success of the IPO,
private equity sellers usually pursue a dual-track strategy. This
process usually begins before the IPO becomes public, due to
If on the sell-side, the private equity investors usually offer
the private equity seller becoming aware of the market’s inten-
limited or no security to the buyer, because, as mentioned above,
tions relating to the deal. The most common result is unclear.
the goal is to provide a clean exit to the private equity investor.
When a guarantee is provided, it usually involves escrow
accounts, holdback of the purchase price or similar arrange- 82 Financing
ments. Conversely, the private equity buyers usually do insist
in the provision of more substantial guarantees, such as liens on 8.1 Please outline the most common sources of debt
remaining shares, real estate collateral or escrow instruments. finance used to fund private equity transactions in your
jurisdiction and provide an overview of the current state
of the finance market in your jurisdiction for such debt
6.7 How do private equity buyers typically provide (including the syndicated loan market, private credit
comfort as to the availability of (i) debt finance, and (ii) market and the high-yield bond market).
equity finance? What rights of enforcement do sellers
typically obtain in the absence of compliance by the The most common source of debt finance is taken with large
buyer (e.g., equity underwrite of debt funding, right to
financial institutions through loans and bonds (debentures). It
specific performance of obligations under an equity
commitment letter, damages, etc.)?
is uncommon to see high-yield bonds being used for private
equity financing.

It is uncommon for the buyers to provide comfort to the sellers

relating to the availability of funds to perform its obligations 8.2 Are there any relevant legal requirements or
restrictions impacting the nature or structure of the debt
under the share purchase agreement. Brazilian agreements are
financing (or any particular type of debt financing) of
usually not financing-contingent and are executed on a firm private equity transactions?
basis. However, the transaction documents usually provide for
certain representations and warranties by the buyer relating to
its financial capabilities. If the investor fails to close the transac- The only relevant restriction relating to debt financing is the
tion, the seller might seek the specific performance of the agree- fact that FIPs are not allowed to incur debt, unless specifically
ment before a court or arbitration. permitted by the CVM. This usually causes the investment to
be structured by a holding company, as a subsidiary of the FIP.

6.8 Are reverse break fees prevalent in private equity

transactions to limit private equity buyers’ exposure? If 8.3 What recent trends have there been in the debt-
so, what terms are typical? financing market in your jurisdiction?

Reverse break fees are not prevalent in Brazil. After a period of low interest rates, we are seeing a constant

Private Equity 2023

30 Brazil

increase in the SELIC (Brazilian standard interest rate). There- The final terms of such reform are not yet defined, but there is
fore, financing structured before local banks might become less a possibility of relevant changes to the FIP structure, removing
common, and international financing might be a better alternative. most of its tax benefits.

92 Alternative Liquidity Solutions 112 Legal and Regulatory Matters

9.1 How prevalent is the use of continuation fund 11.1 Have there been any significant legal and/or
vehicles or GP-led secondary transactions as a deal type regulatory developments over recent years impacting
in your jurisdiction? private equity investors or transactions and are any
anticipated?
Continuation fund vehicles and/or GP-led secondary transactions
are not common in Brazil, although their use is increasing recently. In recent years, there were many regulatory reforms and simpli-
fications. With the intention of improving the business envi-
ronment in Brazil, the government approved: (i) the Economic
9.2 Are there any particular legal requirements or
Freedom Act; (ii) corporations law reform related to the start-up
restrictions impacting their use?
industry; (iii) the Data Protection Law; (iv) enhancement of
securities regulation; and (v) the general review and restructure
Such funds are subject to the general requirements applicable to of rules issued by regulatory bodies.
investment funds. In addition, a specific concern related to this
structure is the management and reduction of conflict of interests.
11.2 Are private equity investors or particular
transactions subject to enhanced regulatory scrutiny in
102 Tax Matters your jurisdiction (e.g., on national security grounds)?

10.1 What are the key tax considerations for private There is no enhanced scrutiny directed to private equity inves-
equity investors and transactions in your jurisdiction?
tors, but if a transaction is made in certain regulated sectors,
Are off-shore structures common?
prior approval by the regulatory bodies might be applicable.

The main tax factor relates to the tax benefits available to struc-
tures involving FIPs. Brazilian Law provides for deferral of 11.3 Are impact investments subject to any additional
legal or regulatory requirements?
capital gains and income taxes to the moment when the proceeds
are distributed to the FIP shareholders. In addition, if certain
requirements are met, non-resident investors may benefit from There are no specific legal or regulatory requirements for impact
special exemption on capital gains. investments in Brazil.

10.2 What are the key tax-efficient arrangements that 11.4 How detailed is the legal due diligence (including
are typically considered by management teams in private compliance) conducted by private equity investors prior
equity acquisitions (such as growth shares, incentive to any acquisitions (e.g., typical timeframes, materiality,
shares, deferred / vesting arrangements)? scope, etc.)?

The Brazilian tax system is known for great complexity and it is Private equity investors usually perform extensive due diligence
thus very difficult to set a definitive guide for the most tax-effi- procedures. The investors will usually hire a full-service law
cient arrangement. The incentive plans might be subject to ordi- firm, accounting and fiscal auditors and business consultants to
nary income taxes and social security contributions if the incen- conduct the due diligence. Compliance and regulatory matters
tive is recognised as a compensation. To avoid this undesirable are usually the mains aspects of the scope of the due diligence,
and more costly structure the beneficiaries must effectively invest which may include the performance of background checks and
in the company and be subject to all the risks of the business. interviews with management members. The usual timeframe of
the questioning is usually limited to five years prior to the due
diligence; however, some aspects may require longer timeframes
10.3 What are the key tax considerations for
(up to 20 years for real estate matters). In relation to the mate-
management teams that are selling and/or rolling over
part of their investment into a new acquisition structure? riality, the report resulting from the due diligence usually indi-
cates the main red flags and relevant risks.
Where the idea is to roll over the investment into a new acquisi-
tion, the transaction should be treated as a contribution of assets 11.5 Has anti-bribery or anti-corruption legislation
into a new vehicle. This causes the capital gains taxes to be impacted private equity investment and/or investors’
approach to private equity transactions (e.g., diligence,
significantly reduced in comparison with structures that involve
contractual protection, etc.)?
a disposal of assets.

Following many corruption investigations in Brazil, there were

10.4 Have there been any significant changes in tax significant changes to the laws relating to anti-bribery and anti-
legislation or the practices of tax authorities (including
corruption. Both the due diligence and the share purchase agree-
in relation to tax rulings or clearances) impacting private
equity investors, management teams or private equity ment considered these aspects. Also, after the implementation of
transactions and are any anticipated? the transaction, it is very common for the private equity investors
to implement strict compliance policies in the invested companies.
Currently, a tax reform is in discussion in the Brazilian Congress.

Private Equity 2023

 Mello Torres Advogados 31

11.6 Are there any circumstances in which: (i) a private 122 Other Useful Facts
equity investor may be held liable for the liabilities of
the underlying portfolio companies (including due to
breach of applicable laws by the portfolio companies); 12.1 What other factors commonly give rise to concerns
and (ii) one portfolio company may be held liable for the for private equity investors in your jurisdiction or should
liabilities of another portfolio company? such investors otherwise be aware of in considering an
investment in your jurisdiction?

There are some cases in which the Brazilian court may determine
the existence of an economic group. In such cases, the affiliate Private equity investors should consider that the Brazilian
companies may be held jointly liable for certain infringements. market is a developing market, which imposes certain risks but
It is important to note, however, that the potentially applicable also great potential for profitable transactions. Investors must
situations are very limited and usually involve labour, tax and be aware that certain companies have family backgrounds and
consumer issues. the business structures might not be as professional as expected.

Private Equity 2023

32 Brazil

Carlos José Rolim de Mello is a recognised specialist in M&A, corporate governance and private equity throughout Brazil. He has participated
in major and complex transactions in Brazil, such as the sale of BRF’s dairy assets to Parmalat, the acquisition of Companhia Providência by
a Blackstone funded company and the business combination between Hapvida and GNDI Grupo NotreDame Intermédica. Mr. Mello has also
advised a number of pharmaceutical companies in a variety of M&A, private equity and commercial transactions in the last couple of years.
Prior to opening Mello Torres, Carlos headed the M&A practice of Machado Meyer Advogados, where he stayed for over 20 years. His international
experience includes working as an associate at Chadbourne & Parke LLP and at Skadden, Arps, Slate, Meagher & Flom LLP, both in New York.

Mello Torres Advogados Tel: +55 11 3074 5708

Av. Brigadeiro Faria Lima, 3355, 16th floor – Itaim Bibi Email: carlos.mello@mellotorres.com.br
CEP 04538-133 – São Paulo (SP) URL: www.mellotorres.com.br
Brazil

Roberto Panucci advises Brazilian and foreign companies on aspects involving banking and insurance regulation, M&A, financing and corpo-
rate law, and also represents clients in administrative proceedings initiated by Brazilian governmental entities. In addition, Roberto Panucci
has acquired solid experience with startups, advising these clients on corporate aspects, compliance, fundraising, among other matters.
Before joining Mello Torres, he worked at Pinheiro Neto Advogados and Mattos Filho. His international experience includes working as a
foreign associate at Paul, Weiss, Rifkind, Wharton & Garrison LLP in New York.

Mello Torres Advogados Tel: +55 11 3074 5739

Av. Brigadeiro Faria Lima, 3355, 16th floor – Itaim Bibi Email: roberto.panucci@mellotorres.com.br
CEP 04538-133 – São Paulo (SP) URL: www.mellotorres.com.br
Brazil

Rafael Biondi Sanchez has more than 13 years of experience in M&A, corporate law and enforcement in financial and capital markets. Rafael
has participated in several M&A transactions and advises companies and capital market participants before the Brazilian Securities and
Exchange Commission (CVM) and self-regulatory agencies.
Before joining Mello Torres, he was a partner at Loria and Kalansky Advogados, officer at the Brazilian Institute of Corporate Law (IBRADEMP)
and an assistant professor of Civil Law at the Law School of Pontifícia Universidade Católica de São Paulo (PUC-SP).

Mello Torres Advogados Tel: +55 11 3074 6946

Av. Brigadeiro Faria Lima, 3355, 16th floor – Itaim Bibi Email: rafael.sanchez@mellotorres.com.br
CEP 04538-133 – São Paulo (SP) URL: www.mellotorres.com.br
Brazil

Mello Torres brings together the expertise of professionals with deep expe-
rience in the corporate and financial area and the enthusiasm of lawyers
with solid academic backgrounds. Our firm works notably in the M&A,
tax, corporate, banking and project finance, infrastructure, environmental,
mining, litigation and arbitration, public and regulatory law, insurance,
labour, real estate, competition and compliance practice areas. With a
diversified expertise, Mello Torres’ team of lawyers offers complete legal
analysis for any case in hand, whether in the drafting and negotiation of
contracts, or in matters of advisory or litigious nature.
www.mellotorres.com.br

Private Equity 2023

 Chapter 5 33

Canada

Canada
Michael P. Brett
Whitcombe Stewart

Enda Bruce
McMillan LLP Wong Chapple

at an average of 6.5×. However, valuations remain increas-

12 Overview ingly difficult to conduct as operations and supply chain disrup-
tion are a key focus of risk assessment and investors have to
1.1 What are the most common types of private equity understand the financial risks associated with a target’s trading
transactions in your jurisdiction? What is the current
partners, suppliers and customers caused by the pandemic and
state of the market for these transactions?
geopolitical events.
The high activity level in the mid-market coupled with the
After the private equity record levels reached in 2021, the North lower Canadian dollar continues to make Canadian targets
American private equity market settled back to its pre-pandemic attractive to foreign private equity buyers, especially if the targets
levels in 2022. According to the year-end market overview report have, or have the potential to, establish a presence in the United
by the Canadian Venture Capital and Private Equity Association, States and are therefore able to generate revenue in US dollars.
$10 billion of private equity was invested in 890 deals in 2022.
Middle-market deals continued to be a significant driver in terms
of total value invested. In the face of the rising interest rates, 1.3 Are you seeing any types of investors other
than traditional private equity firms executing private
national security concerns and economic uncertainty, private
equity-style transactions in your jurisdiction? If so,
equity investors have focused more on small- and medium-sized please explain which investors, and briefly identify any
businesses, with deals under $25 million comprising 85% of the significant points of difference between the deal terms
deals that were closed in 2022. The industrial and manufac- offered, or approach taken, by this type of investor and
turing sector and the information communications technology that of traditional private equity firms.
sector continue to capture the largest share of activity measured
by both the number of deals and total value. Cleantech was the Family offices and institutional investors, such as pension funds,
top sector in investment activity in the first months of 2023, with are continuing to be active and independent participants in the
$883 million invested in over 11 deals. private mergers and acquisitions space. When these investors
compete against private equity firms in an auction setting, they
1.2 What are the most significant factors currently tend to offer private-equity-like transaction terms, including no
encouraging or inhibiting private equity transactions in indemnity deals backstopped by the use of representations and
your jurisdiction? warranties insurance. If it is not a competitive process, then
their approach and timelines are often more closely aligned to
Private equity firms continue to have record levels of dry powder that of a strategic purchaser. Since these investors generally
on hand and increasing pressure to invest those funds; however, have the ability to hold an investment indefinitely, they are typi-
acquisition financing, while still readily available from third- cally more willing to acquire businesses that include real estate
party lenders, is becoming increasingly, and sometimes prohib- assets and will be more willing to consider acquiring manufac-
itively, expensive as interest rates rise and some private equity turing operations that have “legacy issues”.
firms are considering alternative structures or looking to alter-
native lenders to provide their financing. 22 Structuring Matters
Continuing economic uncertainty, rising inflation, supply
chain instability, geopolitical tensions and a renewed focus on 2.1 What are the most common acquisition structures
target financial performance are the most significant factors adopted for private equity transactions in your
currently inhibiting deals. However, 2022 demonstrated stability jurisdiction?
with ongoing private equity activity across all sectors and indus-
tries, driven by continuing access to financing, the availability of Privately held Canadian businesses are generally acquired by
ample dry powder on the buy-side and acceptable multiples on private equity buyers either through a purchase of assets or a
the sell-side. purchase of shares. Private equity investors will typically incor-
From the private equity buyer’s perspective, seller’s valuation porate a Canadian acquisition corporation and fund it by way
expectations have readjusted downward to a degree, but remain of interest-bearing debt and equity on a 1.5:1 basis in order to
high compared to long-term averages. According to Crosbie & comply with Canadian thin-capitalisation rules. This acquisi-
Co., companies with an enterprise value of $100–$250 million tion entity then acquires all of the shares/assets of the Cana-
traded at an average of 9.1×, a premium of 40% to small compa- dian target and, in the case of a share acquisition, the acquisi-
nies with an enterprise value of $10–$25 million, which traded tion corporation and target are then “amalgamated” under the

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relevant corporate statute to align the leverage with the operating minority rights stipulated in the shareholder agreement become
company that will service the debt. Often, these buyout struc- a primary concern to ensure private equity firms have veto
tures include key management rolling their interest and main- power (or at least significant influence) over critical decisions.
taining their equity stake. The then amalgamated operating Likewise, put and drag-along provisions are key to ensure the
company will then typically make add-on transactions by way of private equity investor has flexibility with regard to their exit
direct acquisition whereby the operating company will acquire the strategy. A minority interest is often taken by a private equity
share or assets of an add-on target directly. Add-on acquisitions investor in the form of convertible preferred shares or a convert-
continue to account for over 75% of private equity buyouts in ible debt instrument.
Canada, which is an accurate representation of the trend over the
last five years. With that said, while buyouts remain the preferred
2.5 In relation to management equity, what is the
form of investment, minority investments, once only common typical range of equity allocated to the management, and
in smaller growth equity deals, are a continuing and increasingly what are the typical vesting and compulsory acquisition
popular trend due in part to the rising cost of borrowing. provisions?

2.2 What are the main drivers for these acquisition Allocation to management will vary on a deal-by-deal basis but
structures? typically ranges from 10–20%. Aligning the equity interests
granted to continuing managers with the continued growth and
Whether a Canadian acquisition should be completed by success of the company is essential. In order to align interests,
purchasing assets or shares is driven by both tax and non-tax most stock option plans call for options to vest and become
considerations. The weight given to these factors will depend exercisable upon the achievement of certain time and/or perfor-
on the circumstances of the transaction and the parties’ ability to mance-based conditions. Those conditions are typically tied to
leverage their respective positions. From the point of view of a either continued employment and the passage of time, and/or
potential purchaser, the greatest benefits of an asset sale are tax certain performance/success requirements, such as the achieve-
advantages (obtaining full-cost basis in the acquired assets) and ment of stated financial returns. Generally, management equity
the ability to pick and choose the assets and liabilities that will be is structured to allow for repurchase by the company upon a
acquired. The majority of “legacy liabilities” can be left with the termination of employment. Options granted to management
seller. However, asset sales tend to be significantly more complex may vary on whether they are exercisable following termination
in larger transactions and can require more third-party consents of employment based on whether the termination was a “good
for material contracts. Furthermore, certain permits and licences exit” or a “bad exit” or on where the management ultimately
may not be transferable or assignable in an asset sale. In contrast, lands following the exit. The options granted to management
a share sale is relatively simple from a conveyancing perspec- typically vest automatically in the event of a sale of the company
tive and less likely to trigger third-party consent requirements by the private equity investor.
or a need to apply for new licences or permits by the purchaser.
From the seller’s perspective, tax considerations generally favour 2.6 For what reasons is a management equity holder
share transactions, as individual sellers may be able to utilise their usually treated as a good leaver or a bad leaver in your
$971,190 (as of 2023) lifetime personal capital gains exemptions jurisdiction?
to shelter a portion of the proceeds and there is no recapture of
depreciation that occurs on a sale of assets. Changes to Cana- Under Canadian law, the threshold for firing an employee “for
dian tax rules in 2021 have seen “hybrid” transaction structures, cause” is very high and hard to establish. For that reason,
which were previously popular for providing tax advantages to circumstances amounting to an exiting management equity
both buyer and seller and involved selling shares and assets as part holder leaving as a “bad leaver” are not tied to a causal dismissal
of the same transaction, to be largely ineffective. but rather to more general grounds of dismissal. Any circum-
stance where an exiting equity holder is terminated or is acting in
2.3 How is the equity commonly structured in private competition with the business will be treated as a “bad leaver”.
equity transactions in your jurisdiction (including Good leavers are usually those leaving due to death, disability or
institutional, management and carried interests)? scheduled retirement.

Sellers of businesses, including key management, will often roll 32 Governance Matters
over equity into a Canadian corporate purchaser. The precise
terms of the equity interests offered to, or required of, contin- 3.1 What are the typical governance arrangements
uing management are often a major point of negotiation in trans- for private equity portfolio companies? Are such
actions. Typical structures include multiple classes of equity with arrangements required to be made publicly available in
one class designed to pay out investors, such as the fund and any your jurisdiction?
co-investors (including management), in priority over a second
class designed to pay out continuing management only if the busi- Private equity firms utilise their equity positions, or negoti-
ness is eventually sold for more than a certain threshold value ated minority rights, to assign seats on the board of directors
(incentive equity). Stock options (more tax-effective) or phantom to their principals and nominees. As such, they typically have
stock options (less tax-effective) are also commonly granted. the authority to run the portfolio company for the period of
their investment. In Canada, the names and addresses of private
2.4 If a private equity investor is taking a minority companies’ board of directors are publicly available informa-
position, are there different structuring considerations? tion. In response to foreign pressures to bring disclosure of
ownership of Canadian corporations in line with other major
countries, the federal government committed to improve bene-
Minority positions require private equity firms to consider
ficial ownership transparency by creating a national public and
different structuring issues due to the lack of control. The

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searchable beneficial ownership registry for federally incor- 3.5 Are there any limitations or restrictions on the
porated businesses. The Canada Business Corporations Act contents or enforceability of shareholder agreements
currently requires federally incorporated businesses to main- (including (i) governing law and jurisdiction, and (ii)
tain a record of beneficial owners in their corporate records. non-compete and non-solicit provisions)?
On March 22, 2023, the Government of Canada tabled legis-
lation that would require private federal business corporations A shareholder agreement that is not signed by all of the share-
to report beneficial ownership information to Corporations holders of a company is treated as a regular commercial contract
Canada annually and within 15 days of any change in benefi- and, as such, not automatically enforceable against a subsequent
cial ownership. In Quebec, legislative changes took effect on shareholder; it is subject to the articles and by-laws of the corpo-
March 31, 2023 that made beneficial ownership information ration and the provisions of the relevant corporate statute. In
with respect to owners of Quebec corporations publicly avail- contrast, a USA is a creature of statute, provided that it is signed
able. Similarly, Ontario, British Columbia, Manitoba, Saskatch- by all shareholders. Corporate legislation expressly recognises
ewan, Nova Scotia, and Prince Edward Island have also intro- the ability of shareholders to contract out of certain statutory
duced comparable amendments to their corporate legislation, requirements and fetter certain powers of directors. To the
requiring companies to privately report or maintain records extent a USA restricts the powers of directors to manage the
of their beneficial ownership structures. As a consequence of business and affairs of the corporation, shareholders who are
these various amendments, the public availability of this infor- given that power inherit the rights, powers, duties and liabili-
mation is not consistent across Canadian jurisdictions; however, ties of a director under corporate statutes or otherwise. Cana-
there is certainly a growing trend towards greater transparency. dian courts will generally not enforce restrictive covenants that
unnecessarily restrict an individual’s freedom to earn a liveli-
3.2 Do private equity investors and/or their director hood. What is reasonably necessary depends on the nature of
nominees typically enjoy veto rights over major the business, its geographic reach, and the individual’s former
corporate actions (such as acquisitions and disposals, role in that business. Canadian courts will not enforce a restric-
business plans, related party transactions, etc.)? If a tive covenant that does not contain any time limit.
private equity investor takes a minority position, what
veto rights would they typically enjoy?
3.6 Are there any legal restrictions or other
requirements that a private equity investor should
The default dissent rights provided under corporate legislations be aware of in appointing its nominees to boards of
are typically supplemented through unanimous shareholder portfolio companies? What are the key potential risks
agreements (“USAs”) that ensure the private equity investor and liabilities for (i) directors nominated by private
has ultimate control over the portfolio company. In applicable equity investors to portfolio company boards, and (ii)
Canadian jurisdictions, USAs are effectively part of the articles private equity investors that nominate directors to
of a corporation. Often, such veto rights cease to apply where a boards of portfolio companies?
private equity investor’s equity interest is reduced below a given
benchmark. Where a private equity investor holds a minority Depending on the jurisdiction of incorporation, the board of
position, veto rights are still typically enjoyed over critical busi- directors of a Canadian corporation may be subject to certain
ness matters such as acquisitions, changes to the board and minimum residency requirements. Notably, boards of direc-
management team, the issuance of new equity or debt and the tors for companies incorporated under the federal statute must
disposition of key assets. consist of at least 25% resident Canadian directors or include
at least one resident of Canada if the board has fewer than four
members. Residency requirements only remain under the federal
3.3 Are there any limitations on the effectiveness of
veto arrangements: (i) at the shareholder level; and (ii) at statute, and the corporate statutes of Manitoba, Newfoundland
the director nominee level? If so, how are these typically and Labrador, and Saskatchewan. No other provinces provide
addressed? for director Canadian residency requirements, thus making such
jurisdictions more attractive to foreign-owned private equity
firms who want to have the boards of their Canadian portfolio
In order for a shareholder agreement to be automatically enforce-
investments aligned in terms of membership with those of their
able against a subsequent shareholder, which shareholder agree-
investments held outside of Canada.
ment sets forth veto arrangements, fetters the discretion of the
In Canada, all directors owe fiduciary duties to the corpora-
directors or supplants the default provisions of corporate legisla-
tion, including a duty to act in the best interest of the corpora-
tion where permitted, it must be unanimous in nature (so-called
tion. The potential statutory liabilities directors are exposed to
USAs as described above). At the director level, only certain
can be extensive and the basis for this potential liability varies.
powers of directors can be fettered by a USA and, most notably,
Directors may be personally liable for their own wrongdoing
the fiduciary duty owed by the director of a portfolio company
or failure, such as breaching the duties of loyalty and of care,
to the company itself cannot be restrained.
or, in other instances, held personally liable for wrongdoing by
the corporation. The statutes that impose liability on directors
3.4 Are there any duties owed by a private equity include those governing: corporate matters; securities compli-
investor to minority shareholders such as management ance; employment and labour protection; taxation; pensions;
shareholders (or vice versa)? If so, how are these bankruptcy and insolvency; and environmental. In Quebec,
typically addressed?
amendments to the Charter of the French Language also provide
for potential liability for directors in the case of non-compliance
In contrast to some American jurisdictions, controlling share- with French language legislation by a corporation.
holders in Canada do not owe a fiduciary duty to minority
shareholders.

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3.7 How do directors nominated by private equity Act, non-Canadian investors are also permitted to submit a
investors deal with actual and potential conflicts of voluntary notification of such investments, and such voluntary
interest arising from (i) their relationship with the party filings are also subject to a national security review.
nominating them, and (ii) positions as directors of other
portfolio companies?
4.2 Have there been any discernible trends in
transaction terms over recent years?
Directors of a corporation who are nominees of a particular
shareholder are subject to fiduciary duties to act in the best
The increase in foreign investment, typically from the U.S., has
interest of the corporation, not the shareholder who nomi-
influenced transaction terms, which have gradually shifted to
nated them. Canadian corporate statutes require directors to
become increasingly similar to those in the American market.
disclose in writing the nature and extent of their interest in a
For example, the size of indemnity caps, while still signif-
proposed material contract or transaction with the corpora-
icantly higher in Canada than in the U.S., continues to trend
tion. This provision applies whether the director is a party to
downwards. Earn-out provisions have also become increas-
the contract or transaction personally or is a director or officer
ingly popular as a way to bridge the valuation gap and to work
of, or has a material interest in, a party to the contract or trans-
around business uncertainties caused by the pandemic and have
action. As such, all conflicts or potential conflicts the director
continued to persist post-pandemic.  The Canadian market has
has, as a result of their relationship with the nominating party
also increasingly seen public-company style “no-indemnity”
and/or other portfolio companies, must be disclosed. In situa-
deals as in the U.S. market. Also, the use of representations and
tions of conflict, the statutes require the director to refrain from
warranties insurance is increasingly being seen as standard in
voting on any resolution to approve the contract or transaction
the Canadian private equity market and impacts what terms are
except in narrow circumstances. Notably, Alberta’s corporate
“market” in deals using that product.
statute contemplates a corporation’s ability to include a “corpo-
rate opportunity waiver” in its articles or in a unanimous share-
holder agreement. Alberta is the first to introduce this waiver, 52 Transaction Terms: Public Acquisitions
which is beneficial to directors, officers and shareholders of
a corporation wishing to take advantage of certain business 5.1 What particular features and/or challenges apply
opportunities. This is particularly attractive to private equity to private equity investors involved in public-to-private
investors who may wish to take advantage of business opportu- transactions (and their financing) and how are these
nities afforded to them by being engaged with several different commonly dealt with?
boards and management teams operating in the same industry.
Canadian takeover bids require that adequate arrangements (an
42 Transaction Terms: General interpreted statement) must be made, with the effect that a bid
cannot be conditional on financing. Typically, an interested
investor will have entered into a binding commitment letter with
4.1 What are the major issues impacting the timetable
for transactions in your jurisdiction, including antitrust, a financial institution or other provider of funds before making a
foreign direct investment and other regulatory approval takeover bid. On the other hand, statutory plans of arrangement
requirements, disclosure obligations and financing can be conditional in nature and allow more flexibility to provide
issues? collateral benefits to managements, etc. Due to this flexibility,
most uncontested Canadian privatisation transactions involving
Aside from the typical due diligence process, the timetable for private equity investors are completed by a plan of arrangement.
transactions is often governed by the regulatory approval required
under the Competition Act and the Investment Canada Act, where 5.2 What deal protections are available to private
applicable. In Canada, certain large transactions trigger advance equity investors in your jurisdiction in relation to public
notice requirements under the Competition Act. Such trans- acquisitions?
actions cannot be completed until the end of a review period.
Pre-merger notification filings are required in connection with a In friendly acquisitions, provisions relating to the fiduciary duties
proposed acquisition of assets or shares or an amalgamation or of the public target’s board and break fees are often seen in connec-
other combination to establish a business in Canada where thresh- tion with “no-shop” provisions. The “no-shop clause” is typi-
olds relating to the “size of the parties”, the “size of the trans- cally subject to a fiduciary out, upon which the break fee becomes
action” and “shareholding” are exceeded. Amendments to the payable. The break fee, traditionally in the range of 2–4% of the
Competition Act have resulted in more transactions being subject transaction’s value, is now typically based on enterprise value.
to pre-merger notification as all corporate and non-corporate enti-
ties under common direct or indirect control are now treated as
62 Transaction Terms: Private Acquisitions
“affiliates” and are thus included in the threshold analysis. This
has been especially impactful on traditional private equity funds
that are structured as limited partnerships. In addition to competi- 6.1 What consideration structures are typically
preferred by private equity investors (i) on the sell-side,
tion regulations, under the Investment Canada Act, foreign invest-
and (ii) on the buy-side, in your jurisdiction?
ments that exceed prescribed values or that relate to a cultural
business or involve national security issues are subject to Invest-
ment Canada Act approval. This allows the federal government to Private equity buyers typically require purchase price adjust-
screen proposed investments to determine whether they will be of ments to reflect the financial condition of the target. Typi-
“net benefit” to Canada. Consistent with other jurisdictions glob- cally, these are based on a net working capital adjustment.
ally, Canada has seen a broadened interpretation of what consti- Earn-out provisions are also often contemplated by private
tutes “national security” and consequently more transactions are equity buyers in order to link the seller’s ultimate considera-
potentially subject to this review. Under the Investment Canada tion to the financial success of the target entity post-closing.

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 McMillan LLP 37

Earn-out provisions have become especially popular following 6.5 What limitations will typically apply to the liability
the COVID-19 pandemic as a way for transaction parties to of a private equity seller and management team under
account for uncertain future performance without discounting a warranties, covenants, indemnities and undertakings?
company’s purchase price. While still relatively rare, the use of
“locked box” structures is growing in Canada as a means to limit It is advisable for private equity investors to build restrictions
post-closing price adjustments. Private equity firms generally on the scope of representations and warranties that fund inves-
arrange their own credit facility and invest on a cash-free, debt- tors are required to give on a sale transaction. Representa-
free basis. On the sell-side, private equity investors typically tions and covenants as to the portfolio company’s operations
prefer simple consideration structures with less variability and are more properly given by management shareholders who will
that minimise the size and scope of post-closing obligations. have in-depth knowledge in this regard. Private equity investors
required to indemnify a purchaser in respect of a breach should
6.2 What is the typical package of warranties / do so on a several basis and limitations should be placed on
indemnities offered by (i) a private equity seller, and (ii) the dollar amount for which private equity investors are respon-
the management team to a buyer? sible. Typically, post-closing indemnification on the sale lasts
12−18 months (with fundamental representations and warran-
Private equity sellers and management teams will try to mini- ties lasting longer) and negotiated indemnity cap (for non-fun-
mise the representations and warranties, and insist on a short damental representations) often in the range of 5–30% of the
survival period for representations given. Private equity sellers sale price. Involvement of foreign participants, especially U.S.-
will further try to limit their exposure by ensuring they do not based participants, is often correlated to the lower end of these
include a full disclosure, 10b-5 type representation by liberally ranges applying, whereas we see the upper ends of the ranges
using materiality qualifiers and by including an anti-sandbagging more commonly on truly domestic Canadian transactions.
provision (although most agreements remain silent with respect
to sandbagging provisions). Private sellers are also increasingly 6.6 Do (i) private equity sellers provide security (e.g.,
insisting on public-company style “no-indemnity” exits. This is escrow accounts) for any warranties / liabilities, and
in part due to the growing familiarity with and acceptance of (ii) private equity buyers insist on any security for
representations and warranties insurance in the Canadian market. warranties / liabilities (including any obtained from the
management team)?

6.3 What is the typical scope of other covenants,

undertakings and indemnities provided by a private While representations and warranties insurance is becoming
equity seller and its management team to a buyer? more popular, the traditional approach of a seller indemnity
coupled with a purchase price holdback or escrow is also still
common for both private equity buyers and sellers in Canada.
Private equity sellers generally insist on limiting post-closing
In the event of an earn-out provision, set-off rights against the
exposure as much as possible. As referenced above, they typi-
earn-out payment are also typical.
cally limit the length and scope of indemnity provisions as
much as possible, as well as other post-closing covenants and
undertakings. Public-style exits, in which a private seller’s post- 6.7 How do private equity buyers typically provide
closing exposure is limited exclusively to instances of fraud, are comfort as to the availability of (i) debt finance, and (ii)
becoming increasingly common. equity finance? What rights of enforcement do sellers
typically obtain in the absence of compliance by the
buyer (e.g., equity underwrite of debt funding, right to
6.4 To what extent is representation & warranty specific performance of obligations under an equity
insurance used in your jurisdiction? If so, what are the commitment letter, damages, etc.)?
typical (i) excesses / policy limits, and (ii) carve-outs /
exclusions from such insurance policies, and what is the
typical cost of such insurance? Private equity transactions typically involve equity financing
from the private equity investor and debt financing from a third-
party lender. Comfort, with respect to the equity financing, is
Representations and warranties insurance use is not universal, often provided in the acquisition agreement, which generally
but, as noted above, has become commonplace and is now widely contains a commitment for the private equity investor to fund and
used in Canadian private equity transactions. Policy limits typi- complete the acquisition upon the satisfaction of certain condi-
cally cap out at 10–20% of the purchase price of a transaction. tions. The acquisition agreement generally contains a representa-
Available coverage has become broader and is now available for tion and warranty that the private equity investor has sufficient
both fundamental and non-fundamental representations and funds to provide the funding. A separate equity commitment
warranties with very few exclusions. Over recent years, the letter is often provided by the private equity firm. Comfort
number of typical carve-outs and exclusions from such poli- letters from the third-party lender are typically tabled to provide
cies has decreased quite significantly. However, typically they comfort with respect to the debt financing. In instances where a
remain for pension funding, certain environmental matters financing condition is in place, some transactions contemplate a
(including asbestos), sanction matters and other high-risk reverse break fee that sellers are entitled to if the transaction does
deal-specific terms. In addition, certain exclusions can arise out not close as a result of the financing condition not being met.
of deal-specific matters that present themselves during the due
diligence review process. Apart from a short “blip” at the end
of 2021, where deal flow exceeded the ability of the insurers to 6.8 Are reverse break fees prevalent in private equity
keep up with demand and premiums increased, generally policy transactions to limit private equity buyers’ exposure? If
so, what terms are typical?
premiums for representations and warranties insurance have
remained quite low and generally range between 2.5–4% of the
policy limit, with retention amounts typically ranging between Reverse break fees are becoming more common in Canadian
0.5–1% of enterprise value. private equity transactions. These fees are typically negotiated

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38 Canada

as a fixed dollar amount or a percentage of enterprise value. develop FX hedging strategies, which are typically only provided
Due to the increased exposure of the target entity to potential by traditional banks and can be costly. Traditional senior secured
damage from a failed deal, reverse break fees are often higher debt obtained from a domestic Canadian bank, often in the form
than the negotiated break fee on a transaction, ranging up to of a revolving credit facility or term loan, remains the most
10% of enterprise value. common source of debt financing in Canadian private equity
transactions. At times, senior secured debt is also supplemented
72 Transaction Terms: IPOs by mezzanine financing (usually by way of subordinated debt)
through banks or other financial institutions. The private credit
market can serve to fill the gap in providing funding to Canadian
7.1 What particular features and/or challenges should
a private equity seller be aware of in considering an IPO small- and middle-sized businesses who may prefer the flexibility
exit? of an alternative lender, such as flexibility in repayment schedules
and structure. Since 2021, the private credit market has extended
over $17 billion to Canadian deals.
While traditionally seen as the gold-standard, ideal exit for a
private equity seller, initial public offering (“IPO”) exits are not
common in Canada and are the exception rather than the typical 8.2 Are there any relevant legal requirements or
exit scenario. According to the Canadian Venture Capital and restrictions impacting the nature or structure of the debt
Private Equity Association, while the Canadian exit market financing (or any particular type of debt financing) of
private equity transactions?
saw 21 exits with a total value of $41 million in 2022, no IPO
exits were reported. The most common exit is now the sale to
another private equity fund. When considering an IPO exit, There are no relevant legal requirements or restrictions that
private equity sellers should be aware of the costs of preparing affect the choice of structure used for debt financing in Cana-
for and marketing the IPO, which includes the preparation dian private equity transactions. Canadian loans tend to be fully
of a prospectus and a road show. It is also important for the secured against all available collateral.
private equity seller to be aware that an IPO will not allow for
an immediate exit of its entire position and that the private equi- 8.3 What recent trends have there been in the debt-
ty’s final exit will be subject to lock-up provisions, which will financing market in your jurisdiction?
limit the investor’s abilities to sell their shares for a period of
time following the IPO.
Most private equity firms typically use private lending as part
of the financing for their Canadian transactions. According to
7.2 What customary lock-ups would be imposed on Crosbie & Co., the average equity portion of the capital structure
private equity sellers on an IPO exit? consisted of 50% in 2022 and rose to 54% in the first quarter of
2023 as interest rates continued to heighten.
Underwriters in an IPO will require these shareholders to enter
into a lock-up agreement as a condition to the underwriting to 92 Alternative Liquidity Solutions
ensure their shares do not enter the public market too soon after
the IPO. While the terms of lock-up agreements are subject to 9.1 How prevalent is the use of continuation fund
negotiation, they typically last 180 days. vehicles or GP-led secondary transactions as a deal type
in your jurisdiction?
7.3 Do private equity sellers generally pursue a dual-
track exit process? If so, (i) how late in the process are Historically, the use of continuation funds in the Canadian
private equity sellers continuing to run the dual-track, private equity market has been limited. When used, continua-
and (ii) were more dual-track deals ultimately realised tion funds were typically used as investment vehicles by spon-
through a sale or IPO?
sors that needed additional time to manage a portfolio company
before their exit. However, continuation funds have since
Dual-track processes have not typically been popular in Canada. become more popular, offering investors the option to exit
However, given the increased use of these processes in the United the investment in the portfolio company or remain invested
States, we expect them to become more common in Canada as by rolling into the continuation fund. While the formation of
buyers continue to seek ways to hedge the risk of a failed attempt continuation funds has decreased since its record highs in 2021,
to go public while at the same time increasing valuations. they remain attractive for private equity firms considering alter-
native exit strategies, especially where they feel certain of their
82 Financing assets could benefit from a little more “seasoning”.

8.1 Please outline the most common sources of debt 9.2 Are there any particular legal requirements or
finance used to fund private equity transactions in your restrictions impacting their use?
jurisdiction and provide an overview of the current state
of the finance market in your jurisdiction for such debt
(including the syndicated loan market, private credit The Institutional Limited Partners Association (“ILPA”)
market and the high-yield bond market). provided guidance on May 15, 2023 relating to continuation
funds. Pursuant to the guidance document, the ILPA recom-
Foreign investors, largely U.S.-based, account for a substantial mends certain parameters to align interests between the general
portion of private equity investment in Canada. U.S. investors partner and limited partners. The recommendations were devel-
often bring their American debt financing with them or obtain oped through two operative guiding principles: (i) continuation
Canadian debt financing. Private equity investors utilising U.S. funds should maximise value for existing limited partners; and (ii)
debt sources for Canadian private equity transactions need to limited partners that roll into the continuation fund should be no

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 McMillan LLP 39

worse off than had the transaction not taken place. While the ILPA Development’s BEPS initiative, insofar as anti-treaty-shopping
sets out recommendations that are not legally required, the guid- measures are concerned, has significantly decreased foreign-based
ance looks to protect the interests of limited partners in private private equity funds’ usage of intermediary entities in favour-
funds, and similar to the United States, the Canadian market and able jurisdictions (such as Luxembourg and the Netherlands) for
Canadian private equity investors are mindful of that guidance. their Canadian investments. Amendments to the Excise Tax Act
(Canada), enacted in 2018, impose goods and services tax obliga-
102 Tax Matters tions on investment limited partnerships. These changes imposed
goods and services tax on management and administrative
10.1 What are the key tax considerations for private services provided by the general partner of an investment limited
equity investors and transactions in your jurisdiction? partnership. If the partnership meets the definition of “invest-
Are off-shore structures common? ment limited partnership”, the general partner will be obligated to
charge and remit goods and services tax on the fair market value of
Many of the common tax considerations in transactions with any management/administrative services provided. The amount
private equity funds apply equally to transactions with stra- of stock option deduction that is available in certain circumstances
tegic buyers. However, there are several considerations that is restricted. For stock options granted after June 30, 2021, there
may take on added importance when transacting with foreign is a $200,000 annual limit on the eligibility of employees of certain
private equity investors in particular. Dividend payments made businesses to claim a 50% tax deduction for those stock option
by Canadian portfolio companies to foreign private equity inves- grants. This could affect the compensation packages required to
tors are generally subject to a 25% withholding tax, although this retain and incentivise management.
rate is substantially reduced under tax treaties in most instances.
Non-resident investors should also familiarise themselves with 112 Legal and Regulatory Matters
Canada’s thin-cap rules that prohibit Canadian companies from
deducting interest on a portion of interest-bearing loans from 11.1 Have there been any significant legal and/or
specified non-residents that exceed one-and-a-half times the tax regulatory developments over recent years impacting
equity of the “specified non-residents” in the Canadian company. private equity investors or transactions and are any
Historically, intermediary entities in tax-favourable jurisdictions anticipated?
such as Luxembourg and the Netherlands were often utilised
by foreign-based private equity funds investing into Canada. Amendments to the Competition Act (Canada), most of which
However, the Organisation for Economic Cooperation and came into force on June 23, 2022 as part of the Budget Implemen-
Development’s Base Erosion and Profit Shifting (“BEPS”) initi- tation Act, 2022, required that: (i) companies ordered to produce
ative has significantly affected the usage of such intermediaries. information must also provide information in the possession of
their affiliates; and (ii) persons outside of Canada provide infor-
10.2 What are the key tax-efficient arrangements that mation. This increases the number of entities that may be subject
are typically considered by management teams in private to the orders made to companies to produce information in the
equity acquisitions (such as growth shares, incentive possession of their affiliates. Combined with the 2021 amend-
shares, deferred / vesting arrangements)? ments to the Competition Act, which included non-corporate enti-
ties as affiliates, private equity funds are now potentially subject to
Stock options remain the most popular equity-based compen- much broader information requests, which may include both their
sation tool, due to their favourable treatment (no taxation until domestic and foreign portfolio companies and any other similarly
exercise and general eligibility for a capital-gains equivalent rate structured sister funds controlled by the same entity.
of tax). Other popular equity-based compensation arrange- Changes to the national security review regime under the
ments for management include stock appreciation rights and Investment Canada Act came into effect on August 2, 2022 to
deferred stock units. permit non-Canadian investors to submit a voluntary notifica-
tion of such investments that are not subject to a mandatory
10.3 What are the key tax considerations for filing. The Canadian government may initiate a national secu-
management teams that are selling and/or rolling over rity review within 45 days of receiving a voluntary filing.
part of their investment into a new acquisition structure?
11.2 Are private equity investors or particular
Investors in a Canadian company are generally permitted a transactions subject to enhanced regulatory scrutiny in
tax-free rollover when exchanging their shares in the company your jurisdiction (e.g., on national security grounds)?
for shares of another Canadian company, but not when such
shares are exchanged for shares of a non-Canadian company. Private equity investors are not subject to specific regulatory
An effective workaround may be available in the latter circum- scrutiny; however, the amendments to the Competition Act
stances through the use of “exchangeable shares” (i.e., shares of noted above are likely to increase the number of private equity
a Canadian company that are exchangeable for, and are econom- transactions that trigger advance notice requirements under
ically equivalent in all material respects with, shares in the rele- the Competition Act. Foreign investments that constitute an
vant foreign company).
acquisition of “control” of a Canadian business will require
approval under the Investment Canada Act if the investment
10.4 Have there been any significant changes in tax exceeds certain monetary thresholds, involves a cultural busi-
legislation or the practices of tax authorities (including ness, or has national security implications. Such investments
in relation to tax rulings or clearances) impacting private are subject to approval by the federal Ministry of Innovation,
equity investors, management teams or private equity
Science and Economic Development or the Minister of Cana-
transactions and are any anticipated?
dian Heritage, depending on the nature of the Canadian busi-
ness being acquired. Further, as noted above, amendments
As noted above, the Organisation for Economic Cooperation and to the national security review regime under the Investment

Private Equity 2023

40 Canada

Canada Act create a process by which non-Canadian investors 11.6 Are there any circumstances in which: (i) a private
are permitted to submit a voluntary notification for a minority equity investor may be held liable for the liabilities of
acquisition of a Canadian business and the acquisition or estab- the underlying portfolio companies (including due to
lishment of a business with only limited Canadian aspects (i.e., breach of applicable laws by the portfolio companies);
some Canadian employees or Canadian assets). While these and (ii) one portfolio company may be held liable for the
liabilities of another portfolio company?
acquisitions are not subject to a mandatory filing, the Canadian
government may initiate a national security review within 45
days of receiving a voluntary notice of such investment from the Typically, Canadian courts are hesitant to pierce the corpo-
non-Canadian investors. As noted above, consistent with other rate veil and hold shareholders liable for their portfolio compa-
jurisdictions globally, Canada has seen a broadened interpreta- nies. However, Canadian courts will pierce the corporate veil
tion of what constitutes “national security” and consequently where a corporate entity is controlled and used for fraudulent or
more transactions are potentially subject to this review. improper conduct. Likewise, to the extent a shareholder usurps
the discretion of a director to manage the business, that share-
holder will expose itself to the liabilities of a director of the
11.3 Are impact investments subject to any additional
entity, including where a USA or unanimous shareholders decla-
legal or regulatory requirements?
ration is used to remove the powers of the directors and instil
such powers in a shareholder.
Impact investments are not subject to additional legal or regula-
tory requirements. 122 Other Useful Facts

11.4 How detailed is the legal due diligence (including 12.1 What other factors commonly give rise to concerns
compliance) conducted by private equity investors prior for private equity investors in your jurisdiction or should
to any acquisitions (e.g., typical timeframes, materiality, such investors otherwise be aware of in considering an
scope, etc.)? investment in your jurisdiction?

The majority of private equity investors conduct fairly compre- Other factors that commonly raise concerns for private equity
hensive legal due diligence, reviewing all material legal docu- investors, especially foreign investors, include: that foreign owner-
ments, including the target entity’s corporate records, materials ship in specified industries such as financial services, railway,
contracts and employment records for any “red flags”. In addi- airline, broadcasting and telecommunications is limited by certain
tion, publicly available searches are also typically conducted in federal statutes; management and administration fees paid by a
order to identify any registered encumbrances, active legislation, Canadian resident to a non-arm’s-length non-resident are subject
bankruptcy filings and other similar matters. Most legal due to a 25% withholding tax; and that Canadian employment laws
diligence is conducted virtually by external counsel (increas- differ fairly significantly from American laws and impose more
ingly with the assistance of AI) and other professionals, such as obligations and potential liabilities on a target corporation. Due
environmental consultants. The length of the diligence review to the Russian invasion of Ukraine, Canada has also introduced an
and materiality threshold applied differs greatly and is often increasing number of constraints on trade and financial dealings
dependent on the nature of the sale process, the risk tolerance with Russia. These restrictions have introduced new considerations
of the private equity investor, and the industry the target is in; for Canadian private equity investors and can constrain the oppor-
such length has increased on average following the COVID-19 tunity of certain private equity funds to invest if Russian inves-
pandemic (when it was shortest). tors are present in the funds. Further, many Canadian businesses
do business with Cuba and Canada maintains blocking legislation
that prevents the extraterritorial application of U.S. sanctions on
11.5 Has anti-bribery or anti-corruption legislation
Cuba (creating a conflict with U.S. law). Lastly, amendments to
impacted private equity investment and/or investors’
approach to private equity transactions (e.g., diligence, the Competition Act (Canada) came into effect on June 23, 2023,
contractual protection, etc.)? to criminalise wage-fixing and no-poaching agreements between
unaffiliated employers. These amendments prohibit agreements
between employers: (i) to fix, maintain, decrease or control sala-
Canada’s Corruption of Foreign Public Officials Act (“CFPOA”)
ries, wages or terms and conditions of employment; or (ii) to solicit
was enacted in 1998 to ensure commercial fair dealing, govern-
or hire each other’s employees. Non-solicitation provisions are
ment integrity and accountability, and the efficient and equitable common in the context of M&A transactions. While the Compe-
distribution of limited economic resources. CFPOA prohibits tition Bureau released guidelines providing that the Bureau will
the promise, payment, or giving of money or anything of value “generally” not assess clauses that are ancillary to merger transac-
to any foreign official for the purpose of obtaining or retaining tions and joint ventures, consideration should be given to ensuring
business or gaining an improper advantage and concealing certain types of M&A agreements (i.e., NDAs and exclusivity
bribery in an entity’s books and records. Private equity transac- agreements) do not pose legal risks in light of these amendments.
tions, especially in sensitive industries or which involve a target Furthermore, emphasis should be given during the due diligence
with material government contracts, typically specify diligence process to ensure that these types of provisions are not common-
contracts as well as corporate records and policies for compli- place in a target’s commercial agreements as these should now be
ance with this legislation. In addition, representations and considered “red-flag” issues, whereas they previously may not have
warranties are often obtained from the seller confirming the met such a threshold. Finally, in the province of Quebec specif-
entity’s compliance with the same. While the Foreign Corrupt ically, recent changes enacted to French language legislation and
Practices Act (“FCPA”) is an American law, U.S. private equity privacy legislation raise further considerations in terms of invest-
investors often seek assurances that Canadian target entities are ment in entities with operations in Quebec. Where investments
complying with FCPA. If the Canadian target is not currently involve such entities, consideration may be given to the increas-
owned by an American interest, this can be problematic. ingly onerous obligations for such entities to comply with French
language requirements.

Private Equity 2023

 McMillan LLP 41

Michael P. Whitcombe has been recognised as one of Canada’s leading business lawyers in Lexpert’s Guide to the Leading 500 Lawyers in
Canada. Michael is Co-Chair of McMillan’s Private Equity Group. He principally practises in the areas of negotiated merger and acquisition
transactions (domestic and cross-border), private equity investments, strategic alliances, complex commercial arrangements and corporate
governance. Michael regularly advises private equity firms along with other medium and large corporations (both domestic and international)
and their boards of directors in connection with their operations throughout Canada. He has significant industry experience in the private
equity, pharmaceutical, automotive, manufacturing, distribution, service, entertainment, hospitality and tourism sectors. Michael obtained a
degree in Business Administration (BBA) in addition to his LL.B. and LL.M. and was called to the Ontario Bar in 1987.
McMillan LLP Tel: +1 416 865 7126
181 Bay Street, Suite 4400 Email: michael.whitcombe@mcmillan.ca
Toronto, Ontario, M5J 2T3 URL: www.mcmillan.ca
Canada

Brett Stewart is recognised in the IFLR1000 Financial and Corporate Guide 2016 and 2018 as a rising star in the areas of Investment Funds and
Banking, ranked in Lexpert’s Guide to the Leading U.S./Canada Cross-Border Corporate Lawyers in Canada 2015 as a Corporate Lawyer to Watch in
the area of Corporate Commercial Law, and was selected as a Lexpert® Rising Star: Leading Lawyer Under 40 for 2014 by Lexpert® Magazine.
Brett is Co-Chair of McMillan’s Private Equity Group. With a focus on assisting domestic and foreign clients with negotiated transactions
including mergers and acquisitions, private equity financings, venture capital financings and management buyouts, Brett has represented
clients in a number of sectors including agri-food, food manufacturing, aerospace and defence, engineering, pharmaceuticals, tech and clean-
tech, manufacturing and transportation.
McMillan LLP Tel: +1 416 865 7115
181 Bay Street, Suite 4400 Email: brett.stewart@mcmillan.ca
Toronto, Ontario, M5J 2T3 URL: www.mcmillan.ca
Canada

Enda Wong is an experienced business lawyer whose practice focuses on mergers and acquisitions, and private equity and venture capital
investments. She has recognised expertise in acquisition financing and corporate organisations and structuring. Practising both common
law and civil law, and called to the bar in Ontario and Québec, Enda works on a variety of regional, national and cross-border transactions. She
is trusted for advice on the similarities and differences between the two legal systems. Enda has gained significant experience and industry
knowledge in the technology and food and beverages sectors. Acting on behalf of private enterprises, institutional and private equity inves-
tors and non-profit organisations, Enda provides counsel on commercial, regulatory and compliance-related issues, including in respect of
services agreements, contests filings and compliance with the Charter of the French Language.
McMillan LLP Tel: +1 514 987 5034
1000 Sherbrooke Street West, Suite 2700 Email: enda.wong@mcmillan.ca
Montréal, Québec, H3A 3G4 URL: www.mcmillan.ca
Canada

Bruce Chapple is a business lawyer with a dynamic practice focused on mergers and acquisitions, private equity and complex commercial
transactions. He draws on extensive industry-specific knowledge in sectors ranging from manufacturing to asset management. With a
broad scope of experience, Bruce advises on acquisitions and divestitures in the Canadian market, as well as Canadian issues associated
with international transactions. He also provides counsel on joint ventures and limited partnerships. His clients include public and private
corporations, subsidiaries of international corporations, private equity funds and investment vehicles, including for real estate transactions.
Bruce is known for delivering practical solutions and getting deals done. He is recognised by Lexpert for his expertise as one of Canada’s
leading Finance and Mergers and Acquisition lawyers.

McMillan LLP Tel: +1 416 865 7024

181 Bay Street, Suite 4400 Email: bruce.chapple@mcmillan.ca
Toronto, Ontario, M5J 2T3 URL: www.mcmillan.ca
Canada

McMillan is a leading business law firm serving public, private and not-for-
profit clients across key industries in Canada, the United States and inter-
nationally. With recognised expertise and acknowledged leadership in
major business sectors, we provide solutions-oriented legal advice through
our offices in Vancouver, Calgary, Toronto, Ottawa, Montréal and Hong
Kong. Our firm values – respect, teamwork, commitment, client service
and professional excellence – are at the heart of McMillan’s commitment
to serve our clients, our local communities and the legal profession.
www.mcmillan.ca

Private Equity 2023

 42 Chapter 6

Cayman Islands
Cayman Islands

Julian Patrick
Ashworth Rosenfeld

Maples Group Lee Davis Stef Dimitriou

private equity, including, by way of example, the regime for anti-

12 Overview money laundering and combatting terrorist financing, economic
substance initiatives and tax-transparency reporting obligations.
1.1 What are the most common types of private equity
transactions in your jurisdiction? What is the current
state of the market for these transactions? 1.3 Are you seeing any types of investors other
than traditional private equity firms executing private
equity-style transactions in your jurisdiction? If so,
The Cayman Islands is a key jurisdiction in which to domi- please explain which investors, and briefly identify any
cile private equity funds in light of its legislative and regulatory significant points of difference between the deal terms
framework, tax-neutral status, flexible structuring options and offered, or approach taken, by this type of investor and
experienced service providers. that of traditional private equity firms.
While private equity fund establishment for acquisition
purposes and co-investment opportunities are most common, There are a range of investors beyond traditional private equity
Cayman Islands structures are routinely employed in transac- firm, including family offices and trade buyers, seeking to acquire
tional contexts, particularly buy-out and secondary transactions. investments that are structured through Cayman Islands domi-
The nature, scope and volume of matters being undertaken ciled holding vehicles. Transaction terms, and approach adopted,
in the Cayman Islands across the entire financial markets spec- are dictated by investor profile and other commercial considera-
trum makes it difficult to identify one specific change that tions that are not affected by Cayman Islands legal considerations.
has emerged. At a thematic level, offshore practice continues
to evolve, being more multi-jurisdictional due to onshore and
global developments, more complex as it addresses different,
22 Structuring Matters
and at times conflicting, regulatory frameworks and more
involved as investors seek tailored structures and products that 2.1 What are the most common acquisition structures
adopted for private equity transactions in your
respond to regional and global events.
jurisdiction?

1.2 What are the most significant factors currently The majority of Cayman Islands private equity funds are estab-
encouraging or inhibiting private equity transactions in
lished as limited partnerships, being the Cayman Islands-exempt
your jurisdiction?
limited partnership. It is also possible to structure a Cayman
Islands private equity fund as a company, an LLC or a trust.
The Cayman Islands continues to be the leading offshore domi- The Cayman Islands fund vehicle will generally invest via
cile for private equity funds due to the global distribution appeal other Cayman Islands vehicles, including aggregator vehicles, or
of Cayman Islands vehicles, their ease of use, speed to market entities domiciled outside the Cayman Islands, such as in Dela-
and low cost. The Cayman Islands’ tax-neutral status ensures ware, Luxembourg or Ireland, depending on where the ultimate
the fund vehicle itself does not create an additional layer of tax, operating portfolio company or target entity is located. Ulti-
creating efficiencies in raising funds from a potentially global mately, net returns from the underlying company or target will
investor base. be distributed to the Cayman Islands domiciled fund vehicle,
The Cayman Islands is a well-regulated, co-operative and which net returns will in turn be distributed to investors and
transparent jurisdiction and continues to refine its laws and sponsors and be taxable in accordance with the regimes of the
regulatory standards to respond and adapt to international jurisdictions where such investors and sponsors are tax resident.
standards. This has been most recently demonstrated by the
update to primary legislation governing the most popular entity
types; notably, exempted companies, exempted limited partner- 2.2 What are the main drivers for these acquisition
structures?
ships and limited liability companies (“LLC”). The Cayman
Islands has also recently enforced legislation providing for a
limited liability partnership (“LLP”) vehicle (see section 10). These structures combine the investor familiarity, sophistica-
The global regulatory framework is evolving quickly and tion and flexibility of Cayman Islands fund vehicles with the
this is likely to continue in the near-/mid-term future. The economic and structuring advantages of an underlying holding
Cayman Islands continues to adopt and embrace international structure, which satisfies onshore tax and regulatory considera-
best practice approaches in multiple spheres that interact with tions in an efficient and streamlined manner.

Private Equity 2023

 Maples Group 43

2.3 How is the equity commonly structured in private equity transaction. A director of an exempted company is in a
equity transactions in your jurisdiction (including fiduciary relationship to the company and owes various duties of
institutional, management and carried interests)? a fiduciary nature, which may be broadly characterised as duties
of loyalty, honesty and good faith. Every director owes these
As the majority of Cayman Islands private equity funds are duties individually and they are owed to the company as a whole.
structured as exempted limited partnerships, investors subscribe Specifically, they are not owed to other companies with which
the company is associated, to the directors or to individual
for an equity interest in the exempted limited partnership in the
shareholders. In addition to the fiduciary duties, each director
form of a limited partnership interest. A sponsor/management
owes a duty of care, diligence and skill to the company.
will typically participate in the performance of the exempted
An LLC can be member-managed or can appoint a separate
limited partnership as a carry participant either directly as a
board of managers. There is significant flexibility as to govern-
partner or through a separate vehicle.
ance arrangements with respect to an LLC, which can be agreed
by the parties in the LLC agreement. The default duty of care
2.4 If a private equity investor is taking a minority for a manager or managing member is to act in good faith. This
position, are there different structuring considerations? standard of care may be expanded or restricted (but not elimi-
nated) by the express provisions of the LLC agreement.
Minority investor protections, such as anti-dilution, veto or An exempted limited partnership is managed by its general
information rights, which transaction parties agree to accom- partner. The general partner has a duty to act in good faith
modate within a structure, can be reflected in the governing and, subject to the express provisions of the limited partnership
documents of any Cayman Islands vehicle. These matters are agreement, in the interests of the partnership.
dictated by commercial considerations as opposed to Cayman Operator information, being director, manager or general
Islands legal considerations. partner details (as applicable), can be obtained from the Cayman
Islands registry. Commercial arrangements are not publicly
available and generally information will only need to be disclosed
2.5 In relation to management equity, what is the with consent or in limited, appropriate circumstances, such as
typical range of equity allocated to the management, and with law enforcement agencies or regulatory and tax authorities
what are the typical vesting and compulsory acquisition upon legitimate lawful and proper request.
provisions?

3.2 Do private equity investors and/or their director

There can be a broad range of approaches as to how profits nominees typically enjoy veto rights over major
and other returns are shared among a management team. This corporate actions (such as acquisitions and disposals,
is generally left to the management team to determine with a business plans, related party transactions, etc.)? If a
sponsor and will reflect what is most appropriate with reference private equity investor takes a minority position, what
to their commercial arrangements and target returns. veto rights would they typically enjoy?
The vast majority of Cayman Islands private equity funds are
managed by a US or other international domiciled and regu- This is generally a case-by-case consideration based on the
lated investment manager. Therefore, vesting and compulsory commercial circumstances of each transaction.
acquisition provisions relating to the management equity and Investors in a Cayman Islands private equity fund do not
restraints are typically driven by the onshore legal and regula- typically enjoy veto rights over major corporate actions. For
tory considerations of the fund manager. funds structures structured as exempted limited partnerships,
the general partner must act within any limitations agreed in
2.6 For what reasons is a management equity holder
the limited partnership agreement of the fund (for example,
usually treated as a good leaver or a bad leaver in your as to business purpose, limitations on investment, limitations
jurisdiction? on indebtedness and guarantees, etc.). A limited partner advi-
sory committee will often be established to approve any conflict
transactions of the general partner or fund manager. A minority
Good and bad leaver provisions, and vesting mechanics more
investor would not typically enjoy any veto rights.
generally, are structured in a wide variety of ways depending At an operating company level, it is very common for trans-
on the intention of the transaction parties. These matters are action parties to agree that certain matters will be reserved to
dictated by commercial agreement rather than Cayman Islands shareholders acting by requisite thresholds, which may include
legal considerations or restrictions. veto rights or various minority protections, or require enhanced
director approvals. These arrangements would be reflected in
32 Governance Matters the company’s governing documents, which would typically
include a shareholders’ agreement.
3.1 What are the typical governance arrangements
for private equity portfolio companies? Are such
3.3 Are there any limitations on the effectiveness of
arrangements required to be made publicly available in
veto arrangements: (i) at the shareholder level; and (ii) at
your jurisdiction?
the director nominee level? If so, how are these typically
addressed?
A Cayman Islands private equity portfolio company can be
formed as an exempted company, an LLC or an exempted There is no limitation on reflecting veto arrangements in
limited partnership. governing documents, although it requires a case-by-case analysis
For an exempted company, the board of directors is respon- to determine how such arrangements should be accommodated
sible for the overall management and control of the company. most effectively in a specific context.
The composition of the board of directors of a portfolio If structured as an exempted company, certain veto arrange-
company tends to vary depending on the nature of the private ments may be better afforded to shareholders as opposed to

Private Equity 2023

44 Cayman Islands

director nominees in light of the fiduciary duties owed by direc- 3.7 How do directors nominated by private equity
tors. There is greater flexibility where an LLC is employed. investors deal with actual and potential conflicts of
Such vehicles, by way of example, are particularly well suited to interest arising from (i) their relationship with the party
joint ventures given the governing documents may authorise a nominating them, and (ii) positions as directors of other
manager to act in the interests of his or her appointing member. portfolio companies?

3.4 Are there any duties owed by a private equity Directors are required to comply with the conflicts of interest
investor to minority shareholders such as management provisions set out in the articles of association of the relevant
shareholders (or vice versa)? If so, how are these portfolio company. Typically, the articles of association of a
typically addressed? Cayman Islands company permit a director to vote on a matter
in which he or she has an interest, provided that he or she has
As a matter of Cayman Islands law, a private equity investor disclosed the nature of this interest to the board at the earliest
does not generally owe fiduciary duties or any other duties to opportunity. If a director may wish to recuse him or herself
minority shareholders (or vice versa), unless duties of this nature from a vote on such a matter, then the articles of association
have been contractually agreed between the parties and/or are should be sufficiently flexible to enable a majority of directors at
otherwise expressly set out in governing documents. an otherwise quorate meeting to proceed with a vote.
Where private equity funds are structured as limited part-
nerships, a limited partner advisory committee or other inde-
3.5 Are there any limitations or restrictions on the pendent committee will often be established to approve transac-
contents or enforceability of shareholder agreements tions involving conflicts.
(including (i) governing law and jurisdiction, and (ii)
non-compete and non-solicit provisions)?
42 Transaction Terms: General
A shareholders’ agreement governed by the laws of another
jurisdiction (other than the Cayman Islands) is generally 4.1 What are the major issues impacting the timetable
for transactions in your jurisdiction, including antitrust,
enforceable in the Cayman Islands provided that the agreement foreign direct investment and other regulatory approval
is not contrary to Cayman Islands law or public policy. With requirements, disclosure obligations and financing
respect to non-compete and non-solicit provisions, such provi- issues?
sions in restraint of trade are presumed to be unenforceable
under Cayman Islands law. That presumption can, however,
The timetable for transactions is driven by onshore issues, such
be rebutted by proving that the restraint is “reasonable”, both
as regulatory approvals required in the jurisdictions where the
as between the parties and in relation to the public interest,
assets are domiciled or where the private equity investors are
particularly with reference to time and geographical scope.
resident.
There are no competition approvals or regulatory approvals
3.6 Are there any legal restrictions or other required for Cayman Islands private equity structures notwith-
requirements that a private equity investor should standing that certain filings or notifications may need to be made
be aware of in appointing its nominees to boards of contemporaneously with, or subsequent to, a deal’s completion.
portfolio companies? What are the key potential risks
and liabilities for (i) directors nominated by private
equity investors to portfolio company boards, and (ii) 4.2 Have there been any discernible trends in
private equity investors that nominate directors to transaction terms over recent years?
boards of portfolio companies?

The trends that develop in the Cayman Islands in the context of

While there are no Cayman Islands statutory restrictions private equity funds and transactions reflect the trends experi-
preventing a private equity investor from appointing a nominee enced or developed in the US, Europe, Asia and other markets as
to the board of a Cayman Islands portfolio company, any such well as broader evolving regulatory trends and globally adopted
director owes fiduciary and other duties to the company as a best practices.
whole and not to the private equity investor that nominated the Cayman Islands law, including entity enabling legislation, is
director to the board. Consequently, any such nominee director sufficiently flexible to allow transacting parties to replicate or
must be mindful to avoid a conflict between their duty to the accommodate deal terms driven by onshore requirements.
company and their personal interests (or the interests of the
private equity investor) and must at all times act in the best inter-
ests of the company. Should a director act in breach of its fidu- 52 Transaction Terms: Public Acquisitions
ciary and other duties owed to the company, the director risks
incurring personal liability. As noted previously, there can be 5.1 What particular features and/or challenges apply
greater flexibility in this regard if a Cayman Islands LLC is used to private equity investors involved in public-to-private
transactions (and their financing) and how are these
as the portfolio company.
commonly dealt with?
The concept of a “shadow director” is only recognised in
limited circumstances in the context of certain offences in
connection with winding up of a Cayman Islands company Generally, the target companies in public-to-private trans-
under the Companies Act (As Revised). In these circumstances, actions are not based in the Cayman Islands. The applicable
a private equity investor may be considered a shadow director considerations to take into account would be determined with
if the nominee director is accustomed to acting in accordance reference to the laws and regulations of the jurisdiction where
with the directions or instructions of the private equity investor the target company is based.
responsible for his or her appointment to the board. Where the target company is a Cayman Islands company,
then the target would almost certainly be listed on a stock

Private Equity 2023

 Maples Group 45

exchange outside the Cayman Islands. The listing rules of such 6.4 To what extent is representation & warranty
non-Cayman Islands stock exchange would apply. insurance used in your jurisdiction? If so, what are the
If, however, the target company were listed on the Cayman typical (i) excesses / policy limits, and (ii) carve-outs /
Islands Stock Exchange (“CSX”), then the Cayman Islands exclusions from such insurance policies, and what is the
Code on Takeovers and Mergers and Rules Governing the typical cost of such insurance?
Substantial Acquisitions of Shares would apply (the “Code”),
which is administered by a council executive appointed by the The operating companies and deal terms for specific portfolio
Stock Exchange Authority, the CSX’s regulator. investments are generally not governed by Cayman Islands law
and are non-Cayman Islands considerations typically driven by
onshore tax and regulatory considerations.
5.2 What deal protections are available to private
equity investors in your jurisdiction in relation to public
acquisitions? 6.5 What limitations will typically apply to the liability
of a private equity seller and management team under
As previously noted, the target companies in public-to-private warranties, covenants, indemnities and undertakings?
transactions are generally not based in the Cayman Islands. In
those instances, the considerations that would apply are driven The operating companies and deal terms for specific portfolio
by laws in the relevant jurisdiction(s) where the target is based investments are generally not governed by Cayman Islands law
and/or the rules of the non-Cayman Islands stock exchange on and are non-Cayman Islands considerations typically driven by
which its shares are listed. onshore tax and regulatory considerations.
In the case of a CSX-listed entity, the Code contains a number
of protections for minority shareholders. These include: manda- 6.6 Do (i) private equity sellers provide security (e.g.,
tory offer rules; an obligation to offer a minimum level of consid- escrow accounts) for any warranties / liabilities, and
eration; acquisitions resulting in a minimum level of consider- (ii) private equity buyers insist on any security for
ation; and rules against offering favourable conditions except warranties / liabilities (including any obtained from the
with the consent of the council executive. management team)?
More generally, as a matter of Cayman Islands law, there may
be other protections available to investors, the nature of which The operating companies and deal terms for specific portfolio
protections will depend on the manner in which the deal is struc- investments are generally not governed by Cayman Islands law
tured. By way of example, if the private equity investors were and are non-Cayman Islands considerations typically driven by
shareholders in a Cayman Islands-exempt company and the public onshore tax and regulatory considerations.
acquisition were structured by way of a merger, then such inves-
tors may be able to avail themselves of dissenting shareholder
rights and apply to the Courts seeking fair value for their shares. 6.7 How do private equity buyers typically provide
comfort as to the availability of (i) debt finance, and (ii)
equity finance? What rights of enforcement do sellers
62 Transaction Terms: Private Acquisitions typically obtain in the absence of compliance by the
buyer (e.g., equity underwrite of debt funding, right to
6.1 What consideration structures are typically specific performance of obligations under an equity
commitment letter, damages, etc.)?
preferred by private equity investors (i) on the sell-side,
and (ii) on the buy-side, in your jurisdiction?
The deal terms for specific portfolio investments are generally
The operating companies and deal terms for specific portfolio not governed by Cayman Islands law, nor driven by Cayman
investments are generally not governed by Cayman Islands law Islands considerations. As such, the comfort provided and
and are non-Cayman Islands considerations typically driven by sellers’ enforcement rights with respect to financing commit-
onshore tax and regulatory considerations. ments reflect commercially agreed terms and are typically nego-
tiated and agreed by onshore deal counsel.

6.2 What is the typical package of warranties /

indemnities offered by (i) a private equity seller, and (ii) 6.8 Are reverse break fees prevalent in private equity
the management team to a buyer? transactions to limit private equity buyers’ exposure? If
so, what terms are typical?

The operating companies and deal terms for specific portfolio

investments are generally not governed by Cayman Islands law The operating companies and deal terms for specific portfolio
and are non-Cayman Islands considerations typically driven by investments are generally not governed by Cayman Islands law
onshore tax and regulatory considerations. and are non-Cayman Islands considerations typically driven by
onshore tax and regulatory considerations.

6.3 What is the typical scope of other covenants, 72 Transaction Terms: IPOs
undertakings and indemnities provided by a private
equity seller and its management team to a buyer?
7.1 What particular features and/or challenges should
a private equity seller be aware of in considering an IPO
The operating companies and deal terms for specific portfolio exit?
investments are generally not governed by Cayman Islands law
and are non-Cayman Islands considerations typically driven by
This will depend primarily on which exchange the initial public
onshore tax and regulatory considerations.
offering (“IPO”) is listed; usually, the CSX will not be the
primary listing for such transactions.

Private Equity 2023

46 Cayman Islands

Note that any listing vehicle will need to be a Cayman (such as a limited partnership agreement in the case of a part-
Islands-exempt or ordinary company. Limited partner interests in nership), the terms of which would be agreed by the sponsor and
a limited partnership and membership interests in an LLC cannot investors on launch of the fund.
themselves be the subject of an IPO. Care also needs to be given
as to how any proposed conversion is effected, and there should
8.3 What recent trends have there been in the debt-
be sufficient flexibility in the documents on acquisition to ensure financing market in your jurisdiction?
we have the correct type of entity for listing on an IPO exit.
There has been a continuation of the use of all subscription and
7.2 What customary lock-ups would be imposed on bridge facilities across the private equity market with a marked
private equity sellers on an IPO exit? increase in financings involving the use of wholly owned invest-
ment companies incorporated in the Cayman Islands. The vehi-
This will depend primarily on which exchange the IPO is cles are structured as bankruptcy-remote with at least one inde-
listed; usually the CSX will not be the primary listing for such pendent director or manager, as the case may be, appointed to
transactions. the board. This satisfies the lender’s bankruptcy concerns and
Typically, these commercial terms are agreed by onshore provides strong credit protection for the secured parties. These
counsel to the IPO. financings include plain vanilla loans, note issuances and also
various derivative transactions including total return swaps and
repurchase structures.
7.3 Do private equity sellers generally pursue a dual-
track exit process? If so, (i) how late in the process are
private equity sellers continuing to run the dual-track, 92 Alternative Liquidity Solutions
and (ii) were more dual-track deals ultimately realised
through a sale or IPO?
9.1 How prevalent is the use of continuation fund
vehicles or GP-led secondary transactions as a deal type
This will depend primarily on which exchange the IPO is in your jurisdiction?
listed; usually the CSX will not be the primary listing for such
transactions. The formation and launch of continuation fund vehicles and
We often see private equity sellers pursuing a dual-track exit other types of private equity secondary transactions (including
process. The dual track can run very late in the process. In GP-led secondaries) is prevalent in the Cayman Islands given the
recent times we have seen more dual-track deals ultimately real- jurisdiction’s legislative and regulatory framework, tax-neutral
ised through sale. status and flexible structuring options. The volume of secondary
transactions in the Cayman Islands, notably GP-led secondaries,
82 Financing has increased in recent years in line with the general industry
trends and the increasing number of investment fund vehicles
8.1 Please outline the most common sources of debt whose terms are expiring and that are seeking liquidity options.
finance used to fund private equity transactions in your
jurisdiction and provide an overview of the current state
9.2 Are there any particular legal requirements or
of the finance market in your jurisdiction for such debt
restrictions impacting their use?
(including the syndicated loan market, private credit
market and the high-yield bond market).
There are no specific Cayman Islands statutory restrictions
The Cayman Islands is a leading “creditor-friendly” jurisdic- impacting the formation and launch of continuation fund vehicles
tion, where both Cayman Islands and non-Cayman Islands secu- or the structuring of other secondary transactions. Such trans-
rity packages are respected and recognised. Financing coun- actions will be subject to the same Cayman Islands laws, general
terparties are very familiar with, and comfortable lending to, partner fiduciary duties, disclosure obligations and general regu-
Cayman Islands vehicles, which are able to access the full range lations that apply to private equity funds and related structures in
of debt finance options seen in the market (including through the jurisdiction, as described in more detail in this chapter.
the syndicated loan market and private credit market). Common
private equity financing structures include subscription line 102 Tax Matters
facilities secured on investors’ capital commitments, and lever-
aged finance or “NAV” facilities secured by the relevant target 10.1 What are the key tax considerations for private
group’s assets. Cayman Islands vehicles also feature frequently equity investors and transactions in your jurisdiction?
in lender-side structures in the private credit market. Are off-shore structures common?

8.2 Are there any relevant legal requirements or The Government of the Cayman Islands does not, under
restrictions impacting the nature or structure of the debt existing legislation, impose any income, corporate or capital
financing (or any particular type of debt financing) of gains tax, estate duty, inheritance tax, gift tax or withholding tax
private equity transactions? upon: (i) Cayman Islands-exempt companies, exempted trusts,
LLCs or exempted limited partnerships established to operate
There are no specific Cayman Islands statutory restrictions as private equity funds or portfolio vehicles; or (ii) the holders
impacting the type of debt financing activity that can be under- of shares, units, LLC interests or limited partnership interests
taken and Cayman Islands vehicles are generally able to access (as the case may be) in such private equity vehicles. Interest,
the full range of debt finance options seen in the market. dividends and gains payable to such private equity vehicles and
Restrictions on debt financing may, however, be contained in all distributions by the private equity vehicles to the holders of
the constitutional documents of the Cayman Islands vehicle shares, units, LLC interests or limited partnership interests (as

Private Equity 2023

 Maples Group 47

the case may be) will be received free of any Cayman Islands
income or withholding taxes.
112 Legal and Regulatory Matters
An exempted company, an exempted trust, LLC or an
exempted limited partnership may apply for, and expect to 11.1 Have there been any significant legal and/or
regulatory developments over recent years impacting
receive, an undertaking from the Financial Secretary of the
private equity investors or transactions and are any
Cayman Islands to the effect that, for a period of 20 years (in anticipated?
the case of an exempted company) or a period of 50 years (in the
case of an LLC, an exempted trust or an exempted limited part-
nership) from the date of the undertaking, no law that is enacted The Cayman Islands continues to refine its laws and regulatory
in the Cayman Islands imposing any tax to be levied on profits framework to ensure that it meets the ever-increasing demands of
the private equity industry. This ability to respond and adapt has
or income or gains or appreciations shall apply to the vehicle or
resulted in the following legal developments over recent years:
to any member, shareholder, unitholder or limited partner (as
■ On 30 November 2020, the ability to register a Cayman
the case may be) thereof in respect of the operations or assets of
Islands LLP under the Limited Liability Partnership Act
the vehicle or the interest of a member, shareholder, unitholder
(As Revised) was enforced. The registration process for an
or limited partner (as the case may be) therein; and may further
LLP is similar to that for other forms of Cayman Islands
provide that any such taxes or any tax in the nature of estate duty
vehicles. An LLP combines the flexible features of a
or inheritance tax shall not be payable in respect of the obliga-
general partnership, but has the benefit of separate legal
tions of the vehicle or the interests of a member, shareholder,
personality and affords limited liability status to all its part-
unitholder or limited partner (as the case may be) therein. ners. In the context of private equity, an LLP’s features
The Cayman Islands is not party to a double tax treaty with and flexibility provide additional structuring options for
any country that is applicable to any payments made to or by general partner or management vehicles or fund of funds
private equity vehicles. or holding partnerships. The PF Act (as defined below)
makes provision for registration of an LLP as a private
10.2 What are the key tax-efficient arrangements that fund. Given the relative infancy of the LLP, this chapter
are typically considered by management teams in private does not address the LLP in any material detail.
equity acquisitions (such as growth shares, incentive ■ On 7 February 2020, the Private Funds Act (As Revised)
shares, deferred / vesting arrangements)? (the “PF Act”) came into force pursuant to which certain
closed-ended funds (termed “private funds”) are required
As the Cayman Islands is a tax-neutral jurisdiction, these to register with the Cayman Islands Monetary Authority.
arrangements are typically driven by the tax laws of the jurisdic- The adoption and implementation of the PF Act reflects
tions where the management team is located. However, Cayman the Cayman Islands’ commitment as a co-operative juris-
Islands law allows for significant scope and flexibility to struc- diction, is responsive to EU and other international
ture management equity programmes in a wide variety of ways. recommendations and covers similar ground to existing or
proposed legislation in a number of other jurisdictions.
■ On 27 December 2018, the Cayman Islands published the
10.3 What are the key tax considerations for International Tax Co-operation (Economic Substance)
management teams that are selling and/or rolling-over Act (As Revised) as a response to global OECD Base
part of their investment into a new acquisition structure? Erosion and Profit Shifting (“BEPS”) standards regarding
geographically mobile activities. The Cayman Islands
As the Cayman Islands is a tax-neutral jurisdiction, these Economic Substance regime robustly addresses the ethos
arrangements are typically driven by the tax laws of the jurisdic- of the legislation without materially impacting the private
tions where the management team is located. equity industry. Requirements of this type are rapidly
being implemented on a level playing field basis by all
OECD-compliant “no or only nominal tax” jurisdictions.
10.4 Have there been any significant changes in tax
■ The Cayman Islands was an early introducer of compre-
legislation or the practices of tax authorities (including
in relation to tax rulings or clearances) impacting private hensive and strict anti-money laundering laws and “know
equity investors, management teams or private equity your client” rules and regulations, and continues to adapt
transactions and are any anticipated? these rules and regulations in line with international stand-
ards. In a continuing effort to meet international stand-
ards, a comprehensive update was made to the Cayman
The Cayman Islands has signed an inter-governmental agree-
Islands Anti-money Laundering Regulations in October
ment to improve international tax compliance and the exchange
2017 and further revisions continue to be made as interna-
of information with the United States (the “US IGA”). The
tional standards evolve, including by applying sanctions,
Cayman Islands has also signed, along with over 100 other coun-
including administrative penalties, that are intended to be
tries, a multilateral competent authority agreement to imple- effective, proportionate and dissuasive.
ment the OECD Standard for Automatic Exchange of Financial ■ The enactment of the Limited Liability Companies Act in
Account Information – Common Reporting Standard (“CRS” 2016 provided for the formation of a new Cayman Islands
and, together with the US IGA, “AEOI”). vehicle: the LLC. Since its introduction, we have seen
Cayman Islands regulations have been issued to give effect to LLCs used in private equity structures, particularly as GP
the US IGA and CRS (collectively, the “AEOI Regulations”). governance vehicles, aggregator vehicles (where multiple
All Cayman Islands “Financial Institutions” (as defined in the related funds are investing in the same portfolio invest-
relevant AEOI Regulations) are required to comply with the ment) and holding companies/blockers in portfolio acqui-
registration, due diligence and reporting requirements of the sition structures.
AEOI Regulations, unless they are able to rely on an exemption. ■ A comprehensive review and update to the Exempted
Limited Partnership Act took place in recent years, and
additional enhancements are proposed. While neither the

Private Equity 2023

48 Cayman Islands

current law nor the proposed revisions make fundamental provides generally for four categories of corruption offences:
alterations to the nature, formation or operation of exempted Bribery (both domestic and foreign); Fraud on the Government;
limited partnerships, the statute promotes freedom of Abuses of Public or Elected Office; and Secret Commissions.
contract and includes provisions to deal specifically with There are also ancillary offences for failure to report an offence.
issues and concerns raised and suggestions made by the The impact of the AC Act on private equity transactions in the
industry to bring the Exempted Limited Partnership Act Cayman Islands, given the sophistication of the parties involved
even further in line with Delaware concepts and developing and the nature and quality of their transactions, has been
industry practices, including electronic closing platforms. minimal, although more commonly transaction documents now
include a warranty relating to compliance with such laws.
11.2 Are private equity investors or particular
transactions subject to enhanced regulatory scrutiny in 11.6 Are there any circumstances in which: (i) a private
your jurisdiction (e.g., on national security grounds)? equity investor may be held liable for the liabilities of
the underlying portfolio companies (including due to
breach of applicable laws by the portfolio companies);
Certain private funds set up as Cayman Islands partnerships, and (ii) one portfolio company may be held liable for the
companies, unit trusts and LLCs are required to register with the liabilities of another portfolio company?
Cayman Islands Monetary Authority (“CIMA”) pursuant to the PF
Act unless out of scope on the basis set out in the PF Act. The PF
Act also applies to non-Cayman Islands private funds that make an As a general rule, in the absence of a contractual arrange-
“invitation to the public in the Islands”. Private funds registered ment to the contrary, the liability of a shareholder of a Cayman
with CIMA are required to have their accounts audited annually by Islands-exempt company that has been incorporated with
an auditor approved by CIMA. A private fund is also required to limited liability and with a share capital is limited to the amount
submit its audited accounts, along with the Fund Annual Return to from time to time unpaid in respect of the shares he or she
CIMA within six months of the end of each financial year. Regis- holds. A Cayman Islands company has a legal personality sepa-
tered private funds are also subject to certain operational require- rate from that of its shareholders and is separately liable for
ments regarding valuation of assets, safekeeping of fund assets, its own debts due to third parties. Accordingly, a company’s
cash monitoring and identification of securities. liability does not generally pass through to its shareholders.
A private equity transaction to acquire a business located in or The general principles regarding corporate personality under
regulated in the Cayman Islands such as a local bank, insurance Cayman Islands law are similar to those established under
company or utility services provider may be subject to scrutiny English law, and a Cayman Islands Court will regard English
by CIMA and the Cayman Islands Trade and Business Licensing judicial authorities as persuasive (but not technically binding).
Board. Accordingly, from the date of incorporation of a Cayman Islands
company, it is a body corporate with separate legal personality
capable of exercising all the functions of a natural person of full
11.3 Are impact investments subject to any additional capacity. This includes the ability to own assets, and perform
legal or regulatory requirements? obligations, in its own name as a separate legal person distinct
from its shareholders (Salomon v. Salomon & Co. [1897] A.C. 22).
Cayman Islands domiciled private equity impact funds are not As a matter of English common law, it is only in exceptional
subject to any additional laws or regulations in the Cayman Islands. circumstances that the principle of the separate legal personality
In most cases, such private equity funds will be making impact of a company can be ignored such that the Court will “pierce the
investments in foreign jurisdictions outside of the Cayman Islands. corporate veil”. These circumstances are true exceptions to the
As a general observation, the formation and launch of impact rule in Salomon v. Salomon, and there is now a well-established prin-
funds and ESG funds in the Cayman Islands is increasing in-line ciple under English law that the Court may be justified in piercing
with the global investment funds market given the jurisdiction’s the corporate veil if a company’s separate legal personality is being
leading legislative and regulatory framework, tax-neutral status, abused for the purpose of some relevant wrongdoing.
flexible structuring options and experienced service providers.
122 Other Useful Facts
11.4 How detailed is the legal due diligence (including
compliance) conducted by private equity investors prior 12.1 What other factors commonly give rise to concerns
to any acquisitions (e.g., typical timeframes, materiality, for private equity investors in your jurisdiction or should
scope, etc.)? such investors otherwise be aware of in considering an
investment in your jurisdiction?
The approach to legal due diligence depends on the particular
sponsor and may also vary on a transaction-by-transaction basis. Cayman Islands private equity vehicles play a well-established
and growing role in private equity fund structures. This role
is evidenced by the growing number of exempted limited part-
11.5 Has anti-bribery or anti-corruption legislation nership registrations in the Cayman Islands. Statistics issued by
impacted private equity investment and/or investors’
approach to private equity transactions (e.g., diligence,
the Registrar of Partnerships have confirmed that in the years
contractual protection, etc.)? since the 2008 financial crisis, the Cayman Islands has seen a
consistent increase in the number of annual partnership registra-
tions. In 2022, the number of active exempted limited partner-
The Cayman Islands’ Anti-Corruption Act (As Revised) (the ships stood at 37,640, compared with 35,075 in 2021, 31,733 in
“AC Act”) came into force on 1 January 2010 with the intent of 2020 and 28,469 in 2019. This continued rise in the popularity
giving effect to the OECD Convention on Combating Bribery of of Cayman Islands private equity structures can be attributed in
Foreign Public Officials in International Business Transactions, part to the Cayman Islands’ commercial and industry-specific
as well as the United Nations Convention Against Corruption.
laws, transparency initiatives and compliance with international
The AC Act replaced the provisions relating to anti-corruption
standards, coupled with the Cayman Islands’ flexibility to imple-
and bribery that previously existed under the Penal Code, and
ment change and adapt to new opportunities and challenges.

Private Equity 2023

 Maples Group 49

Julian Ashworth is a partner in the Cayman Islands Funds & Investment Management team at Maples and Calder, the Maples Group’s law
firm. His practice focuses on private equity, hybrid and hedge fund structures and downstream transactions, including financing and secu-
rity agreements, secondary transactions and fund restructurings. He advises sponsors and management companies on profit sharing and
funding arrangements and Cayman Islands regulatory matters. Julian is also involved in corporate finance matters, including M&A transac-
tions, joint ventures, co-investments and restructuring matters.

Maples Group Tel: +1 345 814 5413

Ugland House, South Church Street Email: julian.ashworth@maples.com
PO Box 309, George Town URL: www.maples.com
Grand Cayman, KY1-1104
Cayman Islands

Patrick Rosenfeld is a partner in the Cayman Islands Funds & Investment Management team at Maples and Calder, the Maples Group’s law
firm. He specialises in the formation and restructuring of all types of investment funds and advises clients in the asset management industry.
He also has extensive experience of international debt capital markets, structured finance and securitisation transactions.

Maples Group Tel: +1 345 814 5505

Ugland House, South Church Street Email: patrick.rosenfeld@maples.com
PO Box 309, George Town URL: www.maples.com
Grand Cayman, KY1-1104
Cayman Islands

Lee Davis is a partner in the Cayman Islands Funds & Investment Management team at Maples and Calder, the Maples Group’s law firm. He
advises hedge and private equity funds on their establishment and ongoing legal and regulatory compliance in the Cayman Islands. He also
advises on general corporate and commercial matters.

Maples Group Tel: +1 345 814 5196

Ugland House, South Church Street Email: lee.davis@maples.com
PO Box 309, George Town URL: www.maples.com
Grand Cayman, KY1-1104
Cayman Islands

Stef Dimitriou is a partner in the Cayman Islands Funds & Investment Management team at Maples and Calder, the Maples Group’s law firm.
He advises private equity funds, hedge funds and investment managers on investment fund formation, restructuring and fund transactions.
He also advises on a broad range of corporate and commercial matters.

Maples Group Tel: +1 345 814 5437

Ugland House, South Church Street Email: stef.dimitriou@maples.com
PO Box 309, George Town URL: www.maples.com
Grand Cayman, KY1-1104
Cayman Islands

The Maples Group, through its leading international legal services firms,
advises global financial, institutional, business and private clients on the
laws of the British Virgin Islands, the Cayman Islands, Ireland, Jersey
and Luxembourg. With offices in key jurisdictions around the world, the
Maples Group has specific strengths in the areas of corporate commer-
cial, finance, investment funds, litigation and trusts. Maintaining relation-
ships with leading legal counsel, the Group leverages this local expertise to
deliver an integrated service offering for global business initiatives.
www.maples.com

Private Equity 2023

50 Chapter 7

China
China

Charles Wu

Han Kun Law Offices LLP Hanpeng (Patrick) Hu

12 Overview 22 Structuring Matters

1.1 What are the most common types of private equity 2.1 What are the most common acquisition structures
transactions in your jurisdiction? What is the current adopted for private equity transactions in your
state of the market for these transactions? jurisdiction?

The most common types of private equity transactions in the There are a diverse range of transaction structures for PRC
People’s Republic of China (PRC) are mergers and acquisi- private equity transactions. The most straightforward struc-
tions (M&A), growth investments, and a nascent restructuring tures for international private equity investors are non-PRC
market. The leveraged debt financing market is becoming more parent structures, which allow investors to use structures they
common, especially in M&A. are familiar with in other jurisdictions, such as a U.K.-style
merger or Silicon Valley-style growth documents. However,
asset acquisitions and PRC structures are becoming more and
1.2 What are the most significant factors currently
encouraging or inhibiting private equity transactions in more prevalent, especially as new offshore IPO rules take effect.
your jurisdiction?
2.2 What are the main drivers for these acquisition
Two significant factors have brought increased certainty to the structures?
market. The first is China’s emergence from COVID-19 restric-
tions, which may result in a release of pent-up demand, espe- The main driver for an acquisition structure, whether the trans-
cially from Asia-focused funds who raised significant amounts action is an acquisition or a growth investment, is the current
for deployment in the PRC market. The second is China’s group structure of the target. If the group structure has a parent
release of specific rules, which came into effect on 31 March entity outside of the PRC (typically in the Cayman Islands),
2023, regulating for the first time the overseas (i.e. anywhere then transaction structures available in other jurisdictions are
but Mainland China) IPOs of Chinese businesses with offshore possible. If, however, the group structure has a parent entity in
structures. Geopolitical uncertainty continues to be an over- the PRC, then transaction structures available in other jurisdic-
hang on the market, particularly U.S. export controls impacting tions such as mergers are no longer possible.
portfolio companies and potential U.S. investment restrictions
on certain sectors of the Chinese economy.
2.3 How is the equity commonly structured in private
equity transactions in your jurisdiction (including
1.3 Are you seeing any types of investors other institutional, management and carried interests)?
than traditional private equity firms executing private
equity-style transactions in your jurisdiction? If so,
If the purchaser is a USD fund, whether controlled by general
please explain which investors, and briefly identify any
significant points of difference between the deal terms partners who are PRC nationals or non-PRC nationals, the
offered, or approach taken, by this type of investor and economics of a fund are similar to other jurisdictions in terms
that of traditional private equity firms. of management and carried interest. If the purchaser is a
non-USD fund, the terms are similar but not exactly the same.
For example, certain limited partners that may have government
The PRC market has international private equity investors and a
affiliations may demand more rights over the procurement of
burgeoning group of local or Asia-focused private equity inves-
investment opportunities.
tors who have raised USD, RMB, or USD and RMB funds. There
are also government-backed or government-sponsored funds,
primarily RMB funds. The practice of local or Asia-focused 2.4 If a private equity investor is taking a minority
private equity investors differs slightly from international private position, are there different structuring considerations?
equity investors in terms of the level of flexibility they have with
terms and legal risk. The structuring considerations are generally the same for a
growth investment as they are for a transaction resulting in a
change of control. A unique consideration in growth invest-
ments is whether the rights granted to the investor would

Private Equity 2023

 Han Kun Law Offices LLP 51

result in “control”, which may trigger an antitrust filing under business plans, related party transactions, etc.)? If a
enhanced new rules that took effect on 1 August 2022. private equity investor takes a minority position, what
veto rights would they typically enjoy?

2.5 In relation to management equity, what is the

typical range of equity allocated to the management, and In growth transactions, the existence of individual veto rights is
what are the typical vesting and compulsory acquisition generally more prevalent in the PRC compared with other juris-
provisions? dictions where there may be class voting by preferred share-
holders or certain classes of preferred shareholders. The indi-
The typical range for equity allocated to management, and the vidual veto rights typically extend to economic rights, such as
terms of such equity, varies significantly in the PRC depending IPO, trade sale, and amending the articles of association. Oper-
on the sector. Targets with high cash burn rates consumed for ational veto rights also exist depending on the level of control an
the purposes of user acquisitions may have more management investor seeks to exert, and their extent will also impact whether
equity, while targets with specific product development objec- or not a merger review filing is required or not.
tives such as life sciences may have less management equity,
but this is not a general rule. Vesting conditions can vary from 3.3 Are there any limitations on the effectiveness of
monthly to annual vesting, but accelerated vesting is typically veto arrangements: (i) at the shareholder level; and (ii) at
only granted to founders and senior management. the director nominee level? If so, how are these typically
addressed?

2.6 For what reasons is a management equity holder

usually treated as a good leaver or a bad leaver in your Under the PRC’s merger review standards, an individual veto
jurisdiction? right, whether at the shareholder or director level, over the budget
and business plan, the appointment or dismissal of officers, as
well as matters relating to an employee stock ownership plan,
The reasons are determined by contract and not by law as it relates management remuneration, investment projects and disposal of
to management equity. The distinctions are generally tied to intellectual property rights without high shareholding or mone-
length of service and compliance with employment-related under- tary thresholds, would be deemed “control”, thereby necessitating
takings, such as confidentiality and non-competition (which is a merger review filing if the merger review thresholds are met,
permitted in the PRC as long as the employee receives compensa- even though the underlying transaction is a growth transaction.
tion during the non-competition period).

3.4 Are there any duties owed by a private equity

32 Governance Matters investor to minority shareholders such as management
shareholders (or vice versa)? If so, how are these
3.1 What are the typical governance arrangements typically addressed?
for private equity portfolio companies? Are such
arrangements required to be made publicly available in
Directors appointed by the private equity investor have a fidu-
your jurisdiction?
ciary duty to act in the best interests of the company, whether
the entity in the group structure is incorporated in the PRC or
In an offshore structure where the target’s parent entity is Cayman Islands. Generally speaking, acting in its capacity as a
located in the Cayman Islands, corporate decisions are made by shareholder, absent specific contexts in a PRC liquidation, such
the board of directors except for special resolution items such shareholder does not owe any fiduciary duties to other share-
as amending the articles of association that have to be approved holders in the PRC or Cayman Islands.
by two-thirds of the shareholders. The register of members,
register of directors, register of chargers, and memorandum and
3.5 Are there any limitations or restrictions on the
articles of association are not publicly accessible.
contents or enforceability of shareholder agreements
With respect to PRC subsidiaries in offshore structures and an (including (i) governing law and jurisdiction, and (ii)
onshore structure where the target’s parent entity is located in non-compete and non-solicit provisions)?
the PRC, corporate decisions are made by the board of directors,
documents are executed by the legal representative, the general
In an offshore structure where the target’s parent entity is
manager or managers direct the day-to-day management of the
located in the Cayman Islands, the governing law is typically
entity, and these appointees are supervised by a supervisor or a
Hong Kong law and Hong Kong arbitration at the Hong Kong
board of supervisors independent from the board, legal repre-
International Arbitration Centre (HKIAC). In 2019, Main-
sentative, and the general manager or managers. In an onshore
land China agreed to allow litigants in an HKIAC arbitration
structure where the target’s parent entity is located in the PRC,
to pursue interim relief in the PRC, which is an enforcement
shareholder approval is required to amend the articles of asso- advantage that has led to transaction parties electing arbitra-
ciation. The particulars of the shareholders, board of direc- tion at the HKIAC. In an onshore structure where the target’s
tors, and other legally appointed persons are publicly accessible. parent entity is located in the PRC, generally speaking the
The articles of association and incorporation documents are not governing law cannot be moved outside of Mainland China as
publicly accessible but PRC lawyers and the company itself have there is no sufficient “foreign element” in the transaction, even
the authority to request them from the local registration office. if the private equity investor is incorporated outside of the PRC.
Non-compete and non-solicitation provisions are typically
3.2 Do private equity investors and/or their director enforceable in the PRC so long as the employee receives consid-
nominees typically enjoy veto rights over major eration during the period of the non-compete. The amount
corporate actions (such as acquisitions and disposals, of monthly minimal consideration varies by province but, in
general, it is at least 30% of the average monthly salary in the 12
months prior to the departure.

Private Equity 2023

52 China

In an onshore structure where the target’s parent entity is located an arrangement where the key licences are held by an entity
in the PRC, a redemption provision is generally unenforceable as under contractual control as opposed to shareholding control.
to the company. Transaction parties do frequently attribute joint Notwithstanding the fact that major PRC Internet companies
and several liability for the redemption onto the founders, though have used the structure to attract private equity investment
this provision is infrequently invoked in practice. and then list in Hong Kong or the U.S., the enactment of the
offshore IPO rules and their subsequent implementation raises
significant uncertainty to the continued viability of past prac-
3.6 Are there any legal restrictions or other
requirements that a private equity investor should tices in restricted or prohibited industries. There is an addi-
be aware of in appointing its nominees to boards of tional approval regime for target companies who hold user data
portfolio companies? What are the key potential risks on at least 1 million individuals that applies to U.S. listings but
and liabilities for (i) directors nominated by private not Hong Kong listings.
equity investors to portfolio company boards, and (ii) The PRC recently updated its Anti-Monopoly Law, which raises
private equity investors that nominate directors to filing thresholds but also the consequences of non-compliance,
boards of portfolio companies? from RMB500,000 to up to 10% of global turnover. Under the
new Anti-Monopoly Law, an expedited review where a decision is
There are no nationality restrictions for board appointees of made in as little as one to two months is possible.
PRC entities (either operating subsidiaries in an offshore struc-
ture or onshore structure). Generally speaking, the legal repre-
4.2 Have there been any discernible trends in
sentative, a legally appointed person who has the power to transaction terms over recent years?
execute documents on behalf of PRC entities, is the first line
of defence if a governmental authority requests documents
or information from a PRC entity. Director liability is gener- To account for the changes set forth in question 4.1, transac-
ally limited to the obligation to act in the best interests of the tion terms now have special redemption provisions, mandatory
company. Shareholders are generally not liable unless they are buy-backs, and assistance with offshore IPO applications.
held by a court to be one and the same with the entity itself,
roughly analogous to the standards for “piercing the corporate 52 Transaction Terms: Public Acquisitions
veil” in other jurisdictions.
5.1 What particular features and/or challenges apply
to private equity investors involved in public-to-private
3.7 How do directors nominated by private equity
transactions (and their financing) and how are these
investors deal with actual and potential conflicts of
commonly dealt with?
interest arising from (i) their relationship with the party
nominating them, and (ii) positions as directors of other
portfolio companies? The most common public-to-private transactions involving PRC
companies are take-privates of U.S. listed PRC companies, and
Apart from exercising their general fiduciary obligations to the the acquisition of PRC companies listed on the Stock Exchange
company, the articles of association in a PRC operating entity of Hong Kong. The market for the takeover of companies listed
or a Cayman Islands entity in an offshore structure may contain in Mainland China is still at a nascent stage. For take-privates of
specific provisions pertaining to the handling of potential U.S. listed companies, the major hurdle is not necessarily share-
director conflicts of interest and corporate opportunities. holder approval as the companies almost always have unweighted
voting arrangements, but rather the composition of the special
committee and the inevitable class action lawsuits filed for the
42 Transaction Terms: General
purposes of increasing price. The most time-consuming item
is the adjudication of these class action lawsuits. For the acqui-
4.1 What are the major issues impacting the timetable sition of Hong Kong listed companies, Hong Kong has a take-
for transactions in your jurisdiction, including antitrust,
overs regime requiring over 30% shareholders to tender shares
foreign direct investment and other regulatory approval
requirements, disclosure obligations and financing to all other shareholders and attain 75% or more of the votes of
issues? independent shareholders in order for the acquisition to proceed.
The existence of these requirements should be considered when
negotiating the timing of the acquisition and discussions with
From the perspective of international private equity investors,
selling shareholders. Antitrust merger review filings would also
the first fundamental consideration in any M&A or growth
apply for the above take-privates of U.S. listed companies and
transaction is an examination of whether the underlying busi-
acquisitions of Hong Kong listed companies.
ness is subject to foreign investment restrictions in the PRC.
This consideration has increased in significance with the enact-
ment of the offshore IPO rules, whose regulators will carefully 5.2 What deal protections are available to private
scrutinise foreign investment restrictions and non-PRC share- equity investors in your jurisdiction in relation to public
holding in any subsequent proposed IPO outside of Mainland acquisitions?
China. The major industries restricted to foreign investment
are Internet content services, which require an Internet content For take-privates of PRC companies listed in the U.S., the most
provider (ICP) licence, with a 50% foreign investment limit. common deal protection for an acquirer is to set a deadline for
The major industries prohibited to foreign investment are online completion, after which the acquirer is entitled to terminate the
videos, cloud computing, news and streaming services, and K-12 transaction. For the acquisition of Hong Kong listed compa-
education. The variable interest entity (VIE) structure has been nies, the most common deal protection is the assurance that the
a structure in existence for over 20 years, which allowed foreign requisite takeover thresholds (namely attaining 75% or more of
investors to invest in restricted or prohibited sectors through the votes of independent shareholders) can be met.

Private Equity 2023

 Han Kun Law Offices LLP 53

62 Transaction Terms: Private Acquisitions 6.6 Do (i) private equity sellers provide security (e.g.,
escrow accounts) for any warranties / liabilities, and
(ii) private equity buyers insist on any security for
6.1 What consideration structures are typically warranties / liabilities (including any obtained from the
preferred by private equity investors (i) on the sell-side, management team)?
and (ii) on the buy-side, in your jurisdiction?

Holdbacks and indemnification escrows are gradually being

The preferred consideration structure for both sell-side and replaced with W&I insurance, although they are still present in
buy-side tends to be cash without other forms of consideration. the market. There are still milestone-related management earn-
An exchange of shares is also present for portfolio companies outs tied to financial metrics that occur after completion.
that merge. Consideration paid to a target incorporated in the
PRC may be paid in USD.
6.7 How do private equity buyers typically provide
comfort as to the availability of (i) debt finance, and (ii)
6.2 What is the typical package of warranties / equity finance? What rights of enforcement do sellers
indemnities offered by (i) a private equity seller, and (ii) typically obtain in the absence of compliance by the
the management team to a buyer? buyer (e.g., equity underwrite of debt funding, right to
specific performance of obligations under an equity
commitment letter, damages, etc.)?
The typical package of warranties will relate to all aspect of the
target’s business and will be given by the seller and the manage-
ment on a joint and several basis. PRC-specific warranties relate The most common protection for sellers is an equity commit-
to foreign exchange, cybersecurity, and compliance, allowing the ment letter from the buyer or another affiliate parent entity of
target to list in the future. As very few PRC targets are perfectly the buyer with significant assets. The right of specific perfor-
compliant, holdbacks and indemnification escrows exist but are mance is the most common remedy for a seller in the event of a
being replaced by warranty and indemnity (W&I) insurance. breach by the buyer. Sellers also may require assurances of debt
financing being secured prior to even signing.
6.3 What is the typical scope of other covenants,
undertakings and indemnities provided by a private 6.8 Are reverse break fees prevalent in private equity
equity seller and its management team to a buyer? transactions to limit private equity buyers’ exposure? If
so, what terms are typical?
For growth transactions, covenants tend to be both broad
(general compliance with law) and specific (items of non-com- Reverse break fees and break fees generally are not very common
pliance identified in legal due diligence). For M&A, the cove- in the PRC market. However, they can be used to account for over-
nants tend to be limited, especially for the selling shareholder, seas direct investment (ODI) approval risk (see question 12.1) and
unless the founding team remains with the target, although completion risk associated with not obtaining antitrust approval.
transition services are also present.
72 Transaction Terms: IPOs
6.4 To what extent is representation & warranty
insurance used in your jurisdiction? If so, what are the 7.1 What particular features and/or challenges should
typical (i) excesses / policy limits, and (ii) carve-outs / a private equity seller be aware of in considering an IPO
exclusions from such insurance policies, and what is the exit?
typical cost of such insurance?
The most significant features are the offshore IPO rules, which
W&I insurance is becoming more common in the PRC market, came into effect on 31 March 2023, the cybersecurity review rules,
especially for sellers who are private equity investors. In addi- which came into effect on 15 February 2022, and their implementa-
tion to international insurers, there are also local PRC insurers tion. The importance of these rules for international private equity
active in the W&I insurance market. Exclusions typically cover investors pursuing an IPO exit in Hong Kong or the U.S. cannot
market factors such as changes to the law and the regulatory be overstated, as they regulate an area that was once effectively
environment, and uncertainty in new laws and their implemen- unregulated for companies with an offshore structure. The cyber-
tation, which may impact the target’s business, although these security review rules require prior approval from the Cyberspace
can also be negotiated. The cost of W&I insurance varies signif- Administration of China (CAC) for targets who hold user data
icantly depending on sector and corporate structure. on at least 1 million individuals and are applying to list anywhere
other than Mainland China or Hong Kong (including the U.S.).
These cybersecurity reviews are time-consuming, cumbersome,
6.5 What limitations will typically apply to the liability
of a private equity seller and management team under and do not always result in a successful outcome. For both list-
warranties, covenants, indemnities and undertakings? ings in Hong Kong and the U.S., compliance with foreign invest-
ment restrictions and prohibitions are now paramount, with prior
workarounds such as the variable interest entity structure facing
The most common limitations are an indemnity basket and
significant uncertainty. In addition, the target will need to produce
liability exclusions for matters disclosed in a data room. In
a compliance certificate from its primary regulator, meaning prior
the PRC market, however, there are special indemnity items to
legal due diligence practices such as relying on prospectus disclo-
account for potential regulatory action for past non-compliance,
sures of non-compliance will no longer be adequate.
even if these actions occur after completion.
On 24 March 2023, the Stock Exchange of Hong Kong
released special rules and standards for designated specialist
technology companies, which expands listing options in Hong

Private Equity 2023

54 China

Kong. On 7 April 2023, the China Securities Regulatory

Commission released its first batch of approved offshore list-
92 Alternative Liquidity Solutions
ings, with all three being Hong Kong listings.
9.1 How prevalent is the use of continuation fund
vehicles or GP-led secondary transactions as a deal type
7.2 What customary lock-ups would be imposed on in your jurisdiction?
private equity sellers on an IPO exit?
Due to rapid growth in Asia generally, and China in particular, in
In a Hong Kong IPO, a controlling shareholder holding 30% the past decade, international private equity investors generally
or more of the listed company’s voting rights is subject to a did not need to consider continuation funds as they were able to
six-month statutory lock-up period. For non-controlling share- exit within the original fund’s life. For secondary transactions,
holders and U.S. listings, underwriters will typically require a international investors who invested in a target operating in a
six-month lock-up period. restricted or especially prohibited industry are facing the pros-
pect of holding an illiquid asset with the advent and implemen-
7.3 Do private equity sellers generally pursue a dual- tation of the offshore IPO rules. Therefore, secondary trans-
track exit process? If so, (i) how late in the process are actions, especially where stakes are sold to PRC investors, may
private equity sellers continuing to run the dual-track, become a viable alternative.
and (ii) were more dual-track deals ultimately realised
through a sale or IPO?
9.2 Are there any particular legal requirements or
restrictions impacting their use?
Dual-track potential exits were less common in the PRC market,
but are expected to be more common for target companies
International private equity investors who have USD funds are
who will encounter difficulties in achieving an IPO due to the
usually not subject to the PRC’s jurisdiction at the fund level.
recently enacted offshore IPO rules. When exploring an exit,
Those who raise RMB funds will have to obtain a fresh set of
sellers usually select an exit option over the other.
approvals to establish a continuation fund. Secondary trans-
actions within the fund may also be necessitated by “reverse
82 Financing CFIUS” restrictions by the U.S. on investments in specified
sectors of the China’s economy.
8.1 Please outline the most common sources of debt
finance used to fund private equity transactions in your
jurisdiction and provide an overview of the current state
102 Tax Matters
of the finance market in your jurisdiction for such debt
(including the syndicated loan market, private credit 10.1 What are the key tax considerations for private
market and the high-yield bond market). equity investors and transactions in your jurisdiction?
Are off-shore structures common?

The most common form of debt financing for private equity

transactions is borrowing from traditional banks, either on a Whether a target company has an offshore or onshore structure,
singular or syndicated basis. The use of debt instruments for private equity investors typically use an offshore entity as the
PRC transactions tends to follow trends first used by interna- holding vehicle. The most common form of tax structuring is
tional private equity investors in other jurisdictions. The market to use a Singapore holding vehicle in order to enjoy the benefits
for high-yield bonds is still at a nascent stage. of the double taxation treaty between the PRC and Singapore.
Offshore structures are now subject to the same regulation on
offshore IPOs as onshore structures, so their use may become
8.2 Are there any relevant legal requirements or less common over time.
restrictions impacting the nature or structure of the debt
financing (or any particular type of debt financing) of
private equity transactions? 10.2 What are the key tax-efficient arrangements that
are typically considered by management teams in private
equity acquisitions (such as growth shares, incentive
The provision of security by PRC persons or the use of PRC assets
shares, deferred / vesting arrangements)?
as security to a foreign debtor are subject to registration require-
ments from the State Administration of Foreign Exchange.
Furthermore, if the term of a foreign debt exceeds one year, Generally speaking, asset acquisitions would involve a higher
approval from the National Development and Reform Commis- tax burden for the sellers, but they are still used by strategic
sion is also required. In practice, PRC individuals cannot in prac- buyers. Typically incentive shares, however structured, would
tice complete the required registration, complicating enforce- result in the same tax liability for PRC beneficiaries.
ment. The registrations made by PRC entities to provide security
and the security of PRC assets can be completed in practice. 10.3 What are the key tax considerations for
management teams that are selling and/or rolling over
part of their investment into a new acquisition structure?
8.3 What recent trends have there been in the debt-
financing market in your jurisdiction?
The key tax considerations typically involve the amount of
The use of debt financing for private equity transactions cash consideration management will receive at completion
involving PRC target companies has tended to follow devel- and whether future payments are tied to earn-outs. Generally
opments in other jurisdictions. It is still fairly uncommon in speaking, the roll-over of equity from the seller to the buyer
growth transactions but is gaining tracking in M&A. or to a new merger parent company is a taxable event where
capital gains tax is due on the premium. Generally speaking,

Private Equity 2023

 Han Kun Law Offices LLP 55

the roll-over of options from the seller to the buyer or to a 11.4 How detailed is the legal due diligence (including
new merger parent company is a tax-neutral event as long as compliance) conducted by private equity investors prior
the vesting terms do not change or accelerate. There have to any acquisitions (e.g., typical timeframes, materiality,
been transactions where the target companies were required to scope, etc.)?
provide limited tax indemnities or reimbursement programmes
for shareholders (including management shareholders) who The advent of the offshore IPO rules and cybersecurity reviews
incurred capital gains tax as a result of a merger. as specified in question 7.1 will mean that diligence will be height-
ened as it will impact a future IPO exit. Any identified deficien-
10.4 Have there been any significant changes in tax cies will therefore have to be remedied by completion or prior
legislation or the practices of tax authorities (including to an IPO exit. Some private equity investors prefer a stepped
in relation to tax rulings or clearances) impacting private approach to legal due diligence, where gateway items such as
equity investors, management teams or private equity foreign investment restrictions, offshore listings potential, and
transactions and are any anticipated? structuring issues are handled first prior to other diligence items.

The PRC already has an established tax regime on indirect share 11.5 Has anti-bribery or anti-corruption legislation
sales of PRC companies with offshore structures. There have impacted private equity investment and/or investors’
been no significant developments since that change was made approach to private equity transactions (e.g., diligence,
in 2015. contractual protection, etc.)?

112 Legal and Regulatory Matters The PRC’s anti-bribery and anti-corruption regime has been
enforced with more regularity recently. The basic approach to
11.1 Have there been any significant legal and/or anti-bribery and anti-corruption legal due diligence and contrac-
regulatory developments over recent years impacting tual protections, however, has remained relatively unchanged.
private equity investors or transactions and are any
anticipated?
11.6 Are there any circumstances in which: (i) a private
equity investor may be held liable for the liabilities of
The PRC’s offshore IPO rules, which came into effect on 31 the underlying portfolio companies (including due to
March 2023, the cybersecurity review rules, which came into breach of applicable laws by the portfolio companies);
effect on 15 February 2022, and their implementation, are and (ii) one portfolio company may be held liable for the
perhaps the most consequential legal changes in the market liabilities of another portfolio company?
in the last 20 years. Their impacts on IPOs are set forth in
question 7.1. The market is also bracing for additional “reverse Shareholder liability under PRC law is rare and will only arise if
CFIUS” restrictions from the U.S. that may prevent U.S. inves- the shareholder and the underlying portfolio company are held
tors, including limited partners, from investing in specified by a PRC court to be one and the same. This situation can arise
sectors of the China’s economy. where all or substantially all of the directors and other legally
appointed persons are associated with the private equity investor
11.2 Are private equity investors or particular and not the portfolio company itself, which is a rare arrange-
transactions subject to enhanced regulatory scrutiny in ment for private equity investors in the PRC. There is no mech-
your jurisdiction (e.g., on national security grounds)? anism under PRC law under which one portfolio company can
be held liable for the liabilities of another portfolio company.
Private equity investors are not treated any differently as a
class compared with other non-PRC investors. Investments in 122 Other Useful Facts
restricted or prohibited sectors by non-PRC investors, mainly
involving the distribution of content online, are more sensitive 12.1 What other factors commonly give rise to concerns
than other industries, which the PRC has effectively opened on for private equity investors in your jurisdiction or should
a broad and unfettered basis. The PRC also has a foreign invest- such investors otherwise be aware of in considering an
ment review regime similar to the U.S. CFIUS regime that came investment in your jurisdiction?
into effect on 1 January 2020. While initial implementation was
slow, it is now a required consideration in any transaction where One of the unique aspects of PRC practice that may not be
a non-PRC investor will attain “control” in a target operating in present in other jurisdictions is foreign exchange and the fact
any specified sector. that the PRC does not yet have an open capital account. This
impacts both financial and legal due diligence and involves legal
requirements that may be unique to the PRC. For example, in
11.3 Are impact investments subject to any additional
legal or regulatory requirements? order for a PRC person to hold equity in an entity incorporated
outside of Mainland China acting as the parent entity for the
business, a special registration with the State Administration of
Impact investments that attract headlines may receive addi- Foreign Exchange is required. In order for investors in the PRC
tional scrutiny, especially if they involve any of the large private to invest in or acquire portfolio companies using funds from the
companies that have recently been investigated as part of the PRC (including converting RMB in the PRC into USD outside
PRC’s heightened regulation of the previously unregulated tech- of the PRC), an overseas direct investment (ODI) approval is
nology sector. However, international investors should not required to convert RMB into USD. This approval has become
assume that there will be less scrutiny or lower risk if the invest- more administrative over the years but is still subject to general
ment is not headline-grabbing. foreign exchange trends such as currency outflows, as well as
foreign investment restrictions.

Private Equity 2023

56 China

Charles Wu specialises in cross-border venture capital and private equity, M&A, and general corporate matters. Charles was born in Beijing
and raised in Mississippi and New Jersey. He leverages the firm’s full-service resources to explain “China-specific” issues to international
clients in a clear, concise, and digestible manner. When negotiating transactions on behalf of international clients, he connects his under-
standing of their expectations and priorities with his local knowledge and expertise of international business and legal terms. Charles also
represents domestic clients in pre-IPO cross-border venture capital financings and M&A, outbound investments in non-PRC jurisdictions, and
compliance matters.
Charles has served the following international and domestic clients: Permira; Apax; TPG; GIC; Apple; Microsoft; Marriott; Liverpool Football
Club; Tencent; Baidu; JD.com; Bytedance; and Sequoia China. Prior to joining Han Kun, Charles was a corporate associate at a Wall Street
firm and a law clerk in New Jersey.

Han Kun Law Offices LLP Tel: +852 2820 5617

Rooms 3901-05, 39/F., Edinburgh Tower Email: charles.wu@hankunlaw.com
The Landmark, 15 Queen’s Road Central URL: www.hankunlaw.com
Hong Kong S.A.R.
China

Hanpeng (Patrick) Hu’s main practice areas cover venture capital and private equity, M&A, offshore initial public offerings, foreign direct
investment, and general corporate matters. Mr. Hu has broad experience in industries such as telecommunications, the Internet, new energy
vehicles, and clean energy.

Han Kun Law Offices LLP Tel: +86 21 6080 0909

33/F, HKRI Centre Two, HKRI Taikoo Hui Email: patrick.hu@hankunlaw.com
288 Shimen Road (No. 1), Jing’an District URL: www.hankunlaw.com
Shanghai 200041
China

Han Kun is a leading full-service law firm in China. Over the years, Han
Kun has been widely recognised as a leader in complex cross-border and
domestic transactions.
Our main practice areas include private equity, M&A, international and
domestic capital markets, investment funds, asset management, anti-
trust/competition, banking and finance, aviation finance, foreign direct
investment, compliance, private client/wealth management, intellectual
property and dispute resolution.
We have more than 800 professionals located in our seven offices in
Beijing, Wuhan, Haikou, Hong Kong, Shanghai, Singapore, and Shenzhen.
All of our lawyers are graduates of top universities and have extensive
experience in complex cross-border transactions as counsel to both
Chinese and non-Chinese clients.
www.hankunlaw.com

Private Equity 2023

 Chapter 8 57

France

France
Julie
Lisa Becker Tchaglass

Marine
Vivien & Associés AARPI Pelletier-Capes Julien Koch

VC-like transactions to adapt their activity to the market’s new

12 Overview expectations (e.g., relocation of production activities, reduction
of carbon footprints, or diversification of activities) by acquiring
1.1 What are the most common types of private equity other companies or taking stakes in start-up companies. These
transactions in your jurisdiction? What is the current
transactions may combine M&A transaction philosophy and
state of the market for these transactions?
deal terms with PE or VC transactions financing and structure.

Private equity (PE) transactions refer to investments achieved

by PE investors at different stages of a company’s life, from
22 Structuring Matters
venture capital (VC) investments (pre-seed or seed stage), growth
or expansion capital investments (early or late stage), to buyout 2.1 What are the most common acquisition structures
investments (leveraged buyout (LBO), leveraged management adopted for private equity transactions in your
buyout, buy-in management buyout, family buyout, etc.) and exit jurisdiction?
transactions. The French PE landscape, which has always been
welcoming PE transactions, comprises PE funds focusing on Usually, acquisition vehicles (used for completing a transaction)
LBO transactions involving mature companies and a multiplicity are incorporated under the form of regular companies such as
of VC funds interested in venture and growth capital transactions. “société anonyme” (SA) or “société par actions simplifiée” (SAS) or specific
After the 2021 post-COVID peak, the LBO and VC transaction companies such as VC companies (société de capital-risque – SCR),
flow stayed strong until 2022, began to slow down and then fell as enjoying legal personality but still delegating the management of
from the last Q22, with lower deal valuations, lower quantities of their funds to a management company.
funds raised, and lengthier negotiation timeframes, even if it seems Under French law, investments funds can be incorporated under
that PE activity in France has a bit bounced back in Q1 2023. the form of specific legal structures governed by the French Mone-
tary and Financial code and the French Financial Market Authority
1.2 What are the most significant factors currently (Autorité des Marchés Financiers – AMF), known as “alterna-
encouraging or inhibiting private equity transactions in tive investment funds” (FIA). FIAs raise capital from investors
your jurisdiction? to invest it following a predefined investment policy. The most
commonly known structures are PE mutual funds, including VC
French economy has been able to show signs of resilience and mutual funds ( fonds commun de placement à risque – FCPR), innova-
maintain its appeal for PE transactions notwithstanding the tion capital mutual funds ( fonds commun de placement dans l’innova-
current uncertain global economic environment (i.e., inflation, tion – FCPI) and other professional funds, such as professional PE
invasion of Ukraine, energy crisis, supply chain issues, increased fund (FPCI). These funds are deprived of legal personality and
market interest rates). Indeed, the political will to swiftly relo- managed by a management company (société de gestion).
cate strategic industries, the urgency of global warming, the rise
of Web3 and deep tech companies, and the advancement of envi- 2.2 What are the main drivers for these acquisition
ronmental, social and governance (ESG) goals, coupled with the structures?
French government’s recent and promising initiatives (French
Tech, France 2030, etc.) have been encouraging factors to PE trans-
actions, despite the current worldwide inhibiting factors and some The acquisition vehicles’ structure may differ based on legal and
new regulations (such as foreign investment or antitrust) that may tax considerations and depending on whether the transaction is
have curbed or prevented the completion of certain transactions. organised as an assets deal, a share deal, a merger, etc., but are
mainly incorporated under the corporate form of SAS (see ques-
tions 2.3 and 3.1 below).
1.3 Are you seeing any types of investors other The structure of the investment funds is mainly driven by: (i)
than traditional private equity firms executing private
equity-style transactions in your jurisdiction? If so,
the nature (either professional or non-professional) of their ulti-
please explain which investors, and briefly identify any mate funders (i.e., opposing structures opened to non-professional
significant points of difference between the deal terms funders, inter alia, FCPR, FCPI and fonds d’investissement de proximité,
offered, or approach taken, by this type of investor and to those opened to professional funders, inter alia, FPCI and société
that of traditional private equity firms. de libre partenariat); (ii) the tax regime attached to the subscription
of the securities issued by those structures and the capital gains
Industrial companies use the completion of build-up/PE or achieved by said structures; and (iii) the sector, area of industry

Private Equity 2023

58 France

and type of assets into which the investments are to be made, 2.5 In relation to management equity, what is the
as specific types of funds must comply with certain investments typical range of equity allocated to the management, and
ratios. what are the typical vesting and compulsory acquisition
provisions?

2.3 How is the equity commonly structured in private

equity transactions in your jurisdiction (including In LBO transactions, the package offered to managers aims at
institutional, management and carried interests)? aligning their interests with the financing parties’ interests. The
management is often requested to invest (directly or through
Regarding LBO transactions, PE investors usually acquire the ManCo) in HoldCo on a pari passu basis with the PE investor
entire issued share capital of the target company to fund its regarding securities, capital gain perspective, and exit horizon.
growth through, for instance, completion of build-up transac- As a matter of trend, the managers usually hold between 5% and
tions. The acquisition is completed through a dedicated holding 15% of the equity.
company (HoldCo), usually incorporated under the form of a SAS If it is intended to grant free shares (actions gratuites) to key
(see question 3.1 below), funded by the PE investor and other employees/managers, such granting may not result in allocating
financial partners (such as banks) to acquire the target company. more than 10% of the issued share capital, nor for any allocatee
PE investors often require the key managers to significantly to hold more than 10% of the issued share capital. Such alloca-
invest or reinvest in HoldCo on a pari passu basis. PE inves- tion becomes definitive upon the expiry of a compulsory vesting
tors may also invest in quasi-equity/debt-like securities, such period (which cannot be less than one year), and – if the share-
as convertible or redeemable bonds, to allow the managers to holders so decide – a holding period. The combined vesting and
benefit from a wider portion of the share capital of HoldCo with holding periods may not be less than two years. Some excep-
the same investment amount (sweet equity mechanism). The tions may, however, apply to the 10% threshold and the vesting/
manager can also be granted free shares of HoldCo. holding period (e.g., percentage can be increased up to 30% if
Managers’ investments may be directly in HoldCo, or indi- the allocation of free shares is made to all salaried employees).
rectly in a dedicated company (ManCo) itself investing in In VC transactions, BSPCE allocations are generally preferred.
HoldCo on behalf of the managers. Then, the managers can be They must comply with certain conditions laid down in the
granted free shares of ManCo (instead of HoldCo). French tax code. The BSPCE have no mandatory vesting and
Carried interest securities may benefit to the PE investors’ holding conditions or allocation cap, but market practice gener-
managers, allowing them to have a share of the capital gain ally considers a four-year vesting period (with a one-year cliff) to
achieved by the funds upon exit. Under certain strict conditions, be appropriate.
favourable capital gains tax exemptions may apply to these inter-
ests. Otherwise, they are tax-treated as regular compensation. 2.6 For what reasons is a management equity holder
usually treated as a good leaver or a bad leaver in your
jurisdiction?
2.4 If a private equity investor is taking a minority
position, are there different structuring considerations?
Usually, a resignation or a termination for any reason before an
initial time period fixed with the financial investor, the termi-
Under VC transactions, PE investors usually take a minority
nation of the manager’s functions for gross or wilful miscon-
shareholding in the target company (start-up company) to fund
duct or the violation of provisions of the bylaws or shareholders’
the development of its business and activities, which are not yet
agreement, are considered a bad leaver departure. When the
mature, alongside other types of investors (business angels or
departure results from an unintended event (death, invalidity,
family offices, for instance). Such investment is riskier than a
termination without cause) or when the resignation takes place
buyout transaction involving an already mature company.
after the expiry of the initial time-period, it is usually treated as
Therefore, PE investors usually subscribe to complex secu-
a good leaver departure.
rities, such as shares with ratchet warrants attached, granting
Good and bad leaver provisions are less prevalent following
either protection of their investment against failure of the target
the recent decisions of the French Tax Court on management
company to achieve its project, or the opportunity to participate
incentive plans (see question 10.4 below).
in the next fundraising round at preferential conditions. The
investment can also be made by subscribing to quasi-equity secu-
rities (so-called “BSA Air”), allowing PE investors to convert 32 Governance Matters
their securities at the next liquidity event (mainly fundraising
round) under preferential conditions. 3.1 What are the typical governance arrangements
For PE investors taking a minority position, it is important to for private equity portfolio companies? Are such
negotiate specific rights under a dedicated shareholders’ agree- arrangements required to be made publicly available in
ment (e.g., specific voting rights, reinforced financial informa- your jurisdiction?
tion, tag-along right, anti-dilution). In particular, PE inves-
tors can be granted veto or supervisory rights, either provided Portfolio companies are commonly structured as an SAS, benefit-
in the shareholders’ agreement and/or the company’s bylaws or ting from limited liabilities of shareholders and great freedom in
attached to preferred shares subscribed. corporate governance. The main drawback is that the shares of
In such situations, the management/founders remain the an SAS cannot be listed on stock exchanges – but the SAS can be
majority shareholders and may benefit from free shares or converted into an SA just before an initial public offering (IPO).
founders’ options (so-called “BSPCE”). A board with oversight powers is usually established to oversee
the management, comprising members appointed by the inves-
tors (PE investors are generally reluctant that their nominees be
provided with management powers). Subject to limited excep-
tions, the existence of the board, its functioning rules and the

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 Vivien & Associés AARPI 59

identity of its members can remain fully confidential by being company’s articles of association to avoid difficulties, and they
only stipulated in the shareholders’ agreement. The board can must comply with public order provisions. Subject to the above,
also be disclosed or fully regulated in the articles of association shareholders’ agreements may include all types of provisions,
of the company, which are publicly available. such as non-competition and non-solicitation, which shall also
comply with applicable case law.
3.2 Do private equity investors and/or their director
nominees typically enjoy veto rights over major 3.6 Are there any legal restrictions or other
corporate actions (such as acquisitions and disposals, requirements that a private equity investor should
business plans, related party transactions, etc.)? If a be aware of in appointing its nominees to boards of
private equity investor takes a minority position, what portfolio companies? What are the key potential risks
veto rights would they typically enjoy? and liabilities for (i) directors nominated by private
equity investors to portfolio company boards, and (ii)
private equity investors that nominate directors to
Board veto rights on major corporate actions are typically
boards of portfolio companies?
granted to director nominees of PE investors with significant
shareholdings. PE investors holding only a few percentage
points of share capital do not typically enjoy veto rights. This, PE investors must always ensure that their nominees have the
however, mainly remains a matter of negotiations. legal capacity to act as board members.
The liability of board members is mostly collective: should a
decision made by the board be improper and a source of liability, all
3.3 Are there any limitations on the effectiveness of the board members are deemed jointly and severally liable unless
veto arrangements: (i) at the shareholder level; and (ii) at
they can prove that they behaved with proper care and opposed the
the director nominee level? If so, how are these typically
addressed? contested decision. This mainly explains why PE investors some-
times avoid appointing representatives to the board. If they must
do so, they generally require the portfolio company to subscribe to
Veto arrangements are rather uncommon at the shareholders level liability insurance covering the board members’ liability (see ques-
because usually organised at the board level through the members tion 11.6 below for insurance protection mechanism).
representing PE investors. Violations of veto arrangements are As far as PE investors are concerned, they are not exposed
strongly sanctioned. Managers can be held liable for the breach to liabilities as such, being shareholders, provided they do not
and/or be dismissed. Should the breaching party be shareholder, excessively interfere with the company management and have
the shareholders’ agreement usually includes specific penalties, not commingled their assets with those of the portfolio compa-
such as bad leaver clauses or financial sentences. nies, otherwise their corporate veil of the limited liability may
As a principle, limitations of management’s powers (such as veto be pierced.
arrangements) are, however, unenforceable against third parties,
even when included in the company’s articles of association. This
means that any transaction implemented by a manager in breach 3.7 How do directors nominated by private equity
of a veto with a third party will remain valid, including if this third investors deal with actual and potential conflicts of
interest arising from (i) their relationship with the party
party was aware of such breach. Management decisions made in
nominating them, and (ii) positions as directors of other
violation of veto arrangements can only be cancelled if: (i) they do portfolio companies?
not fall within the corporate purpose of the company, as stipulated
in the articles of association; and (ii) the third party was aware – or,
in view of the circumstances, could not have been unaware – that French law provides a basic procedure to handle conflicts of
the decisions were beyond the corporate purpose of the company. interests from the angle of related-party agreements (conventions
réglementées). However, this procedure is insufficient to deal with
all conflicts of interest. We advise portfolio companies to set up
3.4 Are there any duties owed by a private equity internal rules regarding conflicts of interest.
investor to minority shareholders such as management
shareholders (or vice versa)? If so, how are these
typically addressed? 42 Transaction Terms: General

All shareholders are prohibited from acting in their own interest 4.1 What are the major issues impacting the timetable
for transactions in your jurisdiction, including antitrust,
for a purpose that goes against the company’s interest and with
foreign direct investment and other regulatory approval
the aim of negatively affecting other shareholders (abus de majorité requirements, disclosure obligations and financing
and abus de minorité ). issues?
In addition, managers have, a duty of loyalty towards the
shareholders, which originated from case law. This duty of
Main issues impacting the timetable for French transactions
loyalty is, however, restricted to information known by the
generally are:
manager and that is likely to have a significant influence on
■ before signing (binding agreement): prior-consultative
shareholders’ consent.
opinion of the employees’ representative bodies and/or
prior information of employees (in companies with less
3.5 Are there any limitations or restrictions on the than 250 employees qualifying as SMEs);
contents or enforceability of shareholder agreements ■ before closing: clearances from (i) the French Competition
(including (i) governing law and jurisdiction, and (ii) Authority (Autorité de la Concurrence) or the EU
non-compete and non-solicit provisions)?
Commission as the case may be, (ii) the AMF for listed
companies, or (iii) the Ministry of Economy, Finance and
Shareholders’ agreements can be drafted with extensive Recovery in the case of investment in companies operating
freedom. Still, they should refrain from derogating from the in sensitive industries; and

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60 France

■ usual practical issues, on a case-by-case basis, such as due 6.2 What is the typical package of warranties /
diligence or financing structures (requiring equity and debt indemnities offered by (i) a private equity seller, and (ii)
commitment letters with certain funds commitments). the management team to a buyer?

4.2 Have there been any discernible trends in PE sellers typically refuse to provide warranties and indem-
transaction terms over recent years? nities beyond fundamental representations (such as title to
shares, power and authority, or the company’s capital structure).
While economic and geopolitical uncertainties are weighing on Managers are usually key as part of the transaction. Negotiating
transactions in all Western countries, the French economy seems warranties with them is a sensitive matter, and they tend to offer
to show signs of resilience, even though there was a deceleration rather limited warranties to the buyer.
in PE activities in France in 2022, reflecting the reluctance of
banks to finance certain transactions and rising interest rates. 6.3 What is the typical scope of other covenants,
undertakings and indemnities provided by a private
52 Transaction Terms: Public Acquisitions equity seller and its management team to a buyer?

5.1 What particular features and/or challenges apply As a principle, PE sellers try to resist providing any kind of restric-
to private equity investors involved in public-to-private tive undertakings, but no leakage covenants in case of “locked-box”
transactions (and their financing) and how are these deals and undertakings in connection with the conduct of busi-
commonly dealt with? ness until closing are typical. Managers are commonly bound by
non-competition and non-solicitation undertakings.
Although PE actors have expressed more interest in publicly
listed companies (mainly due to lower valuation than non-listed 6.4 To what extent is representation & warranty
assets), these transactions remain uncommon in France because insurance used in your jurisdiction? If so, what are the
the AMF will generally reject any offer conditional upon typical (i) excesses / policy limits, and (ii) carve-outs /
reaching the squeeze-out threshold. Indeed, PE investors would exclusions from such insurance policies, and what is the
usually carry out public-to-private transactions by: (i) acquiring typical cost of such insurance?
shares of the target listed company to reach the 90% threshold
of the share capital and voting rights, typically by resorting to Representation & warranty insurance used to be very rare but
leverage; and then (ii) triggering the squeeze-out procedure to has become much more popular, although there remains a
acquire the remaining shares of the listed company. significant margin for development. The cost and conditions of
the insurance vary depending on target companies. We never-
5.2 What deal protections are available to private theless notice that most insurance companies have their list of
equity investors in your jurisdiction in relation to public non-negotiable exclusions (e.g., criminal matters or risks iden-
acquisitions? tified in the due diligence) and that specific risks are excluded
depending on the deal or target’s industry.
Unlike private acquisitions (see question 6.8 below), break fees
are common in public transactions. The target can provide 6.5 What limitations will typically apply to the liability
exclusivity undertakings to the bidder, but the board of direc- of a private equity seller and management team under
tors must consider any offer from alternative bidders. Under- warranties, covenants, indemnities and undertakings?
takings from key shareholders to tender their shares are also
lawful, but they must be disclosed and automatically terminated Fundamental warranties are usually not subject to any limita-
if a competing bid is launched. tions except a cap at the purchase price level. PE sellers and
management teams usually refuse to be bound by other liabil-
62 Transaction Terms: Private Acquisitions ities. If additional liabilities are necessary for the deal to go
through (e.g., in the context of a purchase by a corporate buyer –
6.1 What consideration structures are typically see question 6.2 below), PE sellers and management teams will
preferred by private equity investors (i) on the sell-side, endeavour to restrict their liabilities as much as possible.
and (ii) on the buy-side, in your jurisdiction? In the case of “locked-box” deals, any leakage will be recover-
able from the sellers without a cap.
While the completion accounts’ structure remains the most
used, the locked-box mechanism has become increasingly 6.6 Do (i) private equity sellers provide security (e.g.,
popular. Most of the transactions involving PE investors are escrow accounts) for any warranties / liabilities, and
based on locked-box whereas trade sellers generally use comple- (ii) private equity buyers insist on any security for
tion accounts. warranties / liabilities (including any obtained from the
Sellers tend to prefer the locked-box due to the simplicity and management team)?
increased certainty of this mechanism, while purchasers tend
to prefer the completion accounts, ensuring the price’s accu- PE sellers are strongly opposed to providing security, which is
racy. In situations where the closing date is expected to be very correlated to the fact that they are usually only liable for breach
distant, the completion accounts mechanism makes more sense of fundamental warranties, which rarely occurs in practice.
for all parties. PE buyers usually request extensive representations and
Regardless of price structure, deferred purchase price through warranties from sellers and the management team, backed by
earn-out clauses is common in PE transactions but is a breeding a security such as escrow accounts or first-demand bank guar-
ground for litigation. antees. However, in the case of purchase from PE sellers, such

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 Vivien & Associés AARPI 61

as in the context of a secondary buyout, the representations and 7.2 What customary lock-ups would be imposed on
warranties tend to be very limited and, accordingly, securities private equity sellers on an IPO exit?
are very rarely provided.
Terms and duration of lock-up provisions vary depending on the
6.7 How do private equity buyers typically provide company’s particulars, market conditions and parties’ negotia-
comfort as to the availability of (i) debt finance, and (ii) tions, but sellers are generally asked to grant lock-ups for a dura-
equity finance? What rights of enforcement do sellers tion varying from 90/180 days to 365 days.
typically obtain in the absence of compliance by the
buyer (e.g., equity underwrite of debt funding, right to
specific performance of obligations under an equity 7.3 Do private equity sellers generally pursue a dual-
commitment letter, damages, etc.)? track exit process? If so, (i) how late in the process are
private equity sellers continuing to run the dual-track,
and (ii) were more dual-track deals ultimately realised
PE buyers can provide comfort regarding the availability of through a sale or IPO?
financing by providing the sellers, together with their binding
offers, with equity and/or debt commitment letters with certain
funds commitments. In France, PE exits mostly occur through M&A transactions
The extent of the enforcement rights depends on the contrac- or secondary buyouts. Exits through IPOs have been limited
tual arrangements with the banks and investors. Investors on the French market in the past year and first trimester 2023
generally irrevocably undertake to fund the acquisition vehicle compared to 2021, mainly due to a shift in markets with infla-
under equity commitment letters. If the acquisition vehicle is tion and rising interest rates, which explains why dual-track exit
sentenced by a court to pay damages in case of default/breach strategies are rarely pursued in France.
of its contractual undertakings, as per the equity commit-
ment letter, the financial sponsors will be required to pay said 82 Financing
damages. This risk is, however, remote as French courts are
reluctant to award significant damages. 8.1 Please outline the most common sources of debt
finance used to fund private equity transactions in your
jurisdiction and provide an overview of the current state
6.8 Are reverse break fees prevalent in private equity of the finance market in your jurisdiction for such debt
transactions to limit private equity buyers’ exposure? If (including the syndicated loan market, private credit
so, what terms are typical? market and the high-yield bond market).

Reverse break fees are not prevalent in the context of PE The most common sources of debt finance used to fund PE
transactions. transactions in France are debts provided by traditional lenders
(banks) through syndications or clubs. This financing gener-
72 Transaction Terms: IPOs ally involves various types of loans including term loans to refi-
nance the company’s existing debt and revolving credit facilities.
7.1 What particular features and/or challenges should Other debt products are increasingly used to fund PE trans-
a private equity seller be aware of in considering an IPO actions (exclusively or in addition to traditional senior secured
exit? bank loans), such as mezzanine loans, uni-tranche financing,
second lien loan and/or quasi-equity instruments such as bonds
French IPOs are generally considered a time-consuming (straight bonds or bonds into shares).
and costly process, subject to various legal and regulatory Transactions can alternatively be financed by private place-
constraints and specific rules regarding acquisition or disposal ments and/or high-yield bonds provided by institutional inves-
of shareholdings. tors, such as pension funds, insurance companies, and asset
French listed companies are also subject to higher scrutiny management firms.
in terms of transparency requirements, including for corporate
governance practices. 8.2 Are there any relevant legal requirements or
Sellers must pay particular attention to financial market restrictions impacting the nature or structure of the debt
conditions. French IPOs are subject to market fluctuations and financing (or any particular type of debt financing) of
volatility, sometimes leading to a delay or termination of the private equity transactions?
process due to insufficient pricing conditions.
In terms of sellers’ rights, any existing shareholders’ agree- French law prohibits the acquired companies and their subsid-
ment would be terminated as a result of the IPO. Accordingly, iaries from providing any financing or granting any guarantee
sellers’ governance, financial and other specific rights would not or security interest over their assets to secure the purchase or
be maintained, and share transfers restrictions would be termi- subscription of their own shares (financial assistance rules).
nated. A new shareholders’ agreement, including sometimes Therefore, it is generally the acquiring vehicle that provides
board veto rights and potential shares transfer restrictions (such guarantees or security interests over its own assets (including the
as lock-up – see below), may be implemented post-IPO. target company’s shares) and sometimes downstream guarantees.
Regarding selling conditions, the company must declare
in the IPO prospectus certain disclosures, based on which its
shareholders may obtain indemnification post-completion in 8.3 What recent trends have there been in the debt-
financing market in your jurisdiction?
case of misleading disclosures.

The reduction of banking monopoly prohibitions has led to

a surge in competition among lenders in the debt-financing
market in France. Furthermore, as interest rates are continuously

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62 France

increasing in France over the last months, it became costlier dividends or capital gains derived from its investments are
for PE funds to borrow and leverage expensive LBOs. This mostly tax exempt. Anti-hybrid measures, thin capitalisa-
mainly explains the increase in the number of private debt funds tion rules and transfer pricing requirements may, however,
and alternative lenders, providing additional sources of debt to limit the effective amount of deductible interest.
support PE investments. Buying companies are frequently activated (holding animatrice)
Unitranche financings (providing a simplified debt struc- to allow VAT recovery on acquisition costs.
ture, which combines senior and subordinated debt into a single Off-shore structures are expected to become less and less
facility) are also increasingly popular in France. frequent, following implementation of several European direc-
Environmental and ESG considerations have gained impor- tives including DAC6 reporting obligations and ATAD III
tance in the debt-financing market (certain lenders increasingly measures against shell entities, and the evolution of domestic
incorporating sustainability criteria into their investment deci- case law enhancing tax authorities’ powers to discard foreign
sions and financing terms). holding companies lacking substance.

92 Alternative Liquidity Solutions 10.2 What are the key tax-efficient arrangements that
are typically considered by management teams in private
9.1 How prevalent is the use of continuation fund equity acquisitions (such as growth shares, incentive
vehicles or GP-led secondary transactions as a deal type shares, deferred / vesting arrangements)?
in your jurisdiction?
Free share plans and, for start-ups, BSPCEs benefit from a rela-
General Partner (GP)-led secondary transactions (where GPs tively advantageous and, more importantly, reliable tax and
decide to sell one or more portfolio companies from a fund social security regime.
they manage to a new investment vehicle (continuation fund) Outside these regimes, a choice must be made between ordi-
managed by the same GPs) have been increasingly considered nary salaries, which are subject to high employer and employee
since the pandemic, mainly due to downward valuation trends. social charges and up to 45% income tax, and capital invest-
This deal structure, however, remains challenging to execute ment, for which profits are only subject to a 30% flat tax (or
mostly due to difficulties in establishing a market price (allowing an even lower one in certain investment plans ( plan d’épargne
a return) and in dealing with management teams and investors. en actions)). A 3% or 4% exceptional tax on high income may
also apply in any case. Whilst very efficient, caution must be
taken in structuring investment schemes aimed at applying
9.2 Are there any particular legal requirements or
the capital gains taxation regime, as these are often considered
restrictions impacting their use?
disguised remuneration by the French tax authorities, notably in
the context of sweet equity schemes, preferred shares, deferred/
Before implementing this process, it must be ensured that the vesting arrangements, or good/bad leaver put and call options.
assets transferred to the continuation fund are free from any
third-party rights (pursuant to any shareholders’ agreement or
similar) and that the consent of the primary fund’s advisory 10.3 What are the key tax considerations for
management teams that are selling and/or rolling over
board is secured. Certain customary provisions of the contrac-
part of their investment into a new acquisition structure?
tual documentation (including tag-along and drag-along provi-
sions) must be adjusted to cover risks related to the use of
continuation funds and conflicts of interests that may arise in Rolling over part of their investment usually benefits from a tax
connection thereof. deferral regime in the hands of the management teams, which
Managers must then identify which of the LPs are willing to can be a strong incentive. Selling shares triggers capital gain tax
sell and receive their sale price in cash or to reinvest all or part of under the 30% flat tax regime; earn-out payments are usually
their proceeds – before determining the valuation. efficient as they are only subject to tax when effectively due.
In the context of MBOs especially, the sale of shares to the
102 Tax Matters new HoldCo by initial managers who retain a controlling interest
in the new structure can trigger the application of an additional
limitation rules, if a tax consolidation regime is implemented, on
10.1 What are the key tax considerations for private
the tax deductibility of interest (Amendement Charasse).
equity investors and transactions in your jurisdiction?
Are off-shore structures common?
10.4 Have there been any significant changes in tax
PE transactions in France usually benefit from the combination legislation or the practices of tax authorities (including
in relation to tax rulings or clearances) impacting private
of two favourable tax provisions:
equity investors, management teams or private equity
■ the buying and target companies may elect for the tax transactions and are any anticipated?
consolidation regime, notably subject to a minimum 95%
holding requirement, under which: (i) the operational
benefits of the subsidiaries are compensated with the tax French tax environment has recently been relatively stable.
losses usually incurred by the acquiring company; and (ii) In 2018, business-favourable measures were adopted (e.g., the
the subsidiaries contribute the equivalent of the tax they 30% flat tax on all investment income for individuals and the
would have incurred, had they not been included in the tax progressive reduction of corporate income tax).
consolidated group, to the buying entity that can use that PE deals were substantially impacted by recent decisions
cash flow to pay the interest and/or principal of its acqui- of the French highest Court on management incentive plans,
sition loans; and which ruled that capital gains realised by managers qualify
■ interest incurred by the buying company, as well as acqui- as employment income even when they invested money, at
sition and financing costs, are tax deductible even though fair market value and at risk, if the gain realised is directly or

Private Equity 2023

 Vivien & Associés AARPI 63

indirectly linked to the existence or execution of the employ- early-stage companies, DD reviews may focus on specific areas,
ment/management contract. PE actors are thus increasingly such as IP about tech companies, and are usually shorter (usually
turning to free share plans. three to four weeks). Scope, materiality, and areas of the DD
reviews may always vary from investor to investor.
112 Legal and Regulatory Matters
11.5 Has anti-bribery or anti-corruption legislation
11.1 Have there been any significant legal and/or impacted private equity investment and/or investors’
regulatory developments over recent years impacting approach to private equity transactions (e.g., diligence,
private equity investors or transactions and are any contractual protection, etc.)?
anticipated?
Anti-bribery and anti-corruption French regulation has been
The antitrust and foreign investment regulations have been strengthened over the past few years, including with the French
enhanced over the past few years and now apply to a larger act known as “Sapin II”, which requires large companies to
scope of transactions, including PE transactions. Further, recent implement a compliance programme to prevent acts of bribery
French case law relating to the tax treatment of management and corruption. The EU Commission is also currently seeking
packages may cause difficulties in PE transactions. Finally, the to harmonise the anti-bribery between all its members, by
current trend for ESG considerations, the implementation of the setting minimum standards. Therefore, PE actors are paying
duty of vigilance regulation in France, the issuance of the EU greater attention to such compliance, as is the case for ESG
taxonomy and sustainable finance disclosure regulations (SFDR), compliance/considerations.
and the forthcoming EU corporate sustainability reporting
directive regulation (CSDR) are likely to drive PE investments.
11.6 Are there any circumstances in which: (i) a private
equity investor may be held liable for the liabilities of
11.2 Are private equity investors or particular the underlying portfolio companies (including due to
transactions subject to enhanced regulatory scrutiny in breach of applicable laws by the portfolio companies);
your jurisdiction (e.g., on national security grounds)? and (ii) one portfolio company may be held liable for the
liabilities of another portfolio company?

As part of the growing interest in ESG considerations and the

development of the socially responsible investment movement, PE funds are careful and unlikely to exercise any management
PE funds are subject to further scrutiny regarding their appli- duties over the activities of the portfolio companies, to avoid
cation of the Taxonomy/SFDR regulations, which provide for attracting any liability (see question 3.6 above).
a self-classification system to distinguish “green” investments PE investors usually implement several protection mech-
from others. The AMF has recently issued proposals for a more anisms preventing them from being liable due to a breach of
rigorous regulation implementing at the EU level minimum envi- a portfolio company. HoldCo is usually incorporated under
ronmental requirements, which financial products would have to the form of a limited liability company. Further, the inves-
meet to be classified as a green investment under Taxonomy/ tor’s representative may be appointed as a member of supervi-
SFDR regulations to avoid any greenwashing practices. sory bodies within a portfolio company with limited powers,
excluding any managerial power or function.
PE investors may require the portfolio company to, in any
11.3 Are impact investments subject to any additional case, subscribe to liability insurance covering the members of
legal or regulatory requirements? its corporate bodies.

Impact investments are primarily regulated by soft law under 122 Other Useful Facts
which PE actors or companies are looking to comply with
some labels, such as Bcorp label, which is awarded to commer-
12.1 What other factors commonly give rise to concerns
cial companies that meet societal, environmental, governance, for private equity investors in your jurisdiction or should
and public transparency requirements, or GreenFin label, which such investors otherwise be aware of in considering an
guarantees the green quality of investment funds. However, investment in your jurisdiction?
under the influence of the EU, the impact investment sector is
increasingly subject to hard law regulations.
In the vein of France 2030 (i.e., a EUR 54 billion programme
that aims at enabling France to close the industrial gap, invest
11.4 How detailed is the legal due diligence (including massively in innovative technologies and support the ecolog-
compliance) conducted by private equity investors prior ical transition and the correlative French Tech label), French
to any acquisitions (e.g., typical timeframes, materiality, President Emmanuel Macron has recently announced a new
scope, etc.)? EUR 500 million programme dedicated to artificial intelligence
(AI). France intends to remain an attractive and active invest-
Usually, PE investors require full due diligence reviews before ment place in various sectors, focusing on tech, health, AI, and
buyout investments but may fix different materiality thresholds ESG-related sectors.
depending on the reviewed areas. Such DD reviews may last
from four to six weeks. Regarding VC transactions relating to

Private Equity 2023

64 France

Lisa Becker is a Partner in the M&A/Corporate department of Vivien & Associés. Of French nationality, Lisa has been an Attorney-at-Law
and member of the Paris Bar since 2013. Focusing her practice on corporate law and M&A, Lisa advises French and international groups in
the context of domestic and cross-border acquisition (both buy-side and sell-side), restructuring (including merger, spin-off or partial asset
contribution) and joint-venture transactions. She also regularly focuses on capital-investment transactions either alongside companies
working on their development and growth, or investors.

Vivien & Associés AARPI Tel: +33 1 45 02 39 50

3, rue de Monttessuy Email: lisa.becker@va-fr.com
75007 Paris URL: www.va-fr.com
France

Julie Tchaglass is a Partner in the M&A/Corporate department of Vivien & Associés. Of French nationality, Julie has been an Attorney-at-Law
and member of the Paris Bar since 2013. Her practice focuses on international M&A, PE transactions including leveraged acquisitions (LBOs),
capital investment transactions (advising both start-ups and investors), joint-ventures, and general corporate and commercial assistance, repre-
senting French and foreign buyers and sellers (whether listed or unlisted) and PE institutions.

Vivien & Associés AARPI Tel: +33 1 45 02 39 50

3, rue de Monttessuy Email: julie.tchaglass@va-fr.com
75007 Paris URL: www.va-fr.com
France

Marine Pelletier-Capes is a Partner in the Tax department of Vivien & Associés. Of French nationality, Marine has been an Attorney-at-Law and a
member of the Neuilly, then Paris Bar since 2000. Her practice focuses on French and international groups as well as groundbreaking start-ups
for which she provides tax advice on complex acquisitions or reorganisation, and also more general corporate tax advice on daily management
and structuring of the operations or in the context of tax audits or litigations. She has also developed individual taxation practices both in an
international and in a domestic context, including regarding management packages.

Vivien & Associés AARPI Tel: +33 1 45 02 39 50

3, rue de Monttessuy Email: marine.pelletiercapes@va-fr.com
75007 Paris URL: www.va-fr.com
France

Julien Koch is a Partner in the M&A/Corporate department of Vivien & Associés. Of French nationality, Julien has been an Attorney-at-Law
and member of the Paris Bar since 2014. Julien regularly acts on behalf of French and international clients on cross-border and domestic
M&A transactions (including acquisitions, disposals and intra-group restructuring), on capital-investment transactions (advising both
start-ups and investors) and on industrial joint ventures and strategic alliances. Julien also intervenes in alternative dispute resolution
processes as a mediator, mainly in the field of inter-company mediation.

Vivien & Associés AARPI Tel: +33 1 45 02 39 50

3, rue de Monttessuy Email: julien.koch@va-fr.com
75007 Paris URL: www.va-fr.com
France

Vivien & Associés offers competitive legal services and representation across
a broad range of key practice areas: M&A and corporate transactions; joint
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Vivien & Associés was founded in 1999 by lawyers with in-depth experience
in leading international firms. The intention was to establish a firm able to
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www.va-fr.com

Private Equity 2023

 Chapter 9 65

Germany

Germany
Andreas Fogel

Weil, Gotshal & Manges LLP Benjamin Rapp

investments are sought in a few core areas in which the family

12 Overview office or industrial holding has significant industry expertise.

1.1 What are the most common types of private equity

transactions in your jurisdiction? What is the current
22 Structuring Matters
state of the market for these transactions?
2.1 What are the most common acquisition structures
adopted for private equity transactions in your
The majority of private equity transactions were private sales. jurisdiction?
However, P2P activity has increased, although only a limited
number of takeover offers were ultimately launched. In addition,
there have been a number of marketed minority investments. The acquisition of privately held companies is typically carried
Growth transactions, i.e., acquisitions of shares in later stage out by means of a share deal. If the target is a German limited
financing rounds have slowed down compared to previous years. liability company (GmbH), the underlying transaction docu-
Since the second half of 2022, all types of private equity and mentation requires notarisation. For listed companies, the
M&A transactions have slowed down in Germany, particularly acquisition will be carried out on the basis of an offer docu-
large-cap private equity transactions in light of the higher debt ment published by the bidder. If the shares are listed on an
financing costs. The number of equity-financed transactions organised market such as the regulated market of the Frankfurt
also decreased, but not to the same extent, mainly due to lower Stock Exchange, the offer document needs to be approved by
valuation levels. Investments in distressed situations and transac- the German Federal Financial Supervisory Authority (BaFin).
tions in which shares are used as transaction currency increased.
Further, strategists continue to market carved-out business units 2.2 What are the main drivers for these acquisition
that provide for private equity investors a primary situation. structures?

1.2 What are the most significant factors currently Each individual acquisition structure is developed on a case-
encouraging or inhibiting private equity transactions in by-case basis. Key drivers are not only accounting and tax
your jurisdiction? implications, but also legal and regulatory aspects as well as
certain requirements from debt providers. Private equity spon-
Market activity and valuations have been negatively affected, sors further want to ring-fence each investment and, typically,
both in Germany and globally, by not only macro-economic already take the future exit and potential cash repatriation mech-
uncertainties and unfavourable financing conditions resulting anisms into account at the time of the acquisition of the target.
from higher interest rates, but also the increasing global tension
due to the war in Ukraine. 2.3 How is the equity commonly structured in private
equity transactions in your jurisdiction (including
institutional, management and carried interests)?
1.3 Are you seeing any types of investors other
than traditional private equity firms executing private
equity-style transactions in your jurisdiction? If so, Private equity funds typically establish an acquisition structure
please explain which investors, and briefly identify any comprising several special-purpose vehicles (SPVs) incorporated
significant points of difference between the deal terms in Germany and/or countries with a favourable regulatory and tax
offered, or approach taken, by this type of investor and
environment. These tailor-made acquisition structures are typi-
that of traditional private equity firms.
cally driven by accounting, tax, legal and regulatory aspects as well
as the requirements of debt financing. They allow private equity
We see an increasing number of co-investments of LPs in private sponsors to ring-fence their investments and facilitate future exit
equity-led transactions as well as family offices and industrial options and cash repatriation. While implementing different share
holdings that execute private equity style transactions. Key classes at SPVs domiciled in typical holding jurisdictions such as
differences are a long-term investment approach as they often Luxembourg and the Netherlands is common, equity of German
follow a co-entrepreneurial approach to develop the company holding companies usually comprises only ordinary shares, unless
together with founders/current owners and have no obliga- the economics of a management equity programme (MEP) require
tion to sell, more flexibility regarding majority or minority special shares such as preference, hurdle, or growth shares. Carry
investments, and no or low level of debt financing. Usually, interest vehicles are usually established outside of Germany.

Private Equity 2023

66 Germany

2.4 If a private equity investor is taking a minority rules of procedure are not publicly available. The legal imple-
position, are there different structuring considerations? mentation, however, very much depends on the legal form of
the target company, in particular, whether it is a limited liability
company or a stock corporation.
The structuring of the investment vehicles typically remains the
If any co-investors exist, the investors will most likely further
same. In these situations, it is common that the private equity
conclude a shareholder agreement detailing the relationship
investor requires certainty on governance rights (e.g., representa- between the investors and, in particular, outlining minority
tion on the relevant boards, veto rights, etc.), the timing of a protection rights, exit scenarios, and conflict resolution mecha-
potential exit, valuation protection throughout the investment, nisms. The shareholders’ agreement may require notarisation by
and other minority protection rights, such as tag-along rights. a notary public, but is not publicly available.

2.5 In relation to management equity, what is the 3.2 Do private equity investors and/or their director
typical range of equity allocated to the management, and nominees typically enjoy veto rights over major
what are the typical vesting and compulsory acquisition corporate actions (such as acquisitions and disposals,
provisions? business plans, related party transactions, etc.)? If a
private equity investor takes a minority position, what
veto rights would they typically enjoy?
The typical management equity pool can amount to up to 10% of
the target’s equity. Managers need to acquire their equity partici-
pation at fair market value to avoid upfront tax on fringe benefits. Yes, the implementation of restricted matters requiring the
The management pool is usually subject to vesting rules. Common prior consent of representatives of the private equity investor
are time vesting schemes as well as, depending on the transac- is typical for private equity transactions. The catalogue of
tion, performance-based vesting rules. Private equity sponsors restricted matters in minority investments is usually shorter
usually have the right to buy back the equity interests held by the but also covers all measures that have a significant influence
management members once their employment or service agree- on the investment. Minority investors typically only have nega-
ments with the target group have ended or are terminated. Terms tive control rights such as veto rights on the restricted matters.
for such buy-backs, particularly the purchase price, usually take
into account the circumstances triggering the exit of the respective 3.3 Are there any limitations on the effectiveness of
manager (i.e., if the leaving manager is a good or bad leaver) and to veto arrangements: (i) at the shareholder level; and (ii) at
which extent the manager’s equity has actually vested. the director nominee level? If so, how are these typically
addressed?

2.6 For what reasons is a management equity holder

usually treated as a good leaver or a bad leaver in your In case of veto arrangements contained in rules of procedure,
jurisdiction? the managing directors are, in general, legally not restricted in
their power of representation to commit to such transactions
towards third parties. Although the respective managing direc-
It is quite common to distinguish between a manager’s exit trig- tors would be liable for such actions, the underlying transaction
gered by the participant, which generally results in a qualification would be effective. If the target has the legal form of a stock
as a bad leaver, and the good leaver scenarios where the sponsor corporation, consent requirements on major corporate actions
or target wishes to terminate the employment or the participant can generally only be established at the supervisory board level,
otherwise ceases to work for the target. In the case of a termina- not at the shareholders level, and veto rights cannot be assigned
tion for cause, the manager is typically qualified as a bad leaver. to an individual supervisory board member.
Veto arrangements on shareholder level are simply contractual
32 Governance Matters arrangements but may be unenforceable to the extent unlawfully
limiting the statutory rights of a shareholder.
3.1 What are the typical governance arrangements General restrictions to veto arrangements apply on the basis
for private equity portfolio companies? Are such of the shareholder’s and managing director’s duty of loyalty
arrangements required to be made publicly available in towards the company.
your jurisdiction?
3.4 Are there any duties owed by a private equity
Although the holding structure of a portfolio company may investor to minority shareholders such as management
include various holding levels, at least the purchasing entity in shareholders (or vice versa)? If so, how are these
German private equity transactions is usually a German limited typically addressed?
liability company (Gesellschaft mit beschränkter Haftung, “GmbH”).
A company in the legal form of a GmbH has one or more The shareholders of a GmbH have a duty of loyalty towards each
managing directors that are representing the company together. other restricting them from harming each other. Other than
It is very common that the articles of association provide for that, the duties are being negotiated and contractually agreed,
a representation of the company by two managing directors, especially in the shareholders’ agreement or in the management
by a managing director together with an authorised officer participation documentation.
(Prokurist), or by each managing director individually. The
articles of associations are required to be registered with the 3.5 Are there any limitations or restrictions on the
commercial register (Handelsregister) and are publicly available. contents or enforceability of shareholder agreements
The duties and responsibilities of the managing directors (including (i) governing law and jurisdiction, and (ii)
are usually further carried out in rules of procedure (Geschäft- non-compete and non-solicit provisions)?
sordnung), which regularly provide for a catalogue of restricted
matters that require the prior approval of the shareholder(s) or Shareholder agreements relating to a German target would typi-
an (in most cases voluntarily established) advisory board. The cally be subject to German law as well. In the case of the parties

Private Equity 2023

 Weil, Gotshal & Manges LLP 67

agreeing to be governed by the laws of another jurisdiction, the

provisions relating to the (transfer of ) shares are at least required
42 Transaction Terms: General
to be subject to German law.
Non-compete and non-solicitation provisions are, in order to 4.1 What are the major issues impacting the timetable
for transactions in your jurisdiction, including antitrust,
be enforceable, required to comply with certain limitations in
foreign direct investment and other regulatory approval
terms of scope, location and duration. requirements, disclosure obligations and financing
issues?
3.6 Are there any legal restrictions or other
requirements that a private equity investor should The key impacts on the timetable for private equity transactions
be aware of in appointing its nominees to boards of in Germany are:
portfolio companies? What are the key potential risks ■ The due diligence process by a potential buyer and the
and liabilities for (i) directors nominated by private
resources of the seller/company to provide the appropriate
equity investors to portfolio company boards, and (ii)
private equity investors that nominate directors to
information.
boards of portfolio companies? ■ Any discussions and negotiations on the provision of debt
financing by third parties.
■ Tax/structuring considerations and the acquisition and/
The risks and liabilities of a managing director nominated by or incorporation of the entities of the intended acquisi-
the private equity investor are exactly the same as for any other tion structure. It is common to acquire shelf companies in
managing director. Each managing director is fully responsible Germany from service providers.
for the (day-to-day) management of the company and needs to ■ The negotiations of the transaction documentation (in
act in the best interest of the company and in compliance with particular, share purchase agreements and shareholder
the law, the articles of association, the rules of procedure, and agreements).
the resolutions of the shareholder(s), which may issue binding Any required regulatory approvals. This commonly entails
instructions to the managing directors. antitrust clearances and foreign direct investment approval.
Managing directors nominated by an investor are often not From July 2023, another approval requirement under the EU
directly involved in the day-to-day management and try to limit foreign subsidies regulation (Drittstaatensubventionsverordnung) will
their exposure with respect to personal liability by an alloca- also become relevant, which applies in cases where the target has
tion of duties (Geschäftsverteilungsplan). Although such alloca- received any “financial contribution” from a non-EU member
tion prevents them from being primarily responsible for the task within the last three years.
and responsibilities allocated to other managing directors, their
general supervisory duty remains. Further, there are certain key
4.2 Have there been any discernible trends in
responsibilities that may not be allocated and remain as joint
transaction terms over recent years?
responsibility of the managing directors (e.g., the preparation of
the annual accounts). Given this liability risk, it might be advis-
able to take a more passive role (e.g., as a member of an advi- The recent shift of the overall market situation to a more buyer-
sory board). friendly environment has outdated the trends we have discerned
In any case, it should be ensured that appropriate D&O insur- in the past years.
ance coverage exists.
52 Transaction Terms: Public Acquisitions
3.7 How do directors nominated by private equity
investors deal with actual and potential conflicts of 5.1 What particular features and/or challenges apply
interest arising from (i) their relationship with the party to private equity investors involved in public-to-private
nominating them, and (ii) positions as directors of other transactions (and their financing) and how are these
portfolio companies? commonly dealt with?

In order to prevent the nominees from potential conflicts of German capital market laws provide for strict rules to prevent
interest, most private equity investors appoint their respective the secret acquisition of stakes in public companies. For target
team members only to non-executive boards, such as the super- companies listed on a regulated market, acquirers must disclose
their shareholding after reaching thresholds of 3%, 5%, 10%,
visory board or an advisory board. Supervisory and advisory
15%, 20%, 25%, 30%, 50% or 75%. In addition, an investor is
board members are not involved in the day-to-day management
obliged to inform the target company about investment objec-
and, thus, face fewer conflicts of interest.
tives and fund origin by reaching 10% of the voting rights.
As a result of the duty of care of a managing director towards
Outside regulated markets, only a threshold of 25% and 50%
the company, the managing directors must (always) act in the
triggers corresponding notification obligations.
best interest of the company. Any potential conflicts of interest
Once an investor has acquired a stake of 30%, the obliga-
need to be disclosed to the shareholder(s) for evaluation.
tion for a mandatory takeover offer is triggered. Exceptions to
In general, German law provides for self-dealing restrictions
such obligation can be granted on a rare case-by-case basis by
prohibiting representatives from legally binding a third party the German Federal Financial Supervisory Authority (BaFin).
(such as the managing directors representing the company) on Practically, private equity investors seek to avoid mandatory
the one hand and concluding agreements with oneself or another takeover offers and launch voluntary takeover offers instead
third party on the other hand. The managing directors can, before the 30% threshold is hit, thereby being more flexible to
however, be released from such restrictions by the shareholder(s). ensure that their particular structuring considerations reflect,
for example, minimum acceptance rates or material adverse
change clauses. Any takeover offer requires proof of availability
of sufficient funds to execute the offer in order to obtain the
required BaFin approval.

Private Equity 2023

68 Germany

5.2 What deal protections are available to private locked-box consideration mechanisms. Other covenants are
equity investors in your jurisdiction in relation to public negotiated on a case-by-case basis, in particular, in light of due
acquisitions? diligence findings or regulatory requirements. The manage-
ment team would typically provide non-compete covenants.
The private equity investor and the target can enter into a busi-
ness combination agreement to support the takeover offer. Such 6.4 To what extent is representation & warranty
agreements typically prohibit the target from soliciting competing insurance used in your jurisdiction? If so, what are the
offers (“no-shop” clause) or frustrating any offer conditions typical (i) excesses / policy limits, and (ii) carve-outs /
against the assurance of future management composition and exclusions from such insurance policies, and what is the
employee retention. typical cost of such insurance?
In order to further enhance transaction security, it is common
to seek agreements with major shareholders to irrevocably commit W&I insurance is very commonly used. The strong competition
to tender their respective shares irrespective of competing offers, between insurers has led to the availability of favourable terms at
or not to tender their respective shares and sell them outside the a moderate price level (0.8% to 1.5% ratio of the premium to the
takeover offer. These negotiations take place shortly before going recoverable loss (ROL)).
public and are highly confidential in order to avoid any leakage. The retention amounts typically vary in a range between 0.25%
and 0.5% of the enterprise value. Policy limits vary between 10%
62 Transaction Terms: Private Acquisitions and 30%. The policies exclude known risks identified in the due
diligence or exclusions made in the scope of the due diligence.
6.1 What consideration structures are typically
preferred by private equity investors (i) on the sell-side, 6.5 What limitations will typically apply to the liability
and (ii) on the buy-side, in your jurisdiction? of a private equity seller and management team under
warranties, covenants, indemnities and undertakings?
The various geopolitical uncertainties and the increased economic
risks for companies have resulted in a comeback of closing The share purchase agreement typically provides for various
account consideration mechanisms. In contrast to the locked-box limitation periods with respect to different types of claims.
mechanisms that have been standard for many years now in Liability is further limited by de minimis amounts and thresholds/
German transaction markets, closing accounts have the disadvan- baskets. Typical limitation periods for fundamental warranties
tage that they lack purchase price certainty. Although this uncer- are two to five years, and the liability for fundamental warranty
tainty results in increased complexity of the funding process of breaches is in the aggregate limited to the purchase price.
buyer’s acquisition structure, they tend to prefer this administra- Claims for breach of business warranties are typically limited
tive burden more and more as they are no longer willing to accept to one or two years and capped at a certain percentage of the
the risks associated with fixed purchase prices. purchase price (or EUR 1 in the case of a “clean exit” with W&I
Sellers, however, perceive to achieve their desired consider- insurance coverage). The common time limitation period for
ations either in earn-out mechanisms that are strongly linked tax warranty claims is seven years.
to the target company’s economic performance in the years
following the disposal or in an increasing number of a share
6.6 Do (i) private equity sellers provide security (e.g.,
consideration component. escrow accounts) for any warranties / liabilities, and
(ii) private equity buyers insist on any security for
6.2 What is the typical package of warranties / warranties / liabilities (including any obtained from the
indemnities offered by (i) a private equity seller, and (ii) management team)?
the management team to a buyer?
Given the fact that the use of W&I insurance has become
Naturally, any private equity seller that is seeking for a clean exit common practice with private equity sponsors being on the sell-
is trying to reduce the set of warranties and indemnities (W&I) as side as well as buy-side, the prevalence of escrow accounts or
much as possible given the inherent liability risks. The minimum other security in such cases has decreased. Private equity buyers
standard scope of warranties includes title to the shares, capacity would typically only require an escrow component to mitigate a
of the seller and the unencumbered nature of the shares (funda- specific uninsurable risk that has been discovered in the course
mental warranties). The warranties relating to the business (busi- of the due diligence process.
ness warranties) are subject to intensive negotiations.
Indemnifications in favour of the buyer are often provided 6.7 How do private equity buyers typically provide
with respect to tax matters or specific items that have been identi- comfort as to the availability of (i) debt finance, and (ii)
fied as risks during the due diligence process (e.g., environmental, equity finance? What rights of enforcement do sellers
compliance, or litigation risks). typically obtain in the absence of compliance by the
The management team usually offers the same catalogue of buyer (e.g., equity underwrite of debt funding, right to
warranties. In light of the future relationship, it is common to cap specific performance of obligations under an equity
commitment letter, damages, etc.)?
their overall liability to EUR 1 subject to W&I insurance coverage.

It is customary for private equity transactions in Germany that

6.3 What is the typical scope of other covenants,
undertakings and indemnities provided by a private
the sell-side will be provided with equity commitment letters
equity seller and its management team to a buyer? and debt commitment letters to demonstrate the availability of
“certain funds” required for the payment of the purchase price
as well as any damage claims/break fees that may potentially be
The typical scope includes interim covenants for the time period paid in the case of a broken deal after signing of the transaction.
between signing and closing as well as no leakage covenants for

Private Equity 2023

 Weil, Gotshal & Manges LLP 69

6.8 Are reverse break fees prevalent in private equity of the finance market in your jurisdiction for such debt
transactions to limit private equity buyers’ exposure? If (including the syndicated loan market, private credit
so, what terms are typical? market and the high-yield bond market).

They are not and have been rare, particularly before the The most common source of third-party debt used to fund
COVID-19 pandemic. However, we have seen a growing number private equity transactions remains the debt financing by way of
of reverse break fee provisions lately. The terms are typically a non-amortising term loan. The term loan financing is typi-
a result of the negotiations on a case-by-case basis and heavily cally combined with a revolving credit financing. The revolving
depend on the facts and circumstances of each transaction. credit financing is available for general corporate and working
capital purposes of the target group and is often treated, by the
72 Transaction Terms: IPOs terms of an intercreditor agreement, as being super senior. In
addition, where necessary for the ongoing business of the target
group, capex and acquisition facilities are made available on a
7.1 What particular features and/or challenges should
a private equity seller be aware of in considering an IPO pari passu basis.
exit? The term loan and capex/acquisition facilities are currently
mainly provided by credit funds. Banks have significantly
reduced their activities in relation to the term loan financing of
It is customary in Germany that “lock-in” and “orderly market”
private equity transactions. However, banks remain the main
periods prevent a swift and complete exit of a private equity seller.
source for the revolving credit financing.
The high degree of regulation within the European regulatory
The term loan financing is often structured as a unitranche
framework further demands a significant preparation for several
club deal where a wider loan syndication is not intended.
months. In addition, tax considerations pose a common challenge
Secondary loan syndications remain at a low level compared to
since private equity investments typically rely on Luxembourg or
previous years.
Dutch holding structures that prove unfavourable if sellers pursue
Compared to 2022, secured bond financings have increased
the admission of a German entity. Before an IPO, tax-neutral
and are mainly used to refinance maturing acquisition term loans.
reorganisation measures may therefore be required such as a
tax-neutral merger of the previous foreign holding company with
the German. In the event of a dual-track process, if the private 8.2 Are there any relevant legal requirements or
equity seller shares more in-depth information with a bidder than restrictions impacting the nature or structure of the debt
provided in the prospectus published at a later stage, such bidder financing (or any particular type of debt financing) of
private equity transactions?
must be excluded from participating in the IPO.

Compared to previous years, where transactions had been struc-

7.2 What customary lock-ups would be imposed on
tured by using Luxembourg vehicles, private equity inves-
private equity sellers on an IPO exit?
tors now prefer to use local vehicles for their acquisitions (in
Germany, usually GmbHs). Creditors, on the other hand,
On average, the underwriting banks demand a “lock-in” period remain focused on having a single point of enforcement. A
of 180 calendar days following the listing. Carve-outs to such single point of enforcement allows them to sell or to take control
agreements are customary and provide private equity sellers over the entire target group by the enforcement of one single
with sufficient flexibility during the “lock-in” period. Transfers security (typically a share pledge) at the level of one single secu-
of shares to affiliates and pledges in connection with financing rity grantor. Since the enforcement of a German share pledge
transactions, for example, are typically allowed. requires that the secured obligation have become due and
payable, it is preferable for the creditors to obtain a single point
7.3 Do private equity sellers generally pursue a dual- of enforcement that is under the German borrower. In case the
track exit process? If so, (i) how late in the process are German borrower itself would be the single point of enforce-
private equity sellers continuing to run the dual-track, ment, a standstill would have to be granted or other measures
and (ii) were more dual-track deals ultimately realised would have to be taken in order to prevent the insolvency of
through a sale or IPO? the German borrower. Such an insolvency would significantly
reduce to potential enforcement proceeds in relation to the
If private equity sellers pursue an IPO at all in the current market pledged shares of the German borrower.
environment, a dual-track exit process is typical, particularly for When acceding to the acquisition financing as additional
large-cap transactions. The “point of no return” is not determined guarantors and security grantors, the management of the target
by law but rather individual circumstances. Generally, an IPO group companies will have to observe German law capital main-
is abandoned more reluctantly after presenting information to a tenance (Kapitalerhaltung) and liquidity maintenance (Liquidität-
larger audience (e.g., after a roadshow). Yet, synergies for sellers serhaltung) rules, which also apply to the granting of upstream
substantially decrease once the due diligence process has been guarantees and upstream security for the benefit of creditors of
completed. Sellers indeed rarely disclose dual-track processes to a shareholder. A violation of these rules can trigger a personal
avoid jeopardising the IPO by either demonstrating weak demand liability of management. In order to mitigate/exclude the
or a low likelihood of completion. Still, a trade sale remains the described liability issue, it is market practice in German finance
most common exit, without the latest drop in IPO activity. transactions to provide for contractual enforcement limitations
in relation to the upstream guarantees and upstream collateral.
82 Financing Pursuant to such limitations, the enforcement is excluded to the
extent that it would constitute a violation of the relevant rules.
8.1 Please outline the most common sources of debt
finance used to fund private equity transactions in your
jurisdiction and provide an overview of the current state

Private Equity 2023

70 Germany

8.3 What recent trends have there been in the debt- (vi) Investment opportunities to incentivise management
financing market in your jurisdiction? (MEP, virtual share programme, etc).
(vii) Opportunity to on-board co-investors to share the invest-
ment risk and to further leverage the investment structure.
Due to macro-economic headwinds, the origination of new
Besides structural needs, W&I coverage for historic tax risks
acquisition financings has slowed down significantly in the first
becomes more and more popular in German deals. Having said
quarter of 2023. Private equity investors have been focused on
this, a sophisticated and aligned tax due diligence scoping is
the amendments and extensions of their existing acquisition
required to allow for sufficient historic tax risk coverage. Identi-
financings. In that context, we have seen an increased willing-
fied tax risks as part of tax due diligence are more often covered
ness by private equity investors to provide fresh money in order
by special tax insurance to the extent there is no recourse against
to prevent or cure financial covenant breaches.
sellers under special tax indemnities.
Since the beginning of the second quarter of 2023, we have
seen a significant increase in relation to the origination of new
acquisition financings. 10.2 What are the key tax-efficient arrangements that
Apart from pricing, which is higher than in previous years, are typically considered by management teams in private
private equity investors continue to benefit from favourable loan equity acquisitions (such as growth shares, incentive
shares, deferred / vesting arrangements)?
terms, which provide them with a high level of flexibility.

92 Alternative Liquidity Solutions Management incentivisation through participation in the future

value creation of a target group plays a crucial role in most
private equity transactions. Such incentive schemes can be struc-
9.1 How prevalent is the use of continuation fund
tured either as co-investments through (indirect) participation
vehicles or GP-led secondary transactions as a deal type
in your jurisdiction? of the management in the target’s equity or as simple contrac-
tual arrangements, essentially entitling management to a bonus
payment or virtual share options should certain key milestones
The relevance of secondary transactions in Germany is be achieved. While contractual arrangements are easier to imple-
increasing in line with the global trend. Continuation funds ment and more standard in M&A transactions, it is more common
have become a way for GPs and their investors to hold on to for private equity sponsors to offer (senior) management the
companies longer rather than selling them in depressed market opportunity to co-invest in the target with own money (MEP).
environment. Contrary to their reputation as “zombie funds”, In an MEP, typically a mix of preferred instruments and ordi-
the sale of strong assets particularly provides an attractive nary shares (indirectly) held by management will usually govern
benefit/risk profile economically. the management’s risk and return profile. So-called growth
shares (only entitling holders to the value creation after their
9.2 Are there any particular legal requirements or acquisition), hurdle shares (providing holders with value partic-
restrictions impacting their use? ipation once a certain hurdle is achieved) or ratchet shares (enti-
tling holders to a certain return) could be considered. Tax
risks associated with these kinds of special shares are, however,
In general, continuation funds are subject to the same legal frame-
even higher than in a common structure comprising a mix of
work as other alternative investment funds. Legal restrictions preferred and ordinary instruments only. In any case, the treat-
may, in particular, arise in connection with the permanent conflict ment of the underlying MEP returns under the tax preferential
of interest that exists in the context of transactions in which the capital gains regime is key for management.
private equity sponsor acts on both the buy-side and the sell-side. Management’s investment is regularly pooled in vehicles in
the form of a tax-transparent partnership being controlled by the
102 Tax Matters sponsor. This kind of indirect investment structure allows spon-
sors to establish, among other things, appropriate governance.
10.1 What are the key tax considerations for private Sponsors regularly have the right to buy back the equity inter-
equity investors and transactions in your jurisdiction? ests held by the management members once their employment or
Are off-shore structures common? service agreements with the target have ended or have been termi-
nated (leaver schemes differentiating between good leaver and bad
Investors typically use an acquisition structure comprising several leaver). Such leaver schemes are usually aligned with the overall
special-purpose vehicles incorporated in Germany and/ or coun- vesting scheme and tag-along/drag-along rights of the MEP.
tries with a favourable investment environment for private equity
and M&A investments (typically Luxembourg, the Netherlands 10.3 What are the key tax considerations for
or the Channel Islands). Typical tailor-made investment struc- management teams that are selling and/or rolling over
tures for German deals allow for a tax-efficient acquisition of a part of their investment into a new acquisition structure?
target group considering the following key tax aspects:
(i) Exit considerations (sale of shares, IPO, etc.) and opti- Sale and roll-over of management ( pari passu) investments/
mised capital gains treatment as part of an exit scenario. equity must be considered carefully by an in-depth upfront
(ii) Tailored repatriation mechanisms together with a structuring on the management’s sight. Typically, the manage-
financing structure (considering a mixture of equity and ment re-invests based on net profits after tax to the extent a
debt financing) serving the investor’s needs. tax-neutral re-investment/roll-over mechanism is not available
(iii) Optimised overall tax position by allowing to offset target or compliance efforts and resulting holding periods attached to
group’s operating profits with acquisition financing costs such tax neutral roll-over are too burdensome.
by implementing tax grouping schemes. The most common way to entitle management to a later
(vi) Survival of tax attributes (such as tax loss carry forwards tax-efficient sale or tax-neutral roll-over into the new sponsor’s
and current year losses) to protect against historic tax risks structure is to bundle management’s equity in a German corpo-
and to reduce the future target group’s tax burden. ration. Such pooling allows, on the one hand, benefitting from
(v) Optimised real estate transfer tax position.

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 Weil, Gotshal & Manges LLP 71

the tax-preferential German capital gains exemption (c. 1.5% tax lot depending on the requirements of the concrete transaction
on capital gains), in the case of an exit scenario and, on the other such as size of the target, valuation, type of investment or needs
hand, benefitting from tax neutral roll-over schemes (share-for- of the buyer.
share exchange). For complex auction sales, the conduction of a comprehensive
vendor due diligence by sellers (through their advisors) is still very
10.4 Have there been any significant changes in tax common in order to structure and simplify the process. As buyers
legislation or the practices of tax authorities (including will most likely not get reliance on the vendor due diligence report
in relation to tax rulings or clearances) impacting private from sellers’ advisors, they are typically conducting an additional
equity investors, management teams or private equity buy-side due diligence in order to confirm its results.
transactions and are any anticipated? In less complex or bilateral situations, private equity spon-
sors are regularly adjusting their due diligence to the require-
■ Increased substance requirements and recent interna- ments of debt providers or W&I insurance. It is not common to
tional developments such as the EU’s second Anti-Tax apply rather high materiality thresholds and focus on items with
Avoidance Directive (ATAD 2) and the so-called Unshell particular commercial relevance.
Directive (on rules to prevent the misuse of shell entities
for tax purposes) have had a relevant impact on how funds
11.5 Has anti-bribery or anti-corruption legislation
as well as their investments are structured. impacted private equity investment and/or investors’
■ Real estate transfer tax regulations have been tight- approach to private equity transactions (e.g., diligence,
ened recently with additional compliance and filing contractual protection, etc.)?
requirements.
■ Tax audits focus more and more on transactional tax
matters such as transfer pricing aspects in the light of Legal compliance topics in general have become a standard due
financing activities, substance requirements, treatment of diligence item and are regularly covered in-depth within the
transaction costs, and transaction bonuses. business warranties. This applies not only to anti-bribery and
anti-corruption laws, but also to anti-money laundering or other
areas of legal compliance (e.g., data protection).
112 Legal and Regulatory Matters

11.1 Have there been any significant legal and/or 11.6 Are there any circumstances in which: (i) a private
regulatory developments over recent years impacting equity investor may be held liable for the liabilities of
private equity investors or transactions and are any the underlying portfolio companies (including due to
anticipated? breach of applicable laws by the portfolio companies);
and (ii) one portfolio company may be held liable for the
liabilities of another portfolio company?
The regulatory framework (in particular, relating to foreign
investment control) has changed multiple times of the last years.
The most recent example for additional regulatory require- The liability risks of investors could be based on the grounds
ments is the introduction of the EU foreign subsidies regulation of contractual arrangements or fraudulent behaviour. Further,
(Drittstaatensubventionsverordnung) regarding the receipt of “finan- there have been court decisions by the European Court of
cial contributions” from a non-EU member. Justice (EuGH) confirming the joint and several liability of
an investment fund together with one of its portfolio compa-
nies for a violation of anti-trust laws. Although there have not
11.2 Are private equity investors or particular
yet been similar decisions by German courts referring to such
transactions subject to enhanced regulatory scrutiny in
your jurisdiction (e.g., on national security grounds)? EuGH decision, a similar ruling concerning a German invest-
ment could be possible in light of the European legal framework.
Private equity funds (et al.) registered in the EU are subject to
Directive EU 2011/61/EU, the Alternative Investment Fund 122 Other Useful Facts
Managers Directive (AIFMD), a regulatory framework estab-
lished to protect investors and reduce the risks imposed by such 12.1 What other factors commonly give rise to concerns
funds to economies. for private equity investors in your jurisdiction or should
such investors otherwise be aware of in considering an
investment in your jurisdiction?
11.3 Are impact investments subject to any additional
legal or regulatory requirements?
The environment for private equity transactions in Germany
is still highly attractive. Private equity investors have signifi-
Impact investments, e.g., infrastructure projects, can be subject cantly improved their reputation as responsible investors for the
to various specific legal and regulatory requirements that are benefit of the economic viability of the companies, their respec-
and will be dynamically changing in the current environment. tive employees, and the economic area. As private equity inves-
The legal framework in the EU further provides for certain
tors have been shown to achieve particularly strong returns
regulations and directives concerning ESG-relevant topics that
in periods of economic uncertainties and Germany still has a
have gained massive relevance in the past years.
large number of attractive technology leaders as well as small
and mid-sized businesses, it is likely that private equity inves-
11.4 How detailed is the legal due diligence (including tors (both domestic and international) will remain very active in
compliance) conducted by private equity investors prior German transaction markets.
to any acquisitions (e.g., typical timeframes, materiality,
scope, etc.)?

The comprehensiveness of each due diligence process varies a

Private Equity 2023

72 Germany

Andreas Fogel is counsel in the Corporate department of the Munich office of Weil, Gotshal & Manges. He focuses on M&A, private equity
transactions and corporate law. Andreas has broad experience in advising clients throughout a variety of industries and sectors.
Andreas studied law at Ludwig-Maximilians-University of Munich (law degree 2015). He completed his legal clerkship in Munich and New
York and was admitted to practise in Germany in 2018 when he joined Weil, Gotshal & Manges as an associate.

Weil, Gotshal & Manges LLP Tel: +49 89 24243 117

Maximilianstr. 13, Maximilianhöfe Email: Andreas.Fogel@weil.com
80539, Munich URL: www.weil.com
Germany

Benjamin Rapp is a partner in the Tax practice of the Frankfurt office. Ben provides his clients with cutting-edge advice on their private equity,
M&A and real estate transactions. In addition, he has broad experience in advising on restructurings in distressed situations and corporate
reorganisations, as well as in structuring, implementing and maintaining complex management incentive schemes for the most prominent
private equity sponsors. Ben regularly publishes articles on various German tax issues and is co-author of a legal commentary on corporate
reorganisations.
Ben is a graduate of the University of Erlangen-Nuremberg (business degree 2008), holds a BA in Business & Management of the University
of Hull (UK) and became licensed as a certified tax advisor in 2011. Prior to joining Weil, Gotshal & Manges in 2017, Ben worked, inter alia, in
the tax department of another leading international law firm.

Weil, Gotshal & Manges LLP Tel: +49 69 21659 600

Taunusanlage 1 (Skyper) Email: Benjamin.Rapp@weil.com
60329, Frankfurt URL: www.weil.com
Germany

With around 1,100 lawyers in 16 offices across three continents, Weil, Gotshal
& Manges LLP ranks among the world’s leading international law firms and its
global Private Equity practice is recognised as one of the elite market leaders
in this field. Weil’s German offices, located in Frankfurt/Main and Munich, are
an integral part of this global network. A team of approximately 60 lawyers
advises many of the world’s leading private equity firms, their portfolio
companies and other equity financial investors on a broad range of trans-
actions including leveraged buyouts, growth equity transactions, distressed
transactions, add-ons, taking privates, recapitalisations and exits. Legal
counselling services also include advice on corporate matters, tax struc-
turing, acquisition finance as well as antitrust and other regulatory matters,
particularly FIR. As most of the transactions are cross-border and involve
multiple jurisdictions, the German offices work closely with the global Weil
network to provide seamless tailor-made services.
www.weil.com

Private Equity 2023

 Chapter 10 73

Hungary

Hungary
Dr. Márton Kovács

Dr. Áron Kanti

Moore Legal Kovács Dr. Zsigmond Tóth

is the Russian-Ukrainian war. The war has generated extremely

12 Overview strong economic effects: significant increases in material and
energy prices; disruption of supply chains; corporate difficulties
1.1 What are the most common types of private equity or insolvency; and general inflation and insecurity. These factors
transactions in your jurisdiction? What is the current
combined to trigger a process whereby investors and companies
state of the market for these transactions?
seeking investment, even if fewer in number, remained in the
market, sought more investment outside the traditional banking
The business environment for private equity (PE) transactions and bond markets.
in Hungary have been favourable in recent years, though this Given the relative proximity of war and Hungary’s border
has been struck down somewhat by the COVID-19 pandemic. with Ukraine, expectations have come to the fore that invest-
Nevertheless, Central and Eastern Europe (CEE) is still trending ment (mainly foreign) in Hungary will be on a sharp down-
upwards, the domestic economy is growing, and financing is cheap ward trajectory in 2022. Fortunately, these expectations have
and readily available. Thus, Hungary is a well-liked target of inter- been dashed and, as the statistics show, PE investment value
national PE investment companies interested in share and asset is showing a strong increase compared to 2021, a year that was
deals. Hungary closely follows Poland, Latvia and Romania as the hampered by the COVID-19 pandemic.
most-frequented jurisdiction for PE investments in the region. Hungary has already proven to be a credible and growing
Venture capital (VC) markets in particular are emerging market for international and domestic players. The growth
and there are a host of domestic funds specialised in small- potential is still great in CEE and Hungary ranks among the top
scale investments that are financed from EU resources (funds four countries in PE activity.
of funds) and by PE investors. Such public funding is gener- The availability of the European Union (EU) and domestic
ally available on the condition of receiving private funding that funds and their attractiveness to PE and cheap financing possibil-
attracts PE investors. ities, the booming start-up scene and the Hungarian Government
Riding the wave of EU funds and the Hungarian Govern- have many times accentuated the drive to draw in capital to fuel
ment initiatives providing strong support for VC investments, the domestic economy, which keeps the interest of experienced
the past few years saw the rise of seed and start-up investments PE investors from Europe and, especially, the United States, alive.
providing capital for the early phases of product development Hungary is becoming more attractive for investors from
and distribution. According to the market statistics of Invest new regions, such as China, the Middle East and South Africa.
Europe, in 2022, EUR 250 million was invested into Hungarian For these third country investors, besides the general business
companies through 184 transactions. advantages, Hungary offers free access to the EU market.
According to the annual Investment Monitoring Report Also, PE transactions are sometimes inhibited by the relatively
prepared by the Hungarian Private Equity and Venture Capital small market itself. Dealmakers in Hungary are also keeping an
Association in collaboration with EY, 198 investments were eye on geopolitics and focusing on the occurring strains with the
executed by Hungarian investors either in Hungary or abroad EU, a crucial trading partner and investor in the region.
(22% lower than in 2021) for a total value of EUR 220 million, Contrary to expectations, as seen in the statistics, the Russian-
which represents a 62% increase compared to 2021, showing a Ukrainian war had no significant negative impact on Hunga-
significant increase in individual investment value. ry’s foreign PE activity. Apart from a decrease in the fourth
quarter of 2022, despite the war, high inflation, rising interest
1.2 What are the most significant factors currently rates and high energy costs, the PE activity remained high and
encouraging or inhibiting private equity transactions in even increased in volume compared to 2021.
your jurisdiction?

A strong, unpredicted and never-seen-before factor for PE

transactions in Hungary, the whole of CEE and even Europe

Private Equity 2023

74 Hungary

1.3 Are you seeing any types of investors other 2.5 In relation to management equity, what is the
than traditional private equity firms executing private typical range of equity allocated to the management, and
equity-style transactions in your jurisdiction? If so, what are the typical vesting and compulsory acquisition
please explain which investors, and briefly identify any provisions?
significant points of difference between the deal terms
offered, or approach taken, by this type of investor and
that of traditional private equity firms. Transactions vary in this regard, but a typical pool of shares
allocated to management members and key employees (hence
the term ESOP, or “Employer Stock Ownership Programme”)
Other than the usual PE and VC investors, no other specific ranges from 5–10%. Vesting under Hungarian law can some-
type of investor has emerged. The Hungarian Government times be problematic and, especially for VCs, the preferred solu-
pours state funds into the economy, but this is strictly an emer- tion for ensuring management retention is the so-called reverse
gency type of aid and not an investment by any means. vesting, where the management must divest all or part of their
shares if they leave the company or violate the shareholders’
22 Structuring Matters agreement (SHA). This is usually ensured by a call option estab-
lished for the benefit of the company.
2.1 What are the most common acquisition structures
adopted for private equity transactions in your
2.6 For what reasons is a management equity holder
jurisdiction?
usually treated as a good leaver or a bad leaver in your
jurisdiction?
The most common acquisition structure for PE transactions is
naturally the acquisition of 100% or the majority of the target’s Good/bad leaver conditions are usually negotiated on a case-
shareholding. by-case basis but, in general, a management member is typically
In the VC market, portfolio companies are usually set-up considered to be a good leaver if the employment relationship is
jointly by the founders and the investors to serve as a special terminated by mutual consent or unilaterally by the company,
purpose vehicle for future investment rounds; however, in the unless it is based on reasons attributable to the management
case of more mature companies with ongoing product devel- member. Good leaver conditions sometimes include long-term
opment and market presence, the investor may opt for a share health or family issues.
purchase or capital increase in order to keep the brand going. Circumstances under which a management member is consid-
ered and sanctioned as a bad leaver are obviously much broader,
2.2 What are the main drivers for these acquisition e.g. management members terminating their employment
structures? contract during the early years of the investment or without
reasons neither attributable to the portfolio company nor the
The main driver for the acquisition structures is to have corpo- investor, or committing material breaches of the SHA or their
rate control over the target and preservation of the investors’ terms of employment.
rights. In some cases, other considerations, such as tax, have a
substantial effect on structuring matters. 32 Governance Matters

2.3 How is the equity commonly structured in private 3.1 What are the typical governance arrangements
equity transactions in your jurisdiction (including for private equity portfolio companies? Are such
institutional, management and carried interests)? arrangements required to be made publicly available in
your jurisdiction?

The most popular form for PE and VC investments are limited

Most of the portfolio companies operate as private limited
liability companies, namely “zrt.”s, i.e. companies limited by
companies (or stock companies, abbreviated as “zrt.” in
shares, or “kft.”s, a companies that issue business quotas instead
Hungarian) and especially in the VC sector, limited partner-
of shares. Business quotas have their share of limitations in
ships. Hungarian law enables a great deal of flexibility in terms
terms of flexibility compared to shares, but they are still able to
of corporate governance for both. The three most important
meet the investors’ needs with regard to preferential rights asso-
governance bodies of Hungarian companies are:
ciated to the investors’ equity interest.
■ the shareholders’ meeting operating as the fundamental
decision-making body (ownership level);
2.4 If a private equity investor is taking a minority ■ board of directors or a single director heading the day-
position, are there different structuring considerations? to-day business operation (management level); and
■ the supervisory board serving as the controller of a legiti-
An investor with minority shareholding interest in general mate operation.
requires much stronger rights attached to its shares or busi- On the ownership level, the investor, especially if in minority,
ness quota. Such rights embedded into the corporate structure generally retains the most important veto rights in material
and the underlying contractual arrangements usually take the issues to ensure that fundamental decisions affecting the life of
form of a wide range of preferential rights relating to exit, deci- the portfolio company are adopted with due regard to the inves-
sion-making, dividends, liquidation, control over the manage- tor’s interests.
ment and key employees. On the management level, investors generally require the
set-up of a board of directors, if the portfolio company does
not have one already, where the investor delegates at least one
board member. The board decides in every issue not specifically
allocated to the scope of authority of the shareholders’ meeting

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 Moore Legal Kovács 75

but even then, the board member delegated by the investor investor has the final say in crucial management decisions
usually exercises veto rights in material issues. The board of (ESOP, vesting, key employees, management bonus, etc.).
directors’ functions may be allocated to a single management
member who replaces the board, but this usually does not serve
3.3 Are there any limitations on the effectiveness of
either parties’ interests well and it is thus a rare sight. Notwith- veto arrangements: (i) at the shareholder level; and (ii) at
standing the foregoing, in some cases, investors may decide to the director nominee level? If so, how are these typically
maintain the current management structure of the company but addressed?
parallelly require the set-up of a shareholders’ committee, the
members of which are some of the shareholders of the company,
The drawback of veto rights or high quorum provisions incorpo-
including the member delegated by the investor that exercises
rated into the corporate documents of portfolio companies stems
veto rights on the highlighted issues. Although the members
from the relative nature of such internal regulations compared to
of the shareholders’ committee are not qualified as executive
proprietary rights that are absolute. Although corporate documents
officers (managers), it should be noted that since the share-
are publicly accessible, veto rights are not listed in the corporate
holders’ committee decides on matters that otherwise fall within
registry that third parties rely on and third parties may presume, in
the scope of the management level, under Hungarian law, in
good faith, that a decision adopted by the shareholders or manage-
cases where the company goes into compulsory liquidation, the
ment is valid and effective even if they have been adopted contrary
liability of the members of the shareholders’ committee shall be
to the corporate documents including veto rights.
considered as that of the managers if they have the actual power
Further limitation on the effectiveness of such veto arrange-
to influence the decision-making mechanisms of the company.
ments, on either level, is the fact that any decision adopted in
On the third level, investors may require the set-up of a super-
violation with the investor’s rights must be challenged in court
visory board if they deem it necessary, which oversees compli-
and such court procedures may take a long time, ranging from
ance with the relevant laws and internal by-laws of the company.
a couple of months to several years, even if the law provides for
Corporate documents that are submitted to the court of regis-
an expedited procedure.
tration are publicly accessible for anyone but there can be internal
These limitations cannot be effectively addressed, and inves-
regulations and SHAs that remain hidden from the public. The
tors simply must accept the associated risks and negotiate other
drawback of such private law agreements and non-statutory
types of insurances, for example, flip-over, call-and-put-options
regulations is that, in the case of a dispute, they can only be
and other rights exercisable in case of serious violation of the
enforced in the civil court, which may take significant time.
SHA and/or the corporate documents.
Also, veto rights in the Articles of Association are hardcore
3.2 Do private equity investors and/or their director limitations as to the business operation of portfolio compa-
nominees typically enjoy veto rights over major nies and as already mentioned above, the HCA sees them as
corporate actions (such as acquisitions and disposals, controlling rights under competition law, which makes the
business plans, related party transactions, etc.)? If a market players cautious and more inclined to resort to a softer
private equity investor takes a minority position, what
tool (high quorum) to ensure investor rights.
veto rights would they typically enjoy?

Veto rights at both shareholder and management level are a very 3.4 Are there any duties owed by a private equity
investor to minority shareholders such as management
common tool for investors, especially investors with minority
shareholders (or vice versa)? If so, how are these
shareholding, to maintain reasonable control over the opera- typically addressed?
tion of the portfolio company. In recent years, de facto veto rights
started to be replaced by a high quorum required to decide critical
issues. For example, if the investor holds a 4% share in the port- Under Hungarian law, shareholders have a duty towards the
folio company, then setting a minimum quorum of 96.01% means portfolio company and not the other shareholders and even
that no material issues can be decided without the consent of the then, only to the extent of providing their respective capital
investor. This is because the Hungarian competition law and the contributions. Shareholders’ have rights that they can exercise
Hungarian Competition Authority (HCA) considers strong veto vis-à-vis the company itself or the management.
rights to qualify as a controlling right. If a controlling relationship Minority shareholders enjoy special rights pursuant to the
exists between two or more companies, this may call for the appli- corporate laws with regard to convening the shareholders’
cation of the strict EU and domestic competition law and result in meeting or appointing an auditor for the investigation of certain
mandatory pre-notification or even approval to be sought by the business decisions. Furthermore, all shareholders have the right
parties. In order to avoid these costly and time-consuming proce- to contest the validity of a resolution of the supreme body, the
dures, both founders and investors are becoming more careful management or the supervisory board of a company, if the reso-
with incorporating investor rights into the corporate documents. lution violates legal regulations or the articles of incorporation
Veto rights and topics requiring high quorum at the most of the company (with the condition that the shareholder did not
important decision-making levels, the shareholders’ meeting, approve the given resolution with its vote).
are usually restricted to material issues affecting the core oper-
ation of the portfolio company that can range from the most 3.5 Are there any limitations or restrictions on the
important corporate decisions (merger, transformation, liquida- contents or enforceability of shareholder agreements
tion, annual report) to business operation issues such as entering (including (i) governing law and jurisdiction, and (ii)
into high-value contracts, taking out loans and licensing intel- non-compete and non-solicit provisions)?
lectual property rights. There is no exhaustive list of veto rights
as they are usually subject to negotiation by the investor and the The enforceability of SHAs may become problematic and very
founders or other shareholders. time-consuming in the case of parties with different nationali-
Similar veto rights exist on a management level (usually a ties, especially outside the EU. That is why, in practice, SHAs
board of directors) where the board member delegated by the stipulate the governing law and jurisdiction of the country where

Private Equity 2023

76 Hungary

the portfolio company is seated and it is rather rare that an SHA either case, the directors must act at all times by force of law in
related to a Hungarian company stipulates foreign law. Commer- the best interest of the portfolio company, which is also in line
cial arbitration, however, is much more acceptable in high-value with the PE investors’ interests in the successful and profitable
deals and it is not uncommon that the parties submit themselves operation of the company so, in practice, potential conflicts of
to the jurisdiction of an international arbitration court (ICC, interests of this nature are rare and they are not different from
UNCITRAL, etc.) for disputes stemming from the SHA. general conflict of interest issues potentially arising between
The risk of unenforceability is usually addressed in the SHAs shareholders and management members.
by additional insurances for the investors in case of violations, Directors nominated by the same PE investor are usually not
such as triggering exit rights at a given return on the investment, delegated to portfolio companies with competing activities,
the flip-over of management or put/call option on shares. especially with regard to the small Hungarian market, and it is
Enforcing non-compete and non-solicitation obligations is quite rare for a PE investor to invest in companies competing
especially tricky without a reasonable limitation on the affected with each other.
geographic region and scope of activity. Investors run a high risk
of being unable to enforce such provision against parties or activi- 42 Transaction Terms: General
ties on another continent; these undertakings are therefore usually
underlined by penalty payment obligations of the infringing party.
4.1 What are the major issues impacting the timetable
for transactions in your jurisdiction, including antitrust,
3.6 Are there any legal restrictions or other foreign direct investment and other regulatory approval
requirements that a private equity investor should requirements, disclosure obligations and financing
be aware of in appointing its nominees to boards of issues?
portfolio companies? What are the key potential risks
and liabilities for (i) directors nominated by private These issues will very much depend on the industry in which
equity investors to portfolio company boards, and (ii)
the investment is taking place. In industries like banking, insur-
private equity investors that nominate directors to
boards of portfolio companies?
ance and energy, the transfer of control over a regulated entity is
subject to prior regulatory clearance. These clearance proceed-
ings can easily take from three to six months.
There are standard conditions applicable for all board members Financing is cheap and easily available in Hungary for various
(and management in general, altogether known as “execu- PE transactions, but data protection issues, especially GDPR,
tive officers”) across all companies, regardless of nationality or present frequent headaches for sellers, buyers, and investors
whether they are delegated by an investor or not. These general alike. Portfolio deals involving large databases of personal data,
requirements include being of legal age, having full legal capacity, especially if multiple jurisdictions are involved with various regu-
having no criminal record and not being prohibited by court from latory practices, may affect the scheduling or even the feasibility
being a management member. Special conditions may apply to of deals. Unfortunately, such issues may well emerge during
portfolio companies operating in the financial sector or any other the due diligence process by the time the parties have already
sector that requires professional expertise in certain fields. invested serious resources into preparing the transaction.
Risks and liabilities of board members delegated by an investor Regarding the foreign direct investments (FDI) regime, PE
are the same as any other board members: they must perform investors should be aware of Act LVII of 2018 on Controlling
their management functions representing the company’s inter- Foreign Investments Violating Hungary’s Security Interests,
ests; and they must comply with the internal by-laws as to proc- which entered into force on January 1, 2019 and introduced a
uration, decision-making and other regulated areas. However, national security review for foreign investments in Hungary.
in fact, investor-delegated members usually have less rights and For the purposes of the act, according to the original provisions,
information related to the portfolio company’s actual operation any natural person or legal entity registered in a country outside
compared to the other board members. The information asym- of the EU, European Economic Area (EEA) or Switzerland is
metry affects the position and capability of these board members, considered a foreign investor.
which, in turn, results in higher business risk for the investor. This Investors should also be aware of indirect investments
is usually addressed in the SHAs through provisions granting the of foreign entities, where the foreign entity is the majority
investor-delegated board member immunity to set off the lack of controller of a non-foreign investor entity.
information and actual control over day-to-day operation. Pursuant to the act, a foreign investor may acquire more
The investors (or any other shareholders or third parties) than 25% (or 10% in the case of a listed company) shares in a
themselves have no legal risk or liability related to their delegated company registered in Hungary and operating in certain stra-
board members, as “delegation” is not a legally regulated issue tegic industries if a prenotification is filed to the minister subse-
under Hungarian law. Board members are ultimately appointed quently appointed by the Hungarian Government regarding
by the shareholders regardless of any background deals and the the planned transaction. Strategic industries include the mili-
shareholders are not legally liable for the appointment except tary, financial and public utility and public information security
under extreme circumstances where, for instance, the appoint- sectors and will be specified later by the Hungarian Govern-
ment was in bad faith or qualifies as a crime. ment in separate decrees. The minister issues a written resolu-
tion about the acceptance or the prohibition of the transaction
3.7 How do directors nominated by private equity (the latter only if the transaction violates Hungary’s national
investors deal with actual and potential conflicts of security interests). The minister’s decision can be challenged
interest arising from (i) their relationship with the party before court in an expedited procedure.
nominating them, and (ii) positions as directors of other Non-compliance with the law may result in a fine of HUF
portfolio companies? 1–10 million depending on whether the infringing party is a
legal entity or a natural person.
Depending on the actual transaction, a PE investor may have Another part of the Hungarian FDI regime is the so-called
majority or minority voting rights in the portfolio company. In FDI screening regulation, which is a more ambitious and,

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 Moore Legal Kovács 77

in some respects, broader version of the 2018 FDI screening 4.2 Have there been any discernible trends in
regime. The new regime’s declared goal is to protect the public transaction terms over recent years?
interest related to the security and operability of networks and
equipment, and to the continuity of supply by restricting foreign
Transaction terms vary greatly depending on the parties, negoti-
investments made in relation to Hungarian “strategic compa-
ating skills, sector and the type of transaction (share or asset deal,
nies”. The Act provides that such transactions can only take
VC investment, etc.), but one noticeable trend is the more frequent
effect if they are notified to and acknowledged by the Minister
appearance of foreign start-ups in international pitches and as
of Economic Development beforehand.
targets for Hungarian VC funds, which may be the result of the
For the purposes of the regulation, foreign investors are
start-up friendly environment and the cheap funding available.
private persons and legal entities domiciled outside the EU,
It is a minor observation but worth noting that drag-along
EEA and Switzerland, and other entities where a third-country
and tag-along provisions still form part of the regular set of
shareholder holds majority. Strategic companies are all limited
rights in SHAs despite the fact that, according to the common
liability companies, private companies limited by shares or
experience and understanding of market players, no drag-along
public companies limited by shares seated in Hungary if they
or tag-along right has actually been exercised in Hungary in the
are operating in sectors of strategic importance. The affected
past decade.
23 sectors of strategic importance are established in a separate
decree (Gov. Decree 289/2020. (VI.17.)) and include, among
others, many sectors preferred by PE investors, such as energy, 52 Transaction Terms: Public Acquisitions
transport, tourism, trade, construction, IT, telecommunications
and healthcare. 5.1 What particular features and/or challenges apply
Transactions falling within the scope of the regulation are: to private equity investors involved in public-to-private
(i) any transfer or acquisition of an ownership share in a stra- transactions (and their financing) and how are these
commonly dealt with?
tegic company; (ii) capital increase in a strategic company; (iii)
the transformation, merger or division of a strategic company;
(iv) issuing convertible bonds, bonds with subscription rights or Public-to-private transitions are not common in Hungary due
converting bonds by a strategic company; and (v) establishing to the relatively low number of listed companies. Pursuant to
a right of usufruct over a share or business share of a strategic the Hungarian Capital Market Act, any third party intending to
company provided that: acquire more than 33% (or 25% if no other shareholder has more
a) the foreign investor or an EU/EEA or Switzerland-based than 10% in the company) shares in a listed company, a manda-
investor acquires a controlling majority; tory public takeover bid must be submitted to the Hungarian
b) the foreign investor acquires 10% ownership and the Central Bank as supervisory authority. At the same time, the
investment value exceeds HUF 350 million; takeover must be published and sent to the company as well.
c) the foreign investor acquires 15%, 20% or 50% ownership; Any shareholder may decide to opt in and sell their shares within
or a 30–65-day period. Similar rules apply to voluntary takeover
d) the foreign investor’s ownership in the strategic company bids except for the minimum threshold, which means any third
exceeds 25% as a result of the transaction. party may submit a takeover bid regardless of the volume of
The Minister shall provide reasons for a prohibiting decision affected shares.
and the foreign investor may challenge such prohibiting deci- Special rules apply to a takeover bid exceeding 90% or share-
sion in a non-contentious administrative proceeding based on holders ending up with more than 90% of shares following a
the alleged violation of the substantive rules of the procedure. public takeover bid process. In such cases, the majority share-
The acquiring party can apply for registration of its owner- holder can squeeze out the minority shareholders at the price
ship in a strategic company only after acquiring the confirma- quoted in the takeover bid or the amount of equity capital per
tion of the acknowledgment from the Minister. In the absence share, whichever is higher.
of a confirmation of the acknowledgment of the notification, or Breakthrough provisions may be incorporated into the corpo-
if the Minister passed a prohibiting decision, the acquiring party rate documents of the listed company to lift certain restrictions
shall not be registered in the register of shareholders or members applicable the share transfers.
and may not exercise any rights in the strategic company related
to the shareholding interest in question. 5.2 What deal protections are available to private
The Minister adopts its decision within 30 working days (or equity investors in your jurisdiction in relation to public
45 if the deadline is extended) on the transaction by taking into acquisitions?
account whether:
a) the notification meets the conditions set out in the Act; Public takeover bids are strictly regulated and there is little room
b) a violation or compromise of state interest, public secu- for manoeuvring for PE investors. In their takeover bid, a buyer
rity or public policy of Hungary, or the possibility thereof, may reserve the right to withdraw the takeover bid if, pursuant
arises from the transaction; to the declarations of acceptance, the shares to be acquired are
c) the notifier is controlled, directly or indirectly, by an less than 50% of the total shares of the listed company.
administrative organ of a non-EU State, also including Other contractual arrangements (such as a break fee or
state organs and armed forces, either due to its ownership reverse break fee) between the seller and buyer may be appli-
structure or as a result of significant funding; cable and enforceable but any arrangement affecting the price
d) the notifier was already involved in an activity concerning must be published along with the takeover bid.
security or public policy in an EU Member State; and
e) there is a serious risk that the notifier will perform an illegal
activity or an activity constituting a criminal offence.
The failure to notify a transaction under the regulation
may result in a fine up to two times the value of the relevant
transaction.

Private Equity 2023

78 Hungary

62 Transaction Terms: Private Acquisitions 6.4 To what extent is representation & warranty
insurance used in your jurisdiction? If so, what are the
typical (i) excesses / policy limits, and (ii) carve-outs /
6.1 What consideration structures are typically exclusions from such insurance policies, and what is the
preferred by private equity investors (i) on the sell-side, typical cost of such insurance?
and (ii) on the buy-side, in your jurisdiction?

Hungarian PE transactions including W&I insurance are still

PE sellers in Hungary prefer the locked-box mechanism, which uncommon, although they are slowly but steadily spreading in
enables the fixing of the purchase price at the date of signing of practice. W&I insurance is usually applied in high-value (above
the SHA. This pricing method gives more control to the seller EUR 10 million) commercial real estate deals where the insur-
over the elaboration of the price and requires an in-depth due ance premium moves in the range of 0.8–1.3%, but the market
diligence on the buyer’s side to make proper adjustments before players and the insurance companies are becoming more and
signing the SHA with the fixed price. The advantage for both more prepared for reducing the sell-side transaction risks by
parties is that the price is fixed and known in advance and the sale taking out a W&I policy.
process can be much quicker as no closing accounts are necessary. The Hungarian market is starting to realise the valuable advan-
Following the international trends, the locked-box price setting tages of limiting sell-side risks and having a buy-side policy where
methodology is slowly replacing the post-closing price adjustment the buyer and the insurance company may directly deal with each
method as the most commonly used tool in M&A transactions. other without the necessary involvement of the seller committing
On the buyers’ side, PE investors still prefer the classic buyer- a warranty breach. Buyers also spare the costs and time related
friendly method of price adjustment based on the working to the retention of the purchase price or an escrow agent, as well
capital, debt and cash data of the company. This makes the as post-closing litigation, and instead charge their costs to the
acquisition process longer and requires more effort from both sellers who are still better off with the low premium rates.
parties but gives room for the parties to adjust the price based on W&I insurance also makes risky transactions more attractive
events that occurred between the signing and the closing date. and provides another tool for both sellers and buyers to nego-
tiate the deal.
Usual policy limits include a minimum premium set by most
6.2 What is the typical package of warranties / insurers, a de minimis or basket threshold and a cap on the risks
indemnities offered by (i) a private equity seller, and (ii)
covered by the insurer, as well as the exclusion of such forward-
the management team to a buyer?
looking and post-closing warranties as reaching a certain turn-
over or profit level. Existing risks known by the parties, regu-
The list of seller warranties and indemnifications is typically the latory fines, fraud, corruption, environmental issues and
most heavily negotiated set of terms in M&A transactions, and conditions of real estate are also usually excluded.
PE investors always try to narrow down the scope of warran- Premiums are affected by many conditions, including depth
ties to the most prevalent warranties related to legal title and of due diligence, seller transparency, list and type of warran-
capacity. Met with the buyers’ intentions to widen the sellers’ ties, advisor competency, geographic location, etc. As a rule of
scope of liability, an average warranty and indemnity (W&I) thumb, premiums usually move between 1% and 1.5% of the
list usually includes warranties related to good standing, capi- transaction value but coverage for specific or non-regular risks
talisation, shareholder structure, financial statements, intellec- can be more expensive.
tual property, material contracts, taxes and compliance with the
applicable laws and regulations.
6.5 What limitations will typically apply to the liability
Post-closing indemnity is often limited to a reasonable period of a private equity seller and management team under
of time (two to five years depending on the associated risks, for warranties, covenants, indemnities and undertakings?
example, indemnity for environmental issues usually covers a
longer period while tax indemnities are sometimes excluded).
PE sellers usually negotiate a minimum and maximum threshold
Basket thresholds, which mean a certain aggregated amount
for their liability between 10% and 20%, depending on the type
must be reached before any indemnity is enforced, and caps are
and specific conditions of the given deal and especially the
also regularly applied.
outcome of the due diligence and a time limit of three to five
Seller indemnity is often backed by an escrow typically around
years. Buyers generally try to exclude legal title, capacity and tax
5–15% of the purchase price from which the buyer may claim
warranties from such limitations due to their high importance
the amounts related to any specific breach of the seller’s W&I
and the associated risks.
obligations. In the mega-deals, this classic deal structure is The liability of management teams is either dealt with under
currently being transformed slightly by the increasing trend of the general rules applicable for management liability or capped
taking out W&I insurance for the comfort of all parties. pro rata their shareholding interest.

6.3 What is the typical scope of other covenants, 6.6 Do (i) private equity sellers provide security (e.g.,
undertakings and indemnities provided by a private escrow accounts) for any warranties / liabilities, and
equity seller and its management team to a buyer? (ii) private equity buyers insist on any security for
warranties / liabilities (including any obtained from the
Typical undertakings of a PE seller and its management team management team)?
include non-competition and non-solicitation obligation for a
limited period of time, usually one to three years. PE buyers usually provide bank guarantee, parent guaranty, or an
escrow amount for a pre-determined part of the purchase price.
The retention of a certain part of the purchase price on part of the
buyers is still seen as the best option for buyers but this is becoming
less and less frequent due to the current seller-friendly market.

Private Equity 2023

 Moore Legal Kovács 79

Obtaining securities by PE investors for management liability

is not common in Hungary.
82 Financing

8.1 Please outline the most common sources of debt

6.7 How do private equity buyers typically provide finance used to fund private equity transactions in your
comfort as to the availability of (i) debt finance, and (ii) jurisdiction and provide an overview of the current state
equity finance? What rights of enforcement do sellers of the finance market in your jurisdiction for such debt
typically obtain in the absence of compliance by the (including the syndicated loan market, private credit
buyer (e.g., equity underwrite of debt funding, right to market and the high-yield bond market).
specific performance of obligations under an equity
commitment letter, damages, etc.)?
Small-cap transactions that make out most of the PE transactions
on the Hungarian market are usually financed through equity but
Depending on the value of the transaction, the negotiated deal for mid-cap and large-cap transactions, debt financing is much
and the proportion of equity/debt financing, PE buyers usually more common. Unfortunately, debt financing is becoming
provide a comfort letter or a commitment letter on the available more expensive due to the termination of the Hungarian Central
equity financing that is usually sufficient for buyers on the rela- Bank’s policy of keeping interest rates low, which has been the
tively small Hungarian market. principle for the past several years.
As to debt financing, a confirmation letter or mandatory, but The syndicated loan market in Hungary is relatively small, but
conditional, financing offer from banks on the availability of a it is certainly available and there are a few syndicated loans every
loan or line of credit, is usually required. year with varying amounts. In 2022, the largest syndicated loan
in the market was USD 200 million.
6.8 Are reverse break fees prevalent in private equity The private credit market is expected to be on the rise as a
transactions to limit private equity buyers’ exposure? If new amendment to Act CCXXXVII of 2013 on Credit Insti-
so, what terms are typical? tutions and Financial Enterprises creates the opportunity of
granting convertible loans on a limited basis within the meaning
Reverse break fees on the buy-side (and break fees on the sell- of the act on SMEs and the support of their development up
side) usually do not appear in Hungarian M&A PE deals. to a maximum of 15 times in a calendar year, provided that the
aggregate amount of the loans granted does not exceed HUF
72 Transaction Terms: IPOs 500 million in the case of natural persons and HUF 2 billion
in the case of legal persons. If one happens to make a loan that
violates these rules, there is a significant risk that the Hungarian
7.1 What particular features and/or challenges should
Central Bank could deem this as non-licensed lending activity,
a private equity seller be aware of in considering an IPO
exit?
which would violate the licensing requirements and would mean
certain negative consequences such as significant fines being
imposed on the lending entity.
Initial public offering (IPO) exits may provide higher returns for Hungary’s bond market is dominated by government bonds
PE investors than other exit routes (for example, public equity and corporate bond issuance is scarce.
markets may valuate the company higher than regular buyers)
but they also involve several limitations relating to the exit. IPO
processes are also costly and time-consuming efforts and inves- 8.2 Are there any relevant legal requirements or
tors looking for quick cash may eventually pursue other exits restrictions impacting the nature or structure of the debt
financing (or any particular type of debt financing) of
rather than waiting and, even then, the outcome may be uncertain.
private equity transactions?
It must also be noted that IPO exits are not a common occur-
rence in Hungary.
No special legal requirements or restrictions apply to debt
financing of PE transactions.
7.2 What customary lock-ups would be imposed on
private equity sellers on an IPO exit?
8.3 What recent trends have there been in the debt-
financing market in your jurisdiction?
There is no mandatory lock-up period in Hungary for an investor
before going public. Also, although IPO exits are not a common
occurrence in Hungary, in theory, PE shareholders, including Banks operating in Hungary are still offering attractive financing
angel investors, venture capitalists and other entities investing opportunities for PE transactions; however, the interest rates
in the company pre-IPO would be required to comply with a have been on a steep rise in recent months as the Hungarian
lock-up period of three to six months after going public, to keep Central Bank terminated its long-lasting policy to keep interest
the stock prices high. rates low. This factor is mainly driven by the Russian-Ukrainian
war and is expected to be the new principle.

7.3 Do private equity sellers generally pursue a dual-

track exit process? If so, (i) how late in the process are
92 Alternative Liquidity Solutions
private equity sellers continuing to run the dual-track,
and (ii) were more dual-track deals ultimately realised 9.1 How prevalent is the use of continuation fund
through a sale or IPO? vehicles or GP-led secondary transactions as a deal type
in your jurisdiction?
As noted above, such exit strategies, where the PE seller is pursuing
both an IPO and a potential M&A exit, are not as common in Although continuation fund vehicles and GP-led secondary
Hungary as in other European countries or in the United States. transactions are theoretically possible in Hungary, there is

Private Equity 2023

80 Hungary

currently no significant market practice in this field. The transfer Rolling over the investment into a new company structure
of assets between funds is possible, but rarely used and the general does not involve tax considerations if the volume of shares
purpose of such transfers is not to perform a GP-led secondary remains the same.
transaction, but to perform a general exit of the investment.
10.4 Have there been any significant changes in tax
9.2 Are there any particular legal requirements or legislation or the practices of tax authorities (including
restrictions impacting their use? in relation to tax rulings or clearances) impacting private
equity investors, management teams or private equity
transactions and are any anticipated?
There are no additional legal requirements and restrictions, nor
case law regarding continuation funds or GP-led secondary
transactions, due to the fact that these kinds of deals are not A new Act on Social Contribution Tax entered into force in
known to Hungarian market practice. 2019. Since 2019, healthcare contribution has been replaced
One applicable (but not specific) requirement is that, during by social contribution. Under the previous regulation, a 14%
the winding-up procedure of the fund, assets in the portfolio of rate was applied for private individuals on their capital gains
the venture capital and private equity fund are sold within 18 and dividend income, which was increased to 19.5% but later
months. The time limit set for the sale may be extended by three decreased several times and is currently 13%. The current tax
months in the case of financial assets and by six months in the cap on social contribution payment is currently HUF 723,840
case of real estate and other assets, subject to the approval of the for the year 2023.
Hungarian Central Bank for the benefit of investors.
112 Legal and Regulatory Matters
102 Tax Matters
11.1 Have there been any significant legal and/or
regulatory developments over recent years impacting
10.1 What are the key tax considerations for private
private equity investors or transactions and are any
equity investors and transactions in your jurisdiction?
anticipated?
Are off-shore structures common?

In December 2016, the legislator introduced a new regula-

Offshore structures are becoming less preferred due to the
tory package for the establishment of PE funds, which enables
strict anti-money laundering rules of the EU. Ultimate Benefi-
an easier set-up of funds and fund managers. Unfortunately,
cial Owners (UBOs) of contracting parties must be identified in
the laws relating to PE and VC funds are still not unequiv-
various phases of transactions by the parties’ legal and financial
ocal in certain aspects, the application thereof is not clear and
advisors, which makes offshore companies with non-transparent
the Hungarian regulator’s ever-shifting practice makes the
owners less attractive. In addition, the anti-money laundering
Hungarian market sometimes hard for market operators and
legislation has recently undergone a significant change in Hungary
advisors to work in.
according to Act XLIII of 2021, pursuant to which, inter alia, the
organisations that fall within the scope of the act are obliged to
provide data on their beneficial owner(s), which shall be uploaded 11.2 Are private equity investors or particular
to the newly established register of beneficial owners kept by the transactions subject to enhanced regulatory scrutiny in
National Tax and Customs Administration of Hungary. your jurisdiction (e.g., on national security grounds)?

10.2 What are the key tax-efficient arrangements that National security consideration as well as anti-fraud, anti-money
are typically considered by management teams in private laundering and anti-corruption laws do not distinguish between
equity acquisitions (such as growth shares, incentive PE investments but certain sectors, especially the financial
shares, deferred / vesting arrangements)? sector, are under strict scrutiny by the competent authorities.

Management participation is not that common in Hungary, but 11.3 Are impact investments subject to any additional
whether the sale of shares under a management participation legal or regulatory requirements?
qualifies for a tax-exempt capital gain is a case-by-case decision.
Although impact investments make up only a small part of the
10.3 What are the key tax considerations for total investment value in Hungary, Hungary is still ahead of its
management teams that are selling and/or rolling-over neighbours in this field. Hungary was the first country in the
part of their investment into a new acquisition structure? CEE region to set up a social impact investment fund in 2018.
The general market expectations are that impact investments
Since the dividend and capital gains tax form an integral part of (including ESG investments) are going to rise in the near future;
the personal income tax regime, such kinds of income paid to a however, market players must ensure that the real impact invest-
non-resident individual may be subject to personal income tax at ments can be fully distinguished from investments and invest-
15%, unless the rate is reduced under the applicable tax treaty. ment funds that only use “impact” as a marketing catch to
Private person founders or management teams resident in attract investors.
Hungary selling their investment should be aware of the current Currently, in Hungary, there are no additional legal require-
15% income tax and 13% social contribution (szociális hozzá- ments that are specific to impact investments. Certain entities
járulási adó) applicable to natural persons realising any income of public interest are obliged to disclose a non-financial state-
based on the actual profit they make. ment in its annual report containing information on: the enti-
In the case of foreign investors, the relevant Double Tax Treaty ty’s policies; the faced risks and risk management procedures
(DTT) can determine tax exemptions or tax relief opportunities. regarding environmental, social and employment issues; respect
for human rights; and the fight against corruption and bribery,

Private Equity 2023

 Moore Legal Kovács 81

to the extent necessary for an understanding of the development, shareholder is liable for their activities as a shareholder to the
performance, position and impact of the company’s activities. same extent. The extent of liability is predominantly established
by the company form in which the portfolio company operates.
Due to the limited liability nature of the most common company
11.4 How detailed is the legal due diligence (including
compliance) conducted by private equity investors prior forms (kft. and zrt.) in PE transactions, the shareholders are, in
to any acquisitions (e.g., typical timeframes, materiality, general, liable for the obligations of the portfolio company only
scope, etc.)? to the extent of their own capital contribution. Under extreme
circumstances, for example, when a shareholder deliberately
abuses its limited liability, the limited liability is not applicable but
Legal due diligence is confined mostly to a red-flag type of
in practice such investor behaviour is basically unprecedented.
review in smaller transactions, which concentrates on the iden-
Under Hungarian law, a portfolio company will be liable for
tification of the most prevalent legal issues (corporate structure,
the liabilities of another portfolio company only if there is a
lawful operation, capacity of management, significant contracts,
direct link between the unlawful conduct of these companies
employment issues, intellectual property and real estate prop-
either through a contract or market behaviour, for example, in
erty). Such due diligences usually take between two and four
the case of an illegal merger. Under normal circumstances all
weeks depending on the availability and quality of the data room
portfolio companies, even with overlapping shareholders, will
and the maturity phase of the portfolio company.
have a stand-alone liability for their own obligations.

11.5 Has anti-bribery or anti-corruption legislation 122 Other Useful Facts

impacted private equity investment and/or investors’
approach to private equity transactions (e.g., diligence,
contractual protection, etc.)? 12.1 What other factors commonly give rise to concerns
for private equity investors in your jurisdiction or should
such investors otherwise be aware of in considering an
In line with international and EU trends, the Hungarian anti- investment in your jurisdiction?
bribery and anti-corruption laws have been becoming stricter in
recent years, but we are not aware of any shift in the investors
Hungary is as an attractive market for PE investments in the region,
approach to PE transactions.
as reflected in the relevant market statistics mentioned above.
Anti-bribery and anti-corruption regulations are stricter in
Although the main factors that PE investors should consider
various sectors (finance, government) so market players oper-
when planning to invest in Hungary have already been discussed
ating within these fields are more affected if involved in PE
in the previous topics of this chapter, the frequent changes of
transactions and compliance is usually checked during the legal
the transitional rules adopted with regard to the pandemic,
and financial due-diligence process.
Russia’s war on Ukraine or the energy crisis might pose an addi-
tional risk to investors.
11.6 Are there any circumstances in which: (i) a private
equity investor may be held liable for the liabilities of
the underlying portfolio companies (including due to
breach of applicable laws by the portfolio companies);
and (ii) one portfolio company may be held liable for the
liabilities of another portfolio company?

The Hungarian law does not distinguish between a PE investor

shareholder and any other shareholder, which means every

Private Equity 2023

82 Hungary

Dr. Márton Kovács worked in the real estate and litigation practice group of the Budapest office of Baker & McKenzie from 2003–2006. In
2006, he founded his own firm and, from January 2017, became a founding partner of HBK Partners, which quickly became one of the leading
law firms in Hungary in the fields of capital market, M&A and banking & finance. In 2021, HBK Partners joined Moore Global and became
Moore Legal Kovács, with Márton as the managing partner. Although his professional experience covers mainly real estate and M&A, he is
also proficient in capital market transactions, having led his team in all three public takeovers at the Budapest Stock Exchange in 2017 and
2018, and the listing of Hungary’s fourth largest commercial bank in 2019. Further, he has gained unique experience in hotel law, representing
various investors vis-à-vis global and local hotel operator companies. Márton is also a lecturer in M&A courses at the Budapest Institute of
Banking (BIB) and holds workshops for various VC funds and start-up companies.

Moore Legal Kovács Tel: +36 1 610 4440

Vörösmarty tér 5., 2nd floor Email: marton.kovacs@moorelegal.hu
1051 Budapest URL: www.moorelegal.hu
Hungary

Dr. Áron Kanti is a senior associate in the Corporate M&A and Capital Market practice at Moore Legal Kovács. He mainly focuses on M&A
and capital investment transactions alongside providing legal advice in regulatory matters of financial institutions and investment funds.
Áron also participated in numerous VC and PE investment transactions, acting as a legal advisor in relation to small, medium, or large target
enterprises. He also gained valuable experience on the legal aspects of European state aid law and the regulatory environment of collective
investment trusts and fund managers.

Moore Legal Kovács Tel: +36 1 610 4440

Vörösmarty tér 5., 2nd floor Email: aron.kanti@moorelegal.hu
1051 Budapest URL: www.moorelegal.hu
Hungary

Dr. Zsigmond Tóth is an associate in the Corporate M&A and Capital Market practice at Moore Legal Kovács with a primary focus on M&A
transactions. He participated in several high-value deals in the Hungarian market. Besides M&A transactions, Zsigmond gained in-depth knowl-
edge and experience in energy law from both a transactional and regulatory perspective, which makes him able to provide comprehensive legal
advice in this field. He also advises international and domestic clients in various fields of law such as employment, finance and insolvency law.

Moore Legal Kovács Tel: +36 1 610 4440

Vörösmarty tér 5., 2nd floor Email: zsigmond.toth@moorelegal.hu
1051 Budapest URL: www.moorelegal.hu
Hungary

Moore Legal Kovács is a full service, independent Hungarian law firm oper-
ating in partnership with Moore Hungary and Moore Global. As a leading
Hungarian law firm, Moore Legal Kovács is focused on providing premium
legal services to Hungarian and international financial institutions, invest-
ment funds, corporations, and private investors. With Moore Hungary and
Moore Global, we are able to provide comprehensive and a consistent
quality service to our clients looking for a multi-territorial expertise and an
interdisciplinary approach.
In our work, we strive to find solutions that comply with international stand-
ards yet are tailor-made to the peculiarities of the Hungarian legal and busi-
ness environment. Many of our lawyers are featured as ranked practitioners
and recommended lawyers by the leading legal ranking organisations.
www.moorelegal.hu

Private Equity 2023

 Chapter 11 83

India

India
Iqbal Khan

Shardul Amarchand Mangaldas & Co. Devika Menon

Some of the key inhibiting factors are:

12 Overview (i) certain restrictive regulatory approval requirements for
FDI from bordering countries;
1.1 What are the most common types of private equity (ii) certain tax fair market value related changes that may
transactions in your jurisdiction? What is the current
result in additional tax liability for targets; and
state of the market for these transactions?
(iii) the current slowdown in IPO related PE exits.

Similar to the west, the most common type of private equity

transactions that are prevalent in India are minority, growth and 1.3 Are you seeing any types of investors other
than traditional private equity firms executing private
buyout transactions.
equity-style transactions in your jurisdiction? If so,
Further, certain sectors, such as healthcare (hospitals and please explain which investors, and briefly identify any
pharma), infrastructure (especially, green/clean energy) and significant points of difference between the deal terms
technology, have continued their dominance, and will continue offered, or approach taken, by this type of investor and
to remain every investor’s favourite sectors over the course of that of traditional private equity firms.
the next 12–24 months at the very least.
In addition, impact investments have gained significant trac- Lately, the impact investment funds, sovereign wealth funds
tion, and many funds have floated separate impact investment (“SWFs”) and Indian family offices are executing PE-style trans-
affiliates with such investment focus. actions. Indian companies, at times, favour SWFs over PE
Although due to the significant rise in inflation and the investments, given the long investment horizon and the absence
resulting increase in global interest rates, private equity lever- of a short-term time-bound return of capital related outlook. The
aged buy-out transactions have seen a significant decline in the holding period results in subtle differences in the structuring of
west, India has demonstrated resilience for private equity trans- transactions, governance and exit rights involving SWFs.
actions for three primary reasons: first, because it has always India continues to impose capital controls and prohibition on
been a straight equity investment jurisdiction with only a few assured returns for FDI and, given the longer holding period for
funds using structured overseas intermediary lending struc-
SWFs and such restrictions not being applicable to Indian family
tures; second, because India is now looked at as a real alternative
offices, there is increased flexibility to structure such transac-
to China based on, among other things, preferable regulatory
tions and growing preference for such investors. In addition,
environment, depth of investment opportunities and proven
it is also now a common practice for SWFs to co-invest directly
exit/return history; and third, a lot of private equity funds have
in the target to have direct access (as compared to tiered), indi-
significant dry powder with none or limited country alloca-
vidual (as compared to derivative or collective) governance and
tion limits, and therefore, significant allocations have now been
exit rights, and better return economics.
diverted to India.
As per the database of the Sovereign Wealth Fund Insti-
tute, the direct investment by SWFs in India increased from
1.2 What are the most significant factors currently USD 3.797 billion in 2021 to USD 6.712 billion in 2022. India
encouraging or inhibiting private equity transactions in witnessed some notable investments by SWFs in 2022, which
your jurisdiction? included Abu Dhabi-based Mubadala Investment Company’s
investment of INR 40 billion along with BlackRock Real Assets
In addition to those discussed in question 1.1 above, the in Tata Power Renewable Energy Limited and Qatar Invest-
following factors encourage the ongoing investment trend: ment Authority’s investment of USD 1.5 billion in Bodhi Tree
(i) stable political regime and facilitative investment environ- Systems.
ment, including continued relaxations in foreign exchange Similarly, impact investment funds focus substantially more
regulations governing inbound investments; on specific environmental, social and governance (“ESG”)
(ii) increased enforceability of investment agreements and diligence, extensive representations, warranties and undertak-
effective bankruptcy regime; and ings with respect to ESG as a part of deal documentation, with
(iii) the exit aspirations and diversification mindset of the first- continued focus on best ESG practices after the investment and
and second-generation promoters, respectively. on certain investment sectors, such as clean/green energy infra-
structure transactions.

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84 India

22 Structuring Matters 2.5 In relation to management equity, what is the

typical range of equity allocated to the management, and
what are the typical vesting and compulsory acquisition
2.1 What are the most common acquisition structures provisions?
adopted for private equity transactions in your
jurisdiction?
Whilst not mandatory, the management is typically allocated
equity in the form of ESOPs or warrants. Promoters are not
PE transactions are typically structured as under or through one permitted to have ESOPs. The ESOP vesting or conversion
or more of the following modes: conditions are agreed on a case-to-case basis and usually linked
(i) acquisition vehicles: through the traditional route of to performance/exit conditions. Indian law does not contain
investing directly, through special purpose vehicles any compulsory acquisition provisions.
(“SPVs”) incorporated in tax and investor-friendly jurisdic-
tions, or trusts registered as alternative investment funds;
(ii) investment routes: as either FDI, foreign portfolio invest- 2.6 For what reasons is a management equity holder
ments (“FPI”) or foreign venture capital investments; usually treated as a good leaver or a bad leaver in your
(iii) investment instruments: by way of equity or preference jurisdiction?
shares, shares with differential voting rights, or partly paid
shares and/or other equity-linked convertible instruments A good leaver is characteristically someone who leaves by providing
(such as warrants, compulsorily convertible preference prior notice, with reasonable or without cause, and where termi-
shares or compulsorily convertible debentures); and nation is undertaken in compliance with the terms of his/her
(iv) acquisition structures: by way of share acquisition, busi- employment arrangement. Contrarily, a bad leaver leaves without
ness transfer, asset purchase and/or merger, demerger or notice and/or for cause.
amalgamations. Shares of a public listed entity can also be Given that it may be difficult to classify persons as good leavers/
acquired by triggering a voluntary offer/mandatory tender bad leavers at the outset, it is common to give the board of direc-
offer (“MTO”). tors (the “Board”) the discretion to make this determination and/
or capture such definitions in the relevant employment agreements.
2.2 What are the main drivers for these acquisition
structures? 32 Governance Matters

India continues to be a regulation-heavy jurisdiction, regu- 3.1 What are the typical governance arrangements
for private equity portfolio companies? Are such
lating entry as well as exit for foreign investors. Accordingly,
arrangements required to be made publicly available in
structuring to ensure compliance with Indian regulations while your jurisdiction?
achieving investment objectives is the main driver. In addition,
the key structuring considerations are: (i) tax considerations;
(ii) return expectations; (iii) investment horizon; and (iv) any Portfolio companies are governed by the terms of the share-
specific demands or conditions from the management team or holders’ agreement, which typically provide the following
sellers (in secondary transactions). governance arrangements:
(i) appointment of the agreed number of nominees on the
Board;
2.3 How is the equity commonly structured in private (ii) mandatory participation of the nominees to form quorum
equity transactions in your jurisdiction (including in meetings of the Board and shareholders;
institutional, management and carried interests)?
(iii) affirmative veto rights on identified matters;
(iv) information, inspection and audit rights; and
It is common for private companies in India to have several (v) policies and procedures to be implemented by the port-
classes of equity or compulsorily convertible instruments, which folio companies.
can eventually be converted into equity securities. The classes These arrangements are not required to be made public;
of securities progressively decrease from private companies to however, these are usually included in the articles of association
listed companies. Equity for management personnel (except of the relevant portfolio company for the purposes of enforcea-
promoters) is typically provided in the form of ordinary equity bility, and such articles of association are publicly available.
shares, employee stock options (“ESOPs”), warrants (perfor-
mance/exit linked), or convertible instruments. Carried inter-
3.2 Do private equity investors and/or their director
ests are typically structured upstairs (i.e., to offshore entities)
nominees typically enjoy veto rights over major
and sideways (i.e., to the investing SPV). corporate actions (such as acquisitions and disposals,
business plans, related party transactions, etc.)? If a
2.4 If a private equity investor is taking a minority private equity investor takes a minority position, what
position, are there different structuring considerations? veto rights would they typically enjoy?

Minority transactions are structured to protect against the Yes, typically PE investors and/or their director nominees are
erosion of investment value and dilution of stake, and to facil- contractually entitled to veto rights at Board and shareholder
itate exits along with the majority stakeholders. Such protec- meetings, as agreed under the shareholders’ agreement. These
tions are classically structured as limited affirmative veto rights, include, among others, changes to the business plan, acquisi-
anti-dilution rights, liquidation preference, information and tions and divestitures, financing and capital structure-related
audit rights, observer rights and certain negotiated transfer matters, entry into strategic partnerships, etc.
restrictions vis-à-vis other shareholders. Depending on the minority position, the list of the veto rights
may vary. Minority investors typically negotiate limited veto

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 Shardul Amarchand Mangaldas & Co. 85

rights on critical matters such as, among others, changes to director on the Board. Further, companies law also prescribes
constitution or capital structure, matters regarding liquidation, requirements regarding resident directors, women directors,
alteration of constitutional documents affecting their rights, etc. independent directors and limits on the maximum number of
In addition, under law, investors also have a statutory veto on directorships that can be held by a person. Furthermore, the
all matters requiring a special resolution of shareholders if they government has issued a notification that requires mandatory
hold more than a certain percentage of the equity capital (gener- security clearance of proposed directors in Indian companies
ally 25%). prior to being appointed, if such person is a citizen of any of
India’s land-bordering nations. These conditions are generally
applicable and are not specific to PE investor nominees.
3.3 Are there any limitations on the effectiveness of
Directors, including PE nominees, are liable for statutory
veto arrangements: (i) at the shareholder level; and (ii) at
the director nominee level? If so, how are these typically breaches, especially where they can be shown to have breached
addressed? their fiduciary duties or where they had actual knowledge of the
breach. To manage liability, PE nominee directors are usually
appointed in a non-executive capacity, as they are not employed
There are no such limitations. However, investor nominees, like by the company or involved in the day-to-day affairs. As for
any other directors on the Board, have certain fiduciary duties, investors, there is no apparent risk or liability (other than repu-
including to: (i) act in good faith to promote the company’s tational liability) as India maintains separate legal entity of a
objects; (ii) act in the best interest of the company, its employees, company and its shareholders, until there is a reason for courts
shareholders and the community; (iii) not be involved in any to lift the corporate veil.
situation with a direct or indirect conflict of interest; (iv) exer-
cise due and reasonable care and independent judgment; and (v)
not secure any undue gain or advantage. 3.7 How do directors nominated by private equity
investors deal with actual and potential conflicts of
interest arising from (i) their relationship with the party
3.4 Are there any duties owed by a private equity nominating them, and (ii) positions as directors of other
investor to minority shareholders such as management portfolio companies?
shareholders (or vice versa)? If so, how are these
typically addressed?
In an actual or potential conflict of interest situation covered by
Indian law, the law controls recusal and non-voting by interested
Indian law does not prescribe any specific duties for PE investors directors. In other cases, a director may recuse on grounds of
to other shareholders (including minority shareholders). However, propriety, and require the shareholder to vote on such matters.
qualifying minority shareholders have the right to approach a Matters related to conflict on account of portfolio companies
special tribunal in case of oppression or mismanagement. are handled through contracts.

3.5 Are there any limitations or restrictions on the 42 Transaction Terms: General
contents or enforceability of shareholder agreements
(including (i) governing law and jurisdiction, and (ii)
4.1 What are the major issues impacting the timetable
non-compete and non-solicit provisions)?
for transactions in your jurisdiction, including antitrust,
foreign direct investment and other regulatory approval
While Indian law does not contain any express limitation or requirements, disclosure obligations and financing
restriction on contents or enforceability, parties typically opt for issues?
Indian law to be the law governing the substantial obligations set
out under the shareholders’ agreements, to facilitate enforcement The time taken for transactions primarily depends on the
of provisions in respect of, or vis-à-vis, the company. However, nature of the investee (listed/unlisted) and the mode of acquisi-
even where a shareholders’ agreement is governed by foreign law, tion. Acquisition of private companies is comparatively quicker
in a dispute scenario, the arbitral tribunal (as arbitration is the compared to that of public companies, followed by acquisitions
preferred mode for dispute resolution in PE transactions) is likely through schemes.
to consider mandatory legal provisions of Indian law in respect Some of the key issues that commonly impact the timetable
of provisions concerning the Indian company, failing which the for transactions in Indian deals are:
enforceability of the arbitral award in India may be affected.    (i) the timelines for obtaining regulatory approvals (from
Reasonable restrictions (in terms of period and scope) of the Government of India (in case of investments from
non-compete and non-solicit covenants on management and key bordering countries or from entities with beneficial
employees are common and generally enforceable. However, owners from bordering countries), the Reserve Bank
non-compete provisions post-cessation of employment are of India (“RBI”), the Securities and Exchange Board of
contentious and may not be enforceable under Indian law. India (“SEBI”), the Competition Commission of India
and other sector regulators, as the case may be) vary on a
case-to-case basis and are often unpredictable;
3.6 Are there any legal restrictions or other
requirements that a private equity investor should (ii) the timelines for obtaining approvals or sanctions that
be aware of in appointing its nominees to boards of involve courts or tribunals in India may take inordinately
portfolio companies? What are the key potential risks long; and
and liabilities for (i) directors nominated by private (iii) often, on the basis of the due diligence conducted, the
equity investors to portfolio company boards, and (ii) seller is required to obtain contractual consents from
private equity investors that nominate directors to third parties prior to consummation of the transaction,
boards of portfolio companies? and buyers include measures for the investee company
to rectify past non-compliances/regulatory lapses as
Indian companies law prescribes certain qualifications and pre-completion conditions to the transaction, all of which
conditions to be fulfilled prior to a person being appointed as a have an impact on the timetable.

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86 India

4.2 Have there been any discernible trends in On the sell-side, investors may negotiate the amount of
transaction terms over recent years? consideration payable, provided that the price complies with the
FDI regulations on pricing guidelines. Non-cash consideration
(such as a share swap) is permitted under Indian law; however,
As PE in India continues to develop, transaction terms have
the income tax authorities have the authority to determine its
gradually evolved and become standardised in various aspects.
fair value, which may be deemed higher than the agreed consid-
For instance, warranty coverage, indemnity caps and survival
eration and increase the seller’s tax liability. On the buy-side,
periods, scope of veto rights, etc. are well recognised. There is
investors may opt to defer payment of part of their considera-
a growing trend of investors having equal or, in certain cases,
tion. Foreign investors are permitted to defer up to 25% of the
even greater management rights than the founders. There is
total consideration, for a maximum period of 18 months.
an increased focus on thorough due diligence for every transac-
tion, which often includes specific ESG, anti-bribery and anti-
money laundering (“ABC/AML”) and tax diligence. Further, 6.2 What is the typical package of warranties /
trends such as break fee and reverse break fee provisions indemnities offered by (i) a private equity seller, and (ii)
are also starting to gain prominence, although these largely the management team to a buyer?
remain untested from a regulatory perspective. Payment struc-
tures such as locked-box mechanisms, deferred payments and PE sellers generally provide limited representations and warran-
escrow arrangements are also gaining popularity, as well as ties to the buyer in respect of their title to shares, authority,
the increasing use of ‘hell or high water’ clauses as a remedy to capacity and solvency. Indemnities are, accordingly, limited to
complete mega mergers. breach of these representations and warranties only. In addi-
tion, PE sellers may agree to a specific indemnity for identified
52 Transaction Terms: Public Acquisitions breaches, with negotiated terms on quantum, trigger thresholds,
etc. PE sellers are generally keen on hassle-free exits, and do not
5.1 What particular features and/or challenges apply typically provide any business warranties on the grounds that
to private equity investors involved in public-to-private they were financial investors and not in active management.
transactions (and their financing) and how are these PE buyers on the other hand, customarily seek comprehen-
commonly dealt with? sive warranties (comprising of customary fundamental warran-
ties, business warranties and tax warranties), with recourse to
Public-to-private or (take-private) transactions are difficult to general and specific indemnities from the management team
achieve on account of: (i) the requirement that the majority and the sellers upon breach. These include, the scope of warran-
of public shareholders must approve such transaction; and (ii) ties, as well as limitations and exclusions for indemnities, which
the price must be discovered through a reverse book-building are often heavily negotiated. Use of representations and warran-
process that often results in high price discovery. Typically, such ties insurance (“RWI”) policies for acquisition and exit transac-
transactions are attempted only when the investor is willing tions is now more common than it used to be a few years ago.
to pay a high premium, and financing is arranged offshore.
Take-private transactions, completed through a court-approved 6.3 What is the typical scope of other covenants,
insolvency, are relatively easier and an exception, but this typi- undertakings and indemnities provided by a private
cally only suits special situation funds and may also take a long equity seller and its management team to a buyer?
time to consummate.
PE sellers typically agree to provide:
5.2 What deal protections are available to private (i) standstill covenants in terms of conduct and state of oper-
equity investors in your jurisdiction in relation to public ations of the investee company during the period from
acquisitions? signing to completion;
(ii) undertakings for agreed-upon actions for pre-comple-
Indian law is premised on the protection of interests of public tion (fulfilment of conditions precedent), completion and
shareholders and provides little protection to investors in post-completion (if any); and
public acquisitions. However, stringent insider trading norms (iii) indemnities for breach of limited warranties and material
and continual disclosure norms protect the investors as well. covenants.
Further, for deal-protection, PE investors are known to contrac-
tually bind the investee to covenants on exclusivity, break fees, 6.4 To what extent is representation & warranty
etc. Additionally, listed companies are mandated to make insurance used in your jurisdiction? If so, what are the
disclosure of material facts and events, which provides a certain typical (i) excesses / policy limits, and (ii) carve-outs /
degree of comfort to PE investors. exclusions from such insurance policies, and what is the
typical cost of such insurance?

62 Transaction Terms: Private Acquisitions

RWI is rapidly gaining favour in transactions with PE sellers and
6.1 What consideration structures are typically
is now more common than it used to be a few years ago. RWI
preferred by private equity investors (i) on the sell-side, policies are generally co-terminus with the survival period for
and (ii) on the buy-side, in your jurisdiction? claims. Liability limits are usually set out for the primary insurer,
beyond which there is a tower of excess insurance with multiple
insurers. Standard exclusions are insurer-specific, but generally
Cash (paid through banking channels) is the most prevalent
include: issues known to the investor; estimates or projections;
form of consideration, both on the sell-side and buy-side. This
purchase price adjustments; consequential losses; uninsurable and
is primarily due to legal limitations surrounding the form and
criminal fines; stamp duty-related non-compliances; secondary
structuring of consideration involving foreign investors.
tax liabilities; anti-bribery and corruption; and punitive damages,

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 Shardul Amarchand Mangaldas & Co. 87

etc. Lately, COVID-19 is also being included. Further, the 6.8 Are reverse break fees prevalent in private equity
insurer may seek specific exclusions depending on the nature of transactions to limit private equity buyers’ exposure? If
the investee’s business and specifics of the transaction. Although so, what terms are typical?
the premium will depend on the transaction risk, as a general
rule, it is in the range of 3–8% of the policy limit. Addition- There are no provisions for payment of reverse break fees under
ally, parties must bear a specified ‘retention amount’ before the law; however, this can be agreed contractually. Typically, the
payment obligation under the policy starts, which is generally a terms include those in respect of quantum, trigger for payment,
specified percentage of the investee’s enterprise value. mode of payment, etc. Due to the absence of an express legal
regime, effecting payment of reverse break fees from a resident
6.5 What limitations will typically apply to the liability to a non-resident may face regulatory hurdles, such as obtaining
of a private equity seller and management team under RBI approval prior to payment.
warranties, covenants, indemnities and undertakings?
72 Transaction Terms: IPOs
For competitive auctions, we have seen RWI policies as the
sole recourse for buyers. For those transactions that do not 7.1 What particular features and/or challenges should
include such policies, the most common limitation concerns the a private equity seller be aware of in considering an IPO
quantum of liability and the claim periods. Parties negotiate exit?
and set out the thresholds for de minimis and aggregate liability.
The maximum period within which indemnity claims can be (i) The lock in period of pre-IPO securities held by promoters
brought is also set out and varies for each kind of warranty. and non-promoters is 18 months and six months, respec-
Parties also agree to standard principles of ‘no double-recovery’ tively, from the date of allotment and subject to further
and a duty to mitigate on the indemnified party. Other accept- conditionalities.
able exclusions are: contingent liabilities; tax liabilities (arising (ii) Other than the board nomination right, no special rights
after completion); liabilities on account of change in law (after such as affirmative voting matters, are permitted to
completion); voluntary acts or omissions by the indemnified; or continue post-listing.
loss otherwise compensated.

7.2 What customary lock-ups would be imposed on

6.6 Do (i) private equity sellers provide security (e.g., private equity sellers on an IPO exit?
escrow accounts) for any warranties / liabilities, and
(ii) private equity buyers insist on any security for
warranties / liabilities (including any obtained from the All pre-IPO shareholders (other than promoters) are statutorily
management team)? locked-in for a period of six months from the IPO.

Typically, PE sellers or buyers do not provide any security for 7.3 Do private equity sellers generally pursue a dual-
warranties/liabilities. Lately, buyers are seeking RWI in acquisi- track exit process? If so, (i) how late in the process are
tions involving PE sellers as a substitute for escrow. PE buyers, private equity sellers continuing to run the dual-track,
in some cases, may defer payment of a part of their consideration and (ii) were more dual-track deals ultimately realised
amount. This in turn acts as a security against breach of warran- through a sale or IPO?
ties/liabilities by the sellers. We have also seen sophisticated
acquirers requiring a backstop from private equity sellers exiting In the financial year 2022–23, approximately INR 52,116 crores
through an SPV in certain situations and even negotiate for equity were raised by 37 Indian companies, through IPOs. While this
commitment letters (“ECL”) from such private equity sellers. is a dip since the numbers in 2021–22, the first quarter of 2023
witnessed a 33% increase in the number of IPOs in India as
compared to the same period last year. Therefore, IPOs have
6.7 How do private equity buyers typically provide
comfort as to the availability of (i) debt finance, and (ii)
been the preferred exit path; although many deals nowadays are
equity finance? What rights of enforcement do sellers structured as dual-track deals, benchmarking purposes prior to
typically obtain in the absence of compliance by the the IPO run-up and/or a full-exit are preferred by PE investors.
buyer (e.g., equity underwrite of debt funding, right to
specific performance of obligations under an equity 82 Financing
commitment letter, damages, etc.)?

8.1 Please outline the most common sources of debt

Leveraged buyout transactions are generally prohibited in India, finance used to fund private equity transactions in your
unless such leverage is structured overseas, and therefore most jurisdiction and provide an overview of the current state
transactions are structured without any financing outs and as of the finance market in your jurisdiction for such debt
straight equity investments. (including the syndicated loan market, private credit
There is no general statutory obligation on PE buyers in market and the high-yield bond market).
private acquisitions to provide any financing comfort. Sellers
can contractually negotiate and agree on their enforcement rights. Funding through privately placed non-convertible debentures
In most cases, buyers provide fundamental warranties regarding (“NCDs”) is a popular form of debt financing. Funds can
sufficiency of funds, and provisions for funding obligations are be raised through FPIs who can subscribe to NCDs issued by
simultaneous with the seller’s obligation to transfer securities. Indian companies as there is no cap on interest payout and can
Some sellers may insist on an ECL from PE buyers, especially be accompanied with redemption premium, which in turn can
when they invest through SPVs. Common rights of enforce- provide equity upside.
ment available on breach include indemnity, specific perfor- Additionally, Indian assets can also be used to secure NCDs
mance and dispute resolution. through an Indian debenture trustee, who holds security on

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88 India

behalf of NCD holders. The RBI prohibits Indian banks from

granting loans for the purpose of acquisition of shares. While
102 Tax Matters
non-banking financial companies in India are permitted to lend
funds for the purposes of acquisition financing, high borrowing 10.1 What are the key tax considerations for private
equity investors and transactions in your jurisdiction?
costs prove to be a disincentive for PE investors. Hence, any
Are off-shore structures common?
form of acquisition financing is often limited to offshore
sources, which is also challenging owing to restrictions on the
creation of security on Indian assets in favour of non-resident PE investors should evaluate the tax treatment of capital gains,
lenders. Investment structures using Indian companies owned dividend income and interest income, and keep in mind the
or controlled by foreign investors are also not feasible, as the law investment instrument employed and the jurisdiction through
prohibits such companies from raising any debt from the Indian which the investment has been made. An offshore investor
market for any further downstream investments. can choose between being governed by the domestic tax law or
the relevant tax treaty, whichever is more beneficial. Offshore
structures for investment in India are fairly common, particu-
8.2 Are there any relevant legal requirements or larly from jurisdictions with favourable tax treaties with India.
restrictions impacting the nature or structure of the debt
Further, Indian tax laws contain general anti-avoidance rules,
financing (or any particular type of debt financing) of
private equity transactions? whereby Indian tax authorities have the power to deny tax bene-
fits if the arrangement does not have commercial substance and
its main purpose is to obtain tax benefits.
There are limited end-use restrictions on unlisted NCDs that
are privately placed; however, NCDs issued to FPIs for the
purpose of acquisition must be listed. The RBI has introduced 10.2 What are the key tax-efficient arrangements that
a voluntary retention route investment mechanism to enable are typically considered by management teams in private
equity acquisitions (such as growth shares, incentive
FPIs to invest in Indian debt markets without any restrictions
shares, deferred / vesting arrangements)?
on minimum residual maturity, subject to a minimum retention
period of three years, provided that FPIs retain at least 75% of
invested capital in India for such period. Most PE investors use the traditional route of investing directly
or through SPVs. Use of convertible instruments (at times with
profit-linked conversion) is fairly common. Deferred considera-
8.3 What recent trends have there been in the debt- tion per se may not be workable because of regulatory constraints
financing market in your jurisdiction?
and complications in treatment of capital gains tax.

There is a decreasing interest of investors in instruments like

10.3 What are the key tax considerations for
rupee-denominated (masala) bonds. As such instruments are
management teams that are selling and/or rolling over
denominated in Indian rupees, overseas lenders are expected to part of their investment into a new acquisition structure?
bear the risk of exchange rate fluctuations. Accordingly, masala
bonds are not popular among PE investors. SEBI continues to
make amendments to protect investors of listed debt securities and In case of a direct transfer of investments held in Indian compa-
enable debenture trustees to perform their duties more effectively. nies, tax implications could arise in India even where such trans-
fers are part of an internal reorganisation. In case of multi-
layer offshore holding structures, gains derived from an indirect
92 Alternative Liquidity Solutions transfer of Indian assets may be taxable in India. Thus, transfer
of shares or interests in foreign entities that derive their value
9.1 How prevalent is the use of continuation fund substantially from assets located in India would be subject to tax
vehicles or GP-led secondary transactions as a deal type
in India even without direct transfer of Indian assets. However,
in your jurisdiction?
certain types of corporate reorganisations, such as offshore
mergers and demergers, may be tax-neutral, subject to conditions.
While GP-led secondaries were traditionally not seen favour-
ably, these are now being considered in the Indian context, espe-
cially to continue investments in assets that can yield higher 10.4 Have there been any significant changes in tax
legislation or the practices of tax authorities (including
returns in the future.
in relation to tax rulings or clearances) impacting private
equity investors, management teams or private equity
9.2 Are there any particular legal requirements or transactions and are any anticipated?
restrictions impacting their use?
Typically, any changes in Indian taxation laws are brought about
The formation and allocation towards continuation funds has its annually as part of the union budgetary exercise. Under Indian
own set of legal, tax, regulatory and governance complications. tax laws, a private company is assessed to tax on share premium
The structures of such funds should be considered and analysed upon issue of shares in respect to the consideration received from
in the context of the rollover LPs, the assets being continued and a resident if the consideration exceeds the fair market value of
the advantages of leveraging an existing structure as compared the shares. Recently, under the Finance Act, 2023, the scope of
to setting up a new investing vehicle. applicability of angel tax has been widened to include non-res-
ident investors. With this, companies issuing shares above fair
market value to non-resident investors will also now fall within
the ambit of angel tax. Some of the other key changes brought
about by the Union Budget 2023 includes the extension of tax
incentives for start-ups, extension of concessional tax rates on

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 Shardul Amarchand Mangaldas & Co. 89

domestic manufacturing companies, taxation of online gaming 11.4 How detailed is the legal due diligence (including
and increase in withholding tax rates on payment of royalty and compliance) conducted by private equity investors prior
fees for technical services. to any acquisitions (e.g., typical timeframes, materiality,
scope, etc.)?
112 Legal and Regulatory Matters
PE investors usually conduct thorough legal due diligence on the
11.1 Have there been any significant legal and/or investee company prior to investing. The scope, materiality and
regulatory developments over recent years impacting timeframe for diligence varies with each transaction, depending
private equity investors or transactions and are any on the nature and sector of the investee, mode of acquisition, the
anticipated? transaction timetable and the approvals required to be obtained.
Generally, the scope of the legal diligence includes corporate
(i) In 2020, India introduced mandatory government approval matters, licences, contracts, indebtedness, labour, litigation, real
for foreign investment from countries sharing its land and intellectual property, insurance, etc. The timeframe depends
borders/investors whose ultimate beneficial owners were on the nature and scale of operations of the investee and can
citizens of, or situated in such countries. This is princi- take a minimum of two to three weeks. Materiality thresholds
pally aimed at curbing Chinese investments and poten- for review are case-specific and are generally applied to contracts
tial takeovers in light of the pandemic-induced slowdown. and litigation.
Subsequently, investments that would otherwise be auto-
matically permitted now fall under the approval route if 11.5 Has anti-bribery or anti-corruption legislation
the PE investor has a ‘beneficial owner’ from any of India’s impacted private equity investment and/or investors’
bordering countries. approach to private equity transactions (e.g., diligence,
(ii) In June 2022, India introduced the mandatory secu- contractual protection, etc.)?
rity clearance of persons who are citizens of India’s land
bordering countries prior to such persons being appointed PE investors are now increasingly undertaking specific due dili-
as directors on the Board of Indian companies. This is gence for evaluating the investee company’s compliance with
aimed at reducing the backdoor control of Chinese inves- domestic ABC/AML laws as well as internal standards. There is
tors in Indian companies. also a growing (and recommended) trend of engaging specialists
(iii) The Indian Supreme Court has also ruled that two Indian to undertake such diligence. Separately, investors also seek wide
parties are permitted to choose a foreign seat of arbitra- warranties and undertakings from the investee company, founders,
tion and an award passed therein would be enforceable as sellers (in a secondary transaction), and their immediate relatives,
a foreign award. This will enable PE investors investing in respect of compliance with ABC/AML laws, their past and
through an Indian investing vehicle to choose a foreign seat present conduct, the relationship with government officials, etc.
of arbitration.
(iv) FDI thresholds in sectors such as insurance, telecom and
defence have been further liberalised. 11.6 Are there any circumstances in which: (i) a private
(v) Recently, by way of a notification in May 2023, the Finance equity investor may be held liable for the liabilities of
the underlying portfolio companies (including due to
Ministry has also included practicing chartered account-
breach of applicable laws by the portfolio companies);
ants, company secretaries and cost and works account- and (ii) one portfolio company may be held liable for the
ants carrying out financial transactions (such as buying and liabilities of another portfolio company?
selling of immovable property, managing client money,
securities and assets, operation or management of compa-
nies, etc.) on behalf of their clients within the ambit of anti- While the investor may not be liable per se, its nominee director
money laundering laws. may be held liable for actions of the investee in his/her capacity
as a director, to the extent he/she had knowledge of the breach.
Under Indian law, it is unseen for one portfolio company to be
11.2 Are private equity investors or particular held liable for liabilities of another portfolio company. There is a
transactions subject to enhanced regulatory scrutiny in remote possibility of this happening contractually; for instance,
your jurisdiction (e.g., on national security grounds)? in the case of cross-guarantees.

Transactions involving foreign investment from India’s land 122 Other Useful Facts
bordering countries/investors whose ultimate beneficial owners
are citizens of, or situated in such countries requires prior regu-
12.1 What other factors commonly give rise to concerns
latory approval. for private equity investors in your jurisdiction or should
In the last few years, another significant development has been such investors otherwise be aware of in considering an
a disclosure requirement of beneficial ownership for all compa- investment in your jurisdiction?
nies. While this is not specific to PE investors, it mandates all
Indian companies to investigate their ultimate beneficial owners
With Indian laws on foreign investment, securities and corpo-
and make appropriate public disclosures.
rate management being complex and constantly evolving, inves-
tors must engage qualified local legal, financial and tax advisers
11.3 Are impact investments subject to any additional at the inception of every transaction, leading to unavoidable cost
legal or regulatory requirements? expenditure, even for transactions that eventually fall through.
The Indian judicial process, with its uncertain timelines, has been a
SEBI had introduced social venture funds, as category-I alter- concern; though investors invariably choose arbitration for dispute
native investment funds, with relaxed investment conditions to resolution. Lastly, while investors have been concerned about the
enable investors to primarily invest in social ventures and social lengthy timelines taken to obtain regulatory approvals in India,
enterprises. Further, SEBI has also put in place a legal frame- we are now able to provide estimated timelines for obtaining
work for the issue of green bonds. these, which is reassuring to investors.

Private Equity 2023

90 India

Iqbal Khan is an Equity Partner at the Firm and a member of the Private Equity and Mergers & Acquisitions Practice Groups. Iqbal advises
some of the largest global financial and strategic investors, and specialises in PE investments, private and public M&A (both domestic and
cross-border), joint ventures and foreign investment laws.
Iqbal completed his J.D. at Columbia Law School (as a Harlan Fiske Stone Scholar) and LL.B. at the London School of Economics and Political
Science. Iqbal has also worked at Kirkland & Ellis LLP, New York and at Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York. He is enrolled
with the Bar Council of Maharashtra & Goa and is also admitted to the New York Bar.

Shardul Amarchand Mangaldas & Co. Tel: +91 97 6998 9218

Express Towers, 23rd Floor, Nariman Point Email: iqbal.khan@amsshardul.com
Mumbai, Maharashtra – 400 021 URL: www.amsshardul.com
India

Devika Menon is a Principal Associate at the Firm and a member of the Private Equity and Mergers & Acquisitions Practice Groups. Devika
specialises in PE investments, private M&A, joint ventures and foreign investment laws, and advises PE funds and Indian and multinational
corporations, on a variety of domestic and cross-border transactions.

Shardul Amarchand Mangaldas & Co. Tel: +91 91 6799 3239

Express Towers, 23rd Floor, Nariman Point Email: devika.menon@amsshardul.com
Mumbai, Maharashtra – 400 021 URL: www.amsshardul.com
India

Shardul Amarchand Mangaldas & Co, founded on a century of legal clients. We have a pan India presence, with offices in seven cities across
achievement, is one of India’s leading full-service law firms. Our mission India – Ahmedabad, Bengaluru, Chennai, Gurugram, Mumbai, New Delhi,
is to enable business by providing solutions as trusted advisors through and Kolkata.
excellence, responsiveness, innovation, and collaboration. www.amsshardul.com
We are one of India’s most well-recognised firms and are known globally for
our integrated approach. Our 740 lawyers, including 141 partners, provide
exceptional services across practice areas, which include General Corporate,
M&A, PE, Banking & Finance, Insolvency & Bankruptcy, Competition Law,
Dispute Resolution, Projects & Project Finance, Capital Markets, Tax,
Intellectual Property and Venture Capital.
We are at the forefront of global and Indian M&A and PE transactions, cutting-
edge high-risk litigation and advice on strategically important matters
across a spectrum of practices and industries for our multi-jurisdictional

Private Equity 2023

 Chapter 12 91

Italy

Italy
Marco Gubitosi

Legance Lorenzo De Rosa

23.66 billion, with a remarkable increase of 30% in deal volume

12 Overview and 61% in deal value (thanks to some buyout and infrastructure
mega deals) vs the (so far) record year 2021.
1.1 What are the most common types of private equity More specifically, 2022 private equity activity has been
transactions in your jurisdiction? What is the current
mainly fostered by the venture capital/early-stage sector with
state of the market for these transactions?
547 transactions executed (including the relatively new niche in
the Italian market of corporate venture capital) followed by the
The Italian private equity market is well structured and devel- buyout sector with 185 transactions executed while the infra-
oped, similar in its features and dynamics to other sophisti- structure sector registered 52 executed transactions.
cated European markets. It encompasses a significant number As per 2021, also in 2022, the buyout and the infrastruc-
of global, US, pan-European, and domestic private equity firms ture sectors have been the most relevant sectors for the Italian
and other alternative providers of private capital of different economy in terms of deal value by registering the respective
sizes and types. These players carry out all types of transactions amounts of EUR 10.95 billion and of EUR 10.69 billion. On
and are able to meet all the industry’s different needs. At the the contrary, the early-stage sector deal value has been equal to
end of 2022 (according to the Italian Private Capital Association EUR 1.1 billion.
“AIFI”), private equity players owned in their portfolios about Moreover, during 2022, there was a surge in the private equity
2,000 Italian companies for an aggregate value of about EUR 70 pivotal phase of divestment (whereby private equity firms are
billion, 46 of which referred to international financial sponsors. looking to realise a sizeable capital gain with a good return
Nowadays, private equity represents a fundamental, stra- on their investments), with approximately 117 divestments
tegic, and transformative part of the Italian economy and finan- completed involving 94 portfolio companies (+13% vs 2021) for
cial and corporate landscape, linking the worldwide-recognised a total value of EUR 4.3 billion (+63% vs 2021).
Italian family-owned entrepreneurship with transnational and Traditionally in the Italian market, the exit phase has been
international financial and trade markets. predominantly carried out through the exit mechanism of a trade
The appetite of private equity and venture capital inves- sale to industrial buyers. However, in 2022, and for the first
tors for the Italian market during 2022, in contrast with global time, the most predominant exit mechanism has been the trade
and European trends and in line with the 2021 Italian M&A sale – or secondary sales – to other private equity buyers (i.e. 47
frenzy activity, peaked again and at unprecedented record levels executed exits for a deal value of EUR 2.6 billion) followed by a
(compared to the historical market data for the Italian private trade sale to industrial buyers. This rise in secondary sales can
equity market) both in terms of deal value and volume. Also, the be considered a sign of the maturity phase reached by the private
upstream fundraising activity has been in line with – or higher equity industry in Italy. The remaining 2022 divestments have
than – the activity of the record year 2021. been carried out through sales to founders or family offices,
This is in spite of the deep escalation of the ongoing war in and, to an extremely limited extent, by initial public offerings
Ukraine, which has been compounded by dealmakers’ worries (“IPO”) and de-SPACs, and, finally, in some cases, write-offs
about the persistent deceleration of global economic growth (also or involuntary exits.
due to the combined effect of the energy and commodities price Italian private equity activity in the first five months of 2023
crisis, persistence inflation, rising interest rates, public debts, etc.), has continued its transformative development and, despite the
the disruption of the international trade activity, together with the increasing social, economic and geopolitical global concerns,
reshaping of the multilateralist post-cold-war world order and its it has been resilient and in line with the 2022 activity (unlike
ensuing clashes between democracies and autocracies. the wider M&A activity, which suffered a slowdown in its pace
Notwithstanding the deceleration of the global economy, the of activity). Indeed, as of May 2023, the Italian private equity
Italian economy, relative to Italian historical data, for the first market registered the execution of 164 transactions (i.e. 10 trans-
time in several decades, had a growth rate higher than that regis- actions more than those executed in the same period of the year
tered by the other large European economies in 2022 equal to 2022), including several add-on investments – predominantly in
3.7%. However, it has been forecasted that the GDP growth the mid-market sector (which are considered strategic for the
should return to a more modest 1.2% in 2023. characteristics of the Italian corporate landscape) – while there
Looking at investments quantitative data, according to AIFI, have been fewer large deals.
during 2022, a staggering 848 transactions (approximately), The above data demonstrates the enduring confidence of
involving 624 companies, were completed by private equity international and domestic dealmakers and of the global M&A
investors for the unprecedented total deal value of about EUR crowd vis-à-vis the Italian M&A market.

Private Equity 2023

92 Italy

In 2022 and H1 2023, there were no major changes in the (“NRRP”), mostly financed by the European recovery plan
implementation of the structure of private equity transactions known as “Next Generation EU”, which is involving funds for
and, to this end, financial sponsors usually continued to use in more than EUR 220 billion over a five-year period (2021–2026).
the structuring of their investments a combination of equity, The implementation of the National and Resilience Recovery
quasi-equity and debt instruments; together with a preference Plan is ongoing and should be mostly carried out, notwith-
to acquire, directly or through portfolio companies, the control standing several difficulties in its actual implementation by the
of a target company, and minority deals (usually combined with National and local authorities. It seems that such reforms are
quasi-equity instruments), this has been increasingly popular. starting to have a positive boost on the overall Italian business
Some trends and features relating to deal structuring can be and economic environment, including cross-border overall M&A
highlighted: (i) a relative increase in sale auction processes and activity and private equity. Cross-border M&A activity continues
competition between financial sponsors and strategic/corpo- to be a crucial driver for the Italian economy, traditionally largely
rate investors; and (ii) co-investments, club deals or “consortia” influenced by global economic and trade trends and foreign direct
between private equity firms (or between private equity firms investment (“FDI”) flows (generally coming from the United
and strategic investors or State-owned or -sponsored inves- States, France, the United Kingdom, Luxembourg and Germany).
tors) becoming more common in Italy, particularly with regard Finally, there is an abundance of private equity dry powder for
to blue-chip buyout deals in the infrastructure sector, in order investment in Italy, and private equity transactions, particularly
to combine their technical skills and financial capability against in buyouts in mid-market sector, will probably involve a reduced
a new challenging economic environment; (iii) a remarkable amount of debt finance with a moderate leverage, thus with a
increase in the execution of warranties and indemnities (“W&I”) reduced risk for traditional banking or private debt facilities.
policies within the context of buyout transactions; (iv) an increase
in re-investment(s) by the seller/founder(s) of the target alongside
1.3 Are you seeing any types of investors other
the private equity investors in the special purpose vehicle; and (v) than traditional private equity firms executing private
an increase in private investment in public companies (“PIPE”) equity-style transactions in your jurisdiction? If so,
transactions, as well as in public-to-private (“PTP”) transactions please explain which investors, and briefly identify any
that have been, relative to Italian standards, quite significant in significant points of difference between the deal terms
their numbers, notwithstanding the characteristics and limited offered, or approach taken, by this type of investor and
number of available Italian listed companies. that of traditional private equity firms.

1.2 What are the most significant factors currently The Italian market saw the appearance and surge of global
encouraging or inhibiting private equity transactions in private equity houses and conglomerates (often formerly pure
your jurisdiction? hedge funds), as well as other new types of strategic and finan-
cial buyers, e.g.: pension funds; large family offices; sophisti-
cated, large cross-border club deals; corporate venture capital;
The Italian private equity market is generally considered by inter-
and sovereign wealth funds.
national and domestic financial buyers an attractive market. It is
In addition, the Italian market in 2022 also experienced the rise
characterised by a large number of potential primary transactions,
and activism of small private equity investors (entrepreneurial club
relatively few (but increasing in number) sale auction processes
deals and other informal syndicates of investors), with a persistent
and a vast spectrum of appealing targets, often at more advanta-
spill-over of outbound and inbound cross-border M&A trans-
geous valuations than other more mature private equity markets.
actions and private equity buyouts, as well as more structured
More specifically, the Italian corporate landscape and economy,
venture capital players, thanks to a favourable new legislation.
which is the second European manufacturing powerhouse, includes
Within the current market landscape, the so-called special
a multitude of small, mid and large successful family-owned
purpose acquisition company (“SPAC”) represents a relatively
companies (few listed ones) with a particular focus on exports and
new type of investment “tool” in Italy and an alternative to
international markets, active in highly specialised sectors, with a
financing. Such vehicle, incorporated by a team of experienced
skilled and trained workforce. The “Made in Italy” brand plays
sponsors, collects risk capital through an IPO with the purpose
a pivotal role, too. Therefore, this market somewhat represents
to acquire – and, ultimately, aggregate through the so-called
a unique and fertile land for domestic and foreign financial spon-
“business combination” – an operative target that will then be
sors, other alternative capital providers and M&A dealmakers that
listed. Upon completion of the business combination (which
focus their investment appetite on both small and mid-size compa-
will generally occur within 16–18 months from the incorpora-
nies (often through add-on and buy-and-build transactions) as well
tion of the SPAC), the vehicle disappears.
as large private or listed companies. Vast opportunities remain
Notwithstanding the above, the Italian market, in line with
in place for Italian family-owned-businesses of any size or listed
the US and global market, registered – also in 2022 – a correc-
companies willing to open their shareholdings to private equity
tion in de-SPACs transactions, due to the difficulties faced by
investors. In this sense, there is a renewed positive attitude by
the overall capital market sector.
both family-owned businesses and Italian governmental author-
ities towards private equity (and private capital), which, in some
years, might be transformational for the development of the coun- 22 Structuring Matters
try’s economy and for the Italian private equity’s industry.
Private equity investors are traditionally more active in the 2.1 What are the most common acquisition structures
north of Italy, followed by central Italy, while the south of Italy adopted for private equity transactions in your
records only a relatively limited number of investments. jurisdiction?
In particular, the Lombardy region and the city of Milan
attract most cross-border inbound investments. Private equity investors traditionally operate through ad hoc
As to other factors that may encourage private equity trans- structures, which can include a foreign (typically EU and, in
actions in Italy, it is worth emphasising that the Italian govern- particular, Luxembourg) holding company (“HoldCo”), and
ment in 2021 set forth a National Recovery and Resilience Plan sometimes also a mid company (“MidCo”), but the actual

Private Equity 2023

 Legance 93

number of entities and their layers depends mainly on financing, 2.5 In relation to management equity, what is the
tax and governance needs. The direct acquiring company, typical range of equity allocated to the management, and
however, is generally a newly incorporated Italian company what are the typical vesting and compulsory acquisition
(“NewCo”) in the form of a joint-stock company limited by provisions?
shares (“S.p.A.”) or a limited liability company (“S.r.l.”).
In the event that managers want to participate in the envis- The typical range of equity allocated to the management is
aged investment, they may acquire a minority stake in a NewCo generally a small minority of the corporate capital of the target
or its parent company, directly or through another corporate or NewCo (around 5–10% of the shares). However, should the
entity. Management investment is particularly encouraged by target be a “family-managed” company, the equity allocated to
private equity firms in Italy since it guarantees continuity of the the management could be higher. It is not unusual to negotiate a
business and full commitment of key persons. call option on the remaining shares in favour of the investor or a
For additional thoughts and details, please refer to sections 8 put option in favour of the management, which can be triggered
(Financing) and 10 (Tax Matters). upon occurrence of certain specific events (including good or
bad leaver events).
2.2 What are the main drivers for these acquisition Management’s ownership is also usually subject to lock-ups
structures? and other share transfer restrictions and managers are usually
bound by significant non-compete undertakings.
Private equity acquisition structures are traditionally driven by
tax and financing issues, as well as some ownership features. 2.6 For what reasons is a management equity holder
For further details, please refer to sections 8 (Financing) and 10 usually treated as a good leaver or a bad leaver in your
(Tax Matters). jurisdiction?

2.3 How is the equity commonly structured in private Good and bad leaver concepts generally determine the conse-
equity transactions in your jurisdiction (including quences in terms of price of the management equity in the case
institutional, management and carried interests)? of departure of the manager or impossibility for the latter to
serve on his/her role.
The most common events of good leaver are death, mental/
As anticipated, private equity transactions are usually imple-
physical incapacity preventing the manager from continuing
mented by a NewCo whose corporate capital is owned – directly
serving on his/her office, retirement, and revocation without
or indirectly through a MidCo – by a HoldCo. When the private
cause. A good leaver event might trigger a call option in favour
equity fund allows management investment, usually managers
of the investor (or a put option in favour of the manager) at a
participate with a small stake in either the target company, the
strike price not lower than the market price.
NewCo, or the MidCo.
On the other hand, any case of revocation with just cause
Carried interests are an important instrument to incentivise
(giusta causa) usually represents a bad leaver event, which might
managers to perform, and it aligns their interests with those
trigger a call option in favour of the investor at a strike price
of the investors. The carried interests represent a share of the
lower than the market price.
profits of the investment – embodied into a financial instrument
– that managers receive as compensation if a targeted “threshold”
return of the investment is achieved (the “hurdle rate”). Usually, 32 Governance Matters
the relevant instrument also provides for little or no governance
rights and limitations on transfers. For further considerations on 3.1 What are the typical governance arrangements
carried interests, please refer to section 10 (Tax Matters). for private equity portfolio companies? Are such
arrangements required to be made publicly available in
your jurisdiction?
2.4 If a private equity investor is taking a minority
position, are there different structuring considerations?
As a preliminary overview, it is worth noting that Italian compa-
nies are allowed to choose between three different models of
In case of minority investments, private equity firms typically corporate governance. In particular, according to Italian law,
seek: specific protections, such as veto rights/super majority the company’s governance can be structured as follows: (i) the
provisions on certain matters (e.g., extraordinary transactions, one-tier system, deriving from the Anglo-American tradition, in
transactions with related parties, strategic decisions – including which the shareholders’ meeting appoints the board of directors,
relevant investments, disposal of material assets or appoint- which then appoints some of its directors to a management control
ments of certain executive roles, etc.); the possibility to designate committee entrusted with monitoring functions; (ii) the two-tier
“watching dogs” in the board of the target – or sometimes, to system, which owes its basic structure to the German tradition,
designate “their own” directors, specific information rights on without the involvement of the relevant workers/employees of the
the activity of the management body of the company and access company, where the shareholders’ meeting appoints a supervi-
rights. The so-called “waterfall provisions”, which address the sory board, which then appoints a management body; and (iii) the
priority and timing of the distribution of capital upon occur- so-called “traditional Italian model” in which the shareholders’
rence of certain events, are common too. meeting appoints both a management body and a control body.
Furthermore, minority investments entail trust in the seller Notwithstanding the option to choose between three different
who, usually, continues to manage – directly or through his/her systems of corporate governance, it should be highlighted that,
managers – the company’s business and, as a consequence, they based on the available data, the two “alternative” models under
require his/her commitment to the company for a certain time (i) and (ii) above were adopted by a very few companies (mostly
period. Therefore, it is common to see minority investors also listed). In light of the above, the answers below only make refer-
negotiating share transfer limitations (such as lock-ups or tag- ence to the traditional model.
and drag-along clauses).

Private Equity 2023

94 Italy

The governance arrangements for private equity portfolio could lead to the impossibility for the company to operate
companies depend on the type of investment. For instance: and continue pursuing its corporate purpose and, in certain
(i) in case of minority investments, refer to the answer under extreme cases, to its dissolution), escalation procedures may
question 2.4; and be considered. The ultimate deadlock resolution mechanism
(ii) in case of majority investments, governance arrangements is the so-called “Russian roulette” or “cowboy” clause. This
mostly relate to the full operational management of the clause, which forces a shareholder to either sell its participation
target. or acquire the participation of the other shareholder, in both
In Italy, there is no obligation to disclose and/or make avail- cases at the price determined by the proposing shareholder, has
able shareholders’ agreements, unless those agreements concern been widely debated among Italian scholars, and its validity has
listed companies. However, in case corporate arrangements been confirmed only recently by the decisions of two impor-
are also mirrored in the by-laws of the target, those arrange- tant Italian courts. It is worth mentioning that, although such
ments will be publicly available (since by-laws of companies are clause was not new in the Italian legal framework, its validity
publicly available in Italy and can be easily extracted from the was specifically analysed by the Italian case law for the first time
Italian Companies’ Register). only in 2017, when the Court of Rome scrutinised the validity of
It is worth mentioning that, especially for joint-stock compa- a Russian roulette clause inserted in a shareholders’ agreement.
nies (whose regulation is rather less flexible than the regulation The Court of Rome ruled on the legitimacy and validity of the
provided for limited liability companies), certain governance clause. Three years later (on February 3, 2020), the decision was
provisions agreed by the parties in a shareholders’ agreement also upheld by the Court of Appeal of Rome.
cannot be mirrored into the by-laws of the company. Also,
the main difference is that while shareholders’ agreements
3.4 Are there any duties owed by a private equity
are enforceable only towards shareholders who are party to investor to minority shareholders such as management
the agreement (efficacia obbligatoria), by-laws provisions are also shareholders (or vice versa)? If so, how are these
enforceable vis-à-vis third parties (efficacia reale); such difference typically addressed?
plays an obviously important role in the event of violations.
Equity investors have no particular obligations towards
3.2 Do private equity investors and/or their director minority shareholders. However, in taking any decision, the
nominees typically enjoy veto rights over major majority shareholder shall always act in good faith and pursuing
corporate actions (such as acquisitions and disposals, the corporate benefit. The majority shareholder shall also not
business plans, related party transactions, etc.)? If a take advantage of its position (abuso di maggioranza). Therefore,
private equity investor takes a minority position, what
a resolution directed only to the benefit of the majority share-
veto rights would they typically enjoy?
holder (and to the detriment of the minority shareholder) with
no corporate benefit for the company could be challenged in
Unless the by-laws of a private company contain supermajority court for annulment (in certain cases, the minority shareholder
provisions at shareholders’ level and/or board level, resolutions is also entitled to receive liquidated damages).
are taken by simple majority. It is worth mentioning that, on the contrary, minority share-
Generally, a private equity investor (directly or through the holders shall not abuse their position (for instance, in case the
designated director(s)) acquiring a minority stake would seek by-laws of the company provide for a veto right in favour of the
veto rights on all major corporate decisions of the target either minority shareholders) or act to their sole benefit or in prejudice
at the shareholders’ level (such as extraordinary transactions, of the interest of the company (abuso di minoranza).
liquidation, amendments of the by-laws, capital increases, etc.)
or at the board of directors’ level (strategic decisions, related
party transactions, important financial matters such as approval 3.5 Are there any limitations or restrictions on the
contents or enforceability of shareholder agreements
of the business targets, etc.). That being said, the actual range
(including (i) governing law and jurisdiction, and (ii)
and type of vetoes required by a minority investor depends on non-compete and non-solicit provisions)?
the purpose of the investment (as well as of the type of inves-
tors) since certain investors are mainly interested in receiving
a return on the investment, while others might be seeking to Under Italian law, the duration of shareholders’ agreements is
be more involved in the management of the portfolio company subject to certain time limits. In particular:
business. The first type of investor would be keener to “enjoy” ■ with respect to joint-stock companies (società per azioni),
waterfall protections and dividend preferences than vetoes on save in case of joint ventures, the duration of a share-
managerial decisions. holders’ agreement shall not exceed five years; and
Should a private equity investor acquire a controlling stake, ■ with respect to limited liability companies (società a responsa-
the vetoes above are sought by the minorities. bilità limitata), contrary to joint-stock companies, there is
no such time limit; however, the shareholders enjoy a with-
drawal right.
3.3 Are there any limitations on the effectiveness of Furthermore, according to Italian law, holders of the same
veto arrangements: (i) at the shareholder level; and (ii) at class of shares should enjoy the same rights; therefore, it is
the director nominee level? If so, how are these typically
common for joint-stock companies to issue different classes
addressed?
of shares to which different rights are attached. The limited
liability companies are much more flexible on the matter and
There are no specific rules limiting the effectiveness of veto the “same class of shares same rights” tenet does not apply to
rights. Veto rights are usually contained in shareholders’ these entities.
agreements, which are enforceable as contractual obligations With regard to non-competition provisions contained in a
binding upon the signatories unless they are also reflected in shareholders’ agreement, such provisions shall be limited both
the by-laws – to the extent permitted by the law. However, in in terms of time and geographic area or activities and subject to
order to avoid severe and continuous deadlock situations (which antitrust scrutiny.

Private Equity 2023

 Legance 95

3.6 Are there any legal restrictions or other a certain corporate resolution, he/she shall declare the conflict
requirements that a private equity investor should and explain such conflict before voting. A resolution passed
be aware of in appointing its nominees to boards of with the decisive vote of a conflicted director can be challenged
portfolio companies? What are the key potential risks by the other directors or by the auditors if such resolution causes
and liabilities for (i) directors nominated by private damage to the company. In certain cases, the conflicted director
equity investors to portfolio company boards, and (ii) should refrain from voting (for instance, in case the resolution
private equity investors that nominate directors to
concerns the director’s liability).
boards of portfolio companies?

42 Transaction Terms: General

First of all, directors must be entitled to serve the office and
not fall into one of the prohibited categories set out by the law.
Directors of Italian joint-stock companies can be appointed 4.1 What are the major issues impacting the timetable
for transactions in your jurisdiction, including antitrust,
for a maximum three-year term, while no such limit applies to
foreign direct investment and other regulatory approval
directors of a limited liability company, which can serve the requirements, disclosure obligations and financing
office until revocation or departure. issues?
However, it is also worth considering that: (a) the by-laws of
the companies could include specific requirements to be met
The major issues impacting the timetable for transactions in Italy
to serve as director; and (b) certain types of companies (those
are those regarding antitrust (the enactment of the Annual Anti-
subject to the supervision of regulatory authorities, such as banks
trust Law in August 2022, strengthening the Italian Competi-
and insurance companies), directors and top managers shall
tion Regime by providing new powers and tools to the relevant
meet specific requirements provided by applicable ad hoc regula-
Authority) and/or regulatory authorisations/approvals/clear-
tion (in terms of reputation, professionalism and independence).
ances, as well as the completion of unions’ procedures.
The risks and liabilities of directors designated by a private
In addition to the foregoing, Law Decree no. 21/2012, as
equity investor are exactly the same that directors designated
subsequently amended (the “Decree”), has gradually extended,
by any other shareholder might face. Directors shall serve
also in light of EU Regulation no. 452/2019, the scope of the
their office: (i) acting in accordance with applicable law and
governmental rights to veto or impose prescriptions on M&A
the company’s by-laws, to pursue the corporate purpose and
and private equity transactions concerning target companies
in accordance with the corporate benefit principle; (ii) with the
or assets operating in specific sectors that are considered to be
diligence required by their position and based on their specific
strategic under the FDI screening regulation (so-called “golden
skills and knowledge; (iii) acting in an informed manner; and
power” regulation), such as defence and national security,
(iv) not taking any decision that might conflict with the interests
energy, transport, communications, health, water management,
of the company. On the other hand, directors are protected by
semiconductors, cybersecurity, agri-food, banking and insur-
the “business judgment rule” test.
ance, high technology, sensitive data, aerospace, electoral infra-
Directors may be liable towards (a) the company, (b) the
structure, dual-use products and media.
company’s creditors, and (c) the company’s shareholders.
It is worth noting that, for certain sectors (energy, telecom-
Furthermore, it is worth mentioning that, potentially, a share-
munications, transports, health, banking and financial services,
holder could be held liable for the underlying portfolio compa-
agri-food), a mandatory authorisation by the competent authority
nies if, in exercising its “direction and coordination” activity over
(i.e. the Presidency of Council of Ministries) for FDI purposes
its subsidiary, it causes damages or losses to the company. The
could be required not only in case of extra-EU investors, but also
“direction and coordination” activity over a subsidiary is presumed
in case the purchasing party has EU (including Italian) nation-
upon the occurrence of certain conditions, such as the manage-
ality. Furthermore, for extra-EU investors, the acquisition of
ment bodies of the directing company and the controlled company
non-controlling shareholdings representing more than 10% of
including the same persons and the steady stream of instructions
the share capital or voting rights of a company operating strategic
that the directing company provides to the controlled company’s
activities or assets are also subject to FDI authorisation.
directors. Please also refer to the answer to question 11.6.
The Decree also entitled the government to commence ex
officio the procedure to assess the exercise of the golden power
3.7 How do directors nominated by private equity (in case of failure to report a transaction).
investors deal with actual and potential conflicts of Private equity transactions might also be subject to the
interest arising from (i) their relationship with the party control of independent sectorial authorities in accordance with
nominating them, and (ii) positions as directors of other
the sector and industry of the target object of the buyout, e.g.:
portfolio companies?
Bank of Italy and the European Central Bank in the event
of financial institutions and banks; Insurance Supervisory
Under Italian law, there is no conflict of interest per se if a Authority (“IVASS”) in the event of insurance companies;
director is designated by a shareholder or in case a director sits Communications Authority (“AGCOM”) in the event of tele-
on the board of different portfolio companies. communications companies; and the National Commission for
The above being said, a director shall always act in the interest Companies and the Stock Exchange (“CONSOB”) in the event
of the company he/she serves, in order to pursue its corporate of listed companies. Finally, said transactions may be subject
purpose and in compliance with the corporate benefits prin- to the clearance of the Italian Antitrust Authority or the rele-
ciple. As a matter of fact, unless specifically authorised by the vant European authority in the event of such transactions trig-
shareholders’ meeting, directors cannot (i) be shareholders of gering the relevant Italian or EU clearance thresholds. Recently,
competing companies with no liability limitation, (ii) operate a on 12 January 2023, the Foreign Subsidies Regulation (Regula-
competing business, or (iii) hold the office of director or general tion EU no. 2022/2560) entered into force, with the purposes of
manager in competing companies. addressing distortions caused by foreign subsidies. More specifi-
When a director is in a conflict-of-interest position (on his/ cally, it relates to the investigation by the European Commission
her or a third party’s behalf) with respect to the adoption of (also on its own initiative) on financial contributions granted by

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96 Italy

non-EU States to companies engaging in economic activity in the rules and regulations issued by Borsa Italiana running the
the EU with the aim to redress their distortive effects, if needed. Italian securities market on the Milan Stock Exchange, and the
Among other things, such regulation provides some obligations EU Regulation no. 596/2014 (the “Market Abuse Regulation”)
to notify to the Commission concentrations or participations in and the related EU delegated regulations are also applicable.
public procurement procedures involving a financial contribu- More specifically, the control of an Italian public company
tion by a non-EU government. can be acquired in several different ways including, without
In relation to FDI, including private equity investments, the limitations, by: (i) launching a voluntary tender offer over the
Italian legal system also set a general principle of reciprocity by public company’s shares; (ii) acquiring the “controlling” stake
which the Italian authorities could challenge an M&A transaction through a share purchase agreement entered into with the
if there is no reciprocity with the relevant foreign investor’s juris- majority shareholder(s), which implies the launching of a manda-
diction. Accordingly, this set of rules shall not be considered in tory tender offer over all of the public company’s shares; and (iii)
the event of EU and EEA countries, together with those countries subscribing to a capital increase of the listed company. Tender
that have signed bilateral investment agreements with Italy or that offers and capital increases are supervised by CONSOB.
have, in any event, a reciprocity in dealing with the Italian entities. It should be pointed out that the trend of investments carried
out by means of a business combination between unlisted
companies and listed SPACs is increasingly widespread in Italy.
4.2 Have there been any discernible trends in
transaction terms over recent years? Subject to the Consolidated Financial Act and Market Abuse
Regulation, a prospective bidder may generally build a stake in
the target public company’s share capital before the acquisition
The extension of the scope of the FDI regulation triggered a of its control. However, a careful valuation and an in-depth
relevant increase in the transactions notified, even for mere analysis should be made prior to any stakebuilding activity to
precautionary purposes. be made before the launch of a tender offer in case such share-
In particular, the 2022 Annual Report about Golden Power holder has taken the decision (not yet publicly announced to
(FDI) proceedings shows that, in 2021, 496, and in 2022, 608 the market) to launch a voluntary tender offer over the target
notifications have been carried out, of which 314 have been in order to make sure that such stakebuilding activity does not
made as a precautionary measure. Of the above-mentioned raise issues under the Market Abuse Regulation.
cases, 519 concerned strategic sectors (including energy, trans- Due diligence exercises over an Italian public company shall
port and communications in addition to the sectors covered be carried out in compliance with the provisions of the Market
by the European regulation), 71 defence and security, while 18 Abuse Regulation. In particular, although much information
concerned 5G technology. concerning a listed company is available to the public by opera-
tion of law, bidders usually want to conduct a due diligence exer-
52 Transaction Terms: Public Acquisitions cise prior to launch a public tender offer. However, insider trading
provisions and rules prohibiting selective disclosure of price-sensi-
5.1 What particular features and/or challenges apply tive information, which are contained in the Market Abuse Regu-
to private equity investors involved in public-to-private lation, often cause significant concerns as to the limits within
transactions (and their financing) and how are these which due diligence reviews preceding a public tender offer may be
commonly dealt with? safely conducted without (i) qualifying the bidder as an “insider”
(with consequent limitations and restrictions), and (ii) exposing the
The Italian economy boasts a relatively limited number of target to the risk of being sanctioned for having disclosed material
listed companies (a total of 414) for a capitalisation of approxi- information only to the bidder (and not to the general public). The
mately EUR 626 billion, as of 23 December 2022: 223 compa- issue under (ii) above is such that the target’s directors are often
nies are listed on Euronext Milan, i.e., the Italian regulated quite reluctant in allowing the due diligence exercise. Another
main market; 190 companies are listed on the Euronext Growth legal issue/limitation for the target’s directors is that they may
Milan; and one company is listed on MIV Investment Vehicles proceed with the disclosure of information to the bidder, only if
(all figures are correct as of the end of December 2021). Public that is in the best interest of the target company. The satisfac-
M&As in Italy have been relatively dynamic throughout 2022, tion of such interest is usually reached if the proposed transaction
with 29 IPOs (a contraction of more than 40% against the 49 would allow a maximisation of the share value of all of the target’
IPOs registered in 2021), consisting of no. 3 IPOs on Euronext shareholders. Based on the above, while no due diligence access is
Growth Milan and no. 1 direct listings. In this context, public allowed in a hostile bid scenario, it is not uncommon that the target
M&A has been dynamic in terms of deal volume, with 19 tender provides the bidder(s) with details on all the public information in
offers for a value of EUR 2.94 billion – and often with the its possession as well as certain non-privileged/non-price-sensitive
outcome of delisting (about 16) – signalling the use of tender- information that is not known by the public.
offer mechanisms in the Italian market not as a mechanism for In case of a tender offer, one of the main hurdles is represented
the so-called corporate control (as in the case of the US and UK by the regulatory approval of the offering document by CONSOB.
capital markets), but mainly for the so-called PTP transactions Where the tender offer is classified as “voluntary” (Art. 102 and ff.
in a market with limited contestability opportunities, whereby Consolidated Financial Act), the offeror enjoys a broader grade of
the ownership structure of most Italian listed companies is still flexibility in setting out the T&Cs and the price of the transaction;
characterised by strong major anchor blocks of shareholders. by contrast, in case of mandatory offers (Art. 106 and ff. Consol-
With reference to applicable laws, Italian PTP deals are idated Financial Act), the offeror shall abide by the T&Cs of the
governed by the Italian Civil Code (“ICC”), the Legislative bid set out by the law and enjoys less freedom regarding the deter-
Decree no. 58 of February 24, 1998 (the “Consolidated Finan- mination of the consideration. Indeed, if in a voluntary offer the
cial Act”) and the Issuers’ Regulation no. 11971 of May 14, consideration may be represented by cash, existing or new shares
1999, issued by CONSOB (i.e., the Italian authority regulating or other securities (e.g., convertible bonds or warrants), or even a
and supervising companies listed in Italy and Italian securities combination thereof, in case of a mandatory takeover, the bidder
markets, including PTP deals) in order to implement the Consoli- shall offer cash payment as an alternative (where the offer encom-
dated Financial Act provisions at a secondary level. Furthermore, passes securities that are not traded on an EU regulated market).

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In the case of takeover bids, the bidder’s communication to auditing such document; and (iv) the predictability of the busi-
be filed with CONSOB shall comply with some special disclo- ness (and cash flow) carried out by the target. Any difference
sure requirements concerning, for instance, the offeror and its in the finances occurring between the date on which the buyer
controlling entity, the number of securities to be purchased, the “locked the box” (the so-called “locked-box date” or “reference
consideration offered, the reasons for the offer, the conditions date”) and the completion date is considered a “leakage” and
to which the offer is subject and, if any, the clearances needed. discounted from the purchase price. The distribution of divi-
The offeror may submit the communication only after having dends, related party transactions, change in the remuneration
obtained the necessary financing for the offer. The most impor- policies, or transaction’s fees – just to name a few – are common
tant elements of the bidder’s offering document include the guar- examples of leakages.
antees for the offer, the financial statements regarding the offeror, The above being said, buyers seem more comfortable with
and the strategic plans of the offeror on the target. CONSOB is the closing-accounts structure, while a major certainty of the
the authority in charge of approving all offering documents. The purchase price embodied in the locked box makes this mecha-
approval by some other competent supervising authorities (e.g., the nism preferable for sellers. It is also quite common, especially
European Central Bank, Bank of Italy or IVASS) may have to be when the finances of the target depend on general market condi-
requested, depending on the field of business in which the target tions or somehow have a high degree of unpredictability, to have
operates. Italian and/or European Antitrust Authorities’ clearance a mix of locked-box and closing-accounts mechanisms.
may also be required in the case of regulated industries or a merger
leading up to a potential concentration. Furthermore, CONSOB
6.2 What is the typical package of warranties /
should also be provided with all necessary documentation relating indemnities offered by (i) a private equity seller, and (ii)
to the guarantees at least one day before the date of publication of the management team to a buyer?
the offering document, and the bidder has to provide evidence that
the consideration is available before the acceptance period starts.
Private equity sellers generally tend to offer a very limited
package of representations and warranties. In addition to the
5.2 What deal protections are available to private “legal” warranties, which are mandatory by law (these warran-
equity investors in your jurisdiction in relation to public ties, which are not really negotiated, relate to the signatory
acquisitions? powers and the ownership title over the shares subject to sale),
the most accepted warranties are those that cover tax and
Voluntary tender offers (but not mandatory tender offers) may labour matters – those warranties are also usually referred to as
be subject to conditions precedent (e.g., minimum threshold “fundamental” warranties. Indemnity obligations arising from
of acceptance, obtainment of authorisations such as antitrust/ the breach of legal warranties are usually accepted to last until
golden power, etc.), provided that the satisfaction of such the expiration of the relevant statute of limitation, while with
conditions precedent does not depend on the offeror’s mere respect to the fundamental warranties sellers generally accept to
will (so-called condizioni potestative). In private equity transac- be “on the hook” for a maximum between five and seven years.
tions, the material adverse change (“MAC”) conditions are also The time limitations concerning warranties other than legal and
very popular. Their importance increased with the outbreak fundamental are definitely shorter and fall within a range of a
of COVID-19 in 2020 and 2021 and, moreover, with the deep 12–18-month time period.
escalation of the ongoing war in Ukraine in 2022 and 2023, The representations and warranties of the management tend
compounded by the global economic growth deceleration and to be aligned.
international trade disruption. In very general terms, private equity sellers deliver fewer
A common deal protection condition on which both the bidder representations and warranties than industrial investors and
and the target could agree upon is a break-up fee. Usually set out tend to negotiate a very small indemnification cap (around
in the letter of intent or other preliminary agreement, it provides 10–20%); uncapped indemnities (in some deal proposed to
for an indemnification that shall be paid by the party who breaks cover legal and fundamental warranties) are not easily accepted
off the negotiations without reasonable cause. The parties may by private equity players.
also provide for an exclusivity agreement and the target’s share-
holders may approve a resolution in order to issue shares or sell
6.3 What is the typical scope of other covenants,
assets to support the preferred bidder, jeopardising any interven- undertakings and indemnities provided by a private
tion by a competitor. The target’s shareholders can even commit equity seller and its management team to a buyer?
themselves to tender the shares in the offer process.
When a transaction does not provide for a simultaneous signing
62 Transaction Terms: Private Acquisitions and closing, interim period covenants take effect in respect
of the transaction documentation. The interim covenants
6.1 What consideration structures are typically ensure: (i) on the one hand, that between singing and closing
preferred by private equity investors (i) on the sell-side, the target is managed in a manner consistent with past prac-
and (ii) on the buy-side, in your jurisdiction? tice – but always with the intention of not freezing the busi-
ness of the company and losing value; and (ii) on the other hand,
Many transactions have been pursued using the so-called that the transition to a new ownership (or co-ownership) goes as
“locked-box” mechanism. The use of such structure is smoothly as possible.
dependent upon various elements, such as: (i) the time between Other covenants usually requested by, or to, private equity
the date on which the investor has priced the target and the sellers are: (i) specific indemnities, to indemnify the purchasers
closing date of the transaction; (ii) the type and quality of docu- from any red flag specifically spotted during their due diligence
ment produced by the company/seller that the investor used to exercise; or (ii) non-compete undertakings on the top manage-
price the business (e.g., audited financial statements vs financial ment of the sellers involved in the business sold.
statements vs pro forma balance sheet); (iii) the entity certifying or

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98 Italy

6.4 To what extent is representation & warranty buyer (e.g., equity underwrite of debt funding, right to
insurance used in your jurisdiction? If so, what are the specific performance of obligations under an equity
typical (i) excesses / policy limits, and (ii) carve-outs / commitment letter, damages, etc.)?
exclusions from such insurance policies, and what is the
typical cost of such insurance?
A private equity buyer generally delivers to the seller an equity
commitment letter that commits the guarantor/sponsor (part
Representation and warranties insurance policies (“W&I Insur- of the buyer’s group) to provide the necessary funds to close
ance”) have been widely used in private equity transactions in the transaction or fulfil any other buyer’s monetary obligation
recent years, although many operators are still suspicious of this towards the seller. Equity commitment letters usually contain
instrument. The resistance of certain operators to W&I Insur- the seller’s right to trigger the guarantor’s obligation to provide
ance is not completely groundless, since: equity, upon the occurrence of certain conditions (and failure of
1. several insurers do not offer coverage (or provide very the buyer to fulfil them).
little coverage) for specific business;
2. W&I Insurance does not cover: (i) issues identified during
the due diligence process or arising from matters that have 6.8 Are reverse break fees prevalent in private equity
transactions to limit private equity buyers’ exposure? If
not been properly assessed or inspected by the beneficiary
so, what terms are typical?
during the due diligence; or (ii) certain representations and
warranties, such as environmental matters, anti-corruption
matters, secondary tax liability, and product liabilities; Reverse break fees are not common in the Italian market.
3. W&I Insurance is still quite expensive, even if the cost A break-up fee could be negotiated (but would rarely be
depends on the indemnification cap, the coverages sought accepted by a sophisticated seller) in the preliminary documenta-
by the beneficiary and other specific requests to the tion of the transaction. For instance, a break-up fee can be estab-
insurers. In addition, the fees for the legal advisor of the lished for the reimbursement of the due diligence costs suffered
insurer and the broker shall be paid upfront; by the potential purchaser in the event of the seller’s unjustified
4. the underwriting process is quite articulated – although a interruption of the negotiations or wilful misconduct.
well-committed broker can be very helpful – and, some-
times, this does not fit with the timing of a deal quickly 72 Transaction Terms: IPOs
moving towards closure; and
5. the insurers leave very little room for negotiation. 7.1 What particular features and/or challenges should
a private equity seller be aware of in considering an IPO
exit?
6.5 What limitations will typically apply to the liability
of a private equity seller and management team under
warranties, covenants, indemnities, and undertakings? The exit phase is the most important for the success of a private
equity investment. Exits through IPOs are often at higher
Sellers’ indemnification obligations are always subject to: (a) multiples and at a closer market price than exits through third-
limitations: cap (around 10–20% of the consideration); basket party sale transactions. For these reasons, IPOs represent one
(around 10–20% of the cap); and de minimis (which is expressed of the main strategies of divestment for private equity sellers.
by an amount); and (b) exclusions, such as losses resulting from However, exits through IPOs are subject to volatility and present
change of laws occurred after closing, events fairly disclosed other significant pitfalls. Therefore, as set forth by the relevant
during the due diligence or caused by an action or omission Italian and European legislation (in particular, Regulation (EU)
of the buyer. Time limitations for general representations and no. 2017/1129 of the Parliament and of the Council, as amended
warranties range between 12 and 18 months. Private equity and integrated by Delegated Regulation (EU) no. 2019/980 of
sellers tend not to deliver uncapped indemnities, neither in the Commission), the IPO prospectus contains an extensive and
terms of amount nor timing. detailed section dedicated to risks. Along the lines provided by
applicable regulation and the guidance of the European Secu-
rities and Markets Authority, an IPO prospectus distinguishes
6.6 Do (i) private equity sellers provide security (e.g., between the characteristic risks of the issuer, those linked to the
escrow accounts) for any warranties / liabilities, and
sector to which it belongs and those relating to the transaction
(ii) private equity buyers insist on any security for
warranties / liabilities (including any obtained from the
itself of listing the company on the stock exchange and the secu-
management team)? rities being offered.
Moreover, from a corporate governance standpoint, the
IPO process requires a sort of “transformation” of the private
Should W&I Insurance be executed, private equity sellers do not company into a public corporation; this usually implies an
generally provide additional guarantees. In the absence of the internal reorganisation, also in terms of governance, in order to
above policy, a corporate guarantee or an equity commitment letter allow the company to comply with the rules provided for listed
from a company belonging to the seller’s group might be delivered. entities (just to name a few areas in terms of independent direc-
Private equity buyers, on the other hand, usually request first tors, gender equality and committees).
demand bank guarantees or an escrow to guarantee the fulfil- A significant step forwards in the Italian IPO market that
ment of the seller’s indemnification obligations. facilitates such an exit strategy for international private equity
sellers is that the Commissione Nazionale per le Società e la
6.7 How do private equity buyers typically provide Borsa, the Italian securities regulator, from August 2022, allows
comfort as to the availability of (i) debt finance, and (ii) issuers to file a prospectus exclusively drafted in English (with
equity finance? What rights of enforcement do sellers the exception of the summary note, which needs to be in Italian).
typically obtain in the absence of compliance by the This is a significant game-changer on the path to the market in

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 Legance 99

Italy. Mid and large corporates such as Lottomatica, Ferretti prone to spend resources to concurrently prepare for both an
and Eurotech have already opted for English as their prospectus IPO and a third-party exit.
language. This seems to be a market trend for the future. In the context of a dual-track process, any communication
Another recent development is the growth of Euronext or information provided to private investors invited to partic-
Growth Milan, the multilateral trading facility organised and ipate in the competitive bid, irrespective of the means chosen
managed by the Italian Stock Exchange, which started off as to convey them (e.g. oral, in writing, by means of digital data)
being primarily focused on small deals with very limited vola- or of the stage of the competitive bid, is subject to transpar-
tility, and has now turned into a more solid platform for larger ency and equal treatment principles (in line with those of the
issuers (which could include companies owned by private equity addressees of the IPO), and must be consistent with the infor-
firms). A new trend, which reflects the higher dimension of mation contained in the IPO prospectus.
the companies accessing such market, is the use of English as In order to ensure compliance with such principles, it is neces-
the language for the admission document. In this case, the sary that, in the context of the dual-track process, informa-
admission document is not technically a prospectus, as defined tion flows are carefully monitored, ensuring that the informa-
pursuant to the applicable EU Regulation, and does not require tion made available to private investors is the same information
the official approval of the local securities regulator. Recent provided to the addressees of the IPO and contained in the IPO
examples of such approach are Technoprobe and the upcoming prospectus. Therefore, it appears appropriate that adequate
listing of Maggioli, with an expected market capitalisation “gate keeping” controls be set up, directly involving the legal
exceeding Euro 400 million. counsel assisting the issuer, as well as the investor relator, to
continuously monitor the information flows ensuring the
highest level of coordination and consistency in the approach
7.2 What customary lock-ups would be imposed on
private equity sellers on an IPO exit? between the IPO and the M&A sale.
Should any information different from or additional to that
made available in the context of the IPO be provided to private
Although there are no legal requirements relating to lock-up investors in the context of the dual-track process, it will be
arrangements or their term in connection with an IPO exit, necessary to supplement and/or amend the IPO prospectus in
market practice is that Joint Global Coordinators usually request order to disclose the new information to the market, unless,
sellers to commit to a lock-up period ranging from six to 12 after careful evaluation and subject to confirmation from the
months (starting from the IPO date). It should also be noted that legal counsel, such information is deemed not to be material to
the lock-up period is usually longer for: (i) SPAC IPOs, where the investors in the context of the IPO.
lock-up usually lasts until the business combination (which will It should be noted that, if material information other than or
generally occur within 16–18 months from the incorporation of in addition to that made available to the addressees of the IPO
the SPAC) is completed; and (ii) companies that are in substance is disclosed, private investors who become aware of such infor-
start-ups, particularly in the technology sector. In such cases, mation should refrain from trading on the market involving the
lock-up periods of up to 24 months have been negotiated. issuer’s securities until the inside information is made public
Lock-up periods are not mandated by the Italian legislation (so-called “cleansing”). In this case, private investors should sign
or any other regulatory body, but they are either self-imposed by specific confidentiality commitments covering such matters and
the company going public or required by the investment bank their implications. Breach of the duty to refrain from trading
underwriting the IPO request. In either case, the goal is the in the company’s securities could entail criminal charges for the
same: to keep stock prices up after a company goes public. person who unlawfully used inside information, pursuant to
In such context, additional attention is also given in case of Article 184 of the Italian Security Act, as well as the liability of
incentive plans already in place or to be implemented upon the Issuer and/or shareholders who have unlawfully disclosed
completion of the IPO to ensure that key executives are also inside information, pursuant to Article 187-bis of the Italian
considered for lock-up coverage. Security Act and Article 14 of the Market Abuse Regulation.

7.3 Do private equity sellers generally pursue a dual- 82 Financing

track exit process? If so, (i) how late in the process are
private equity sellers continuing to run the dual-track,
8.1 Please outline the most common sources of debt
and (ii) were more dual-track deals ultimately realised
finance used to fund private equity transactions in your
through a sale or IPO?
jurisdiction and provide an overview of the current state
of the finance market in your jurisdiction for such debt
The dual-track process is usually pursued by private equity funds (including the syndicated loan market, private credit
as it enhances the successful outcome of the exit strategy. The market and the high-yield bond market).
decision to move forwards with a sale or the IPO is usually taken
before the approval by CONSOB for the publication of the The structure of the financing of private equity acquisitions
prospectus and ultimately depends on the price offered by the in Italy largely depends on the size of the transaction. In the
potential buyers and capital market conditions. There have been mid-cap market, deals are generally financed through senior
cases in which the IPO process was cancelled immediately prior bank loans provided by a pool of banks or, for higher amounts,
to CONSOB’s approval and theoretically a decision to cancel the syndicated loans. The number of transactions financed with
IPO and complete a sale is possible also after the publication of the support of private debt providers by means of bond issu-
the approval, but prior to the notification of the allocations upon ance due to regulatory restrictions and the recourse to mezza-
completion of the book building process in the IPO context. nine financing, unitranches and vendor loans is also growing.
A dual-track exit process is usually functional to maximise the However, in larger transactions, acquisitions are also frequently
price paid to the seller(s), leading to more favourable T&Cs and financed through a combination of senior and mezzanine debt,
assuring a greater level of execution certainty. unitranches or senior debt and high-yield bonds. Financing
Dual-track strategies depend also on the portfolio company’s can include senior term and revolving debt, first and second
size. Small and mid-size portfolio companies are indeed less

Private Equity 2023

100 Italy

lien debt in the form of loans or notes, mezzanine term debt, 8.3 What recent trends have there been in the debt-
payment-in-kind loans or notes and vendor financing. financing market in your jurisdiction?
Furthermore, high-yield market is a viable source of acquisi-
tion financing; the related corporate structure, similarly to bank
At the beginning of 2023, the global increase of the costs of the
financing, may contemplate senior and subordinated debt compo-
debt financing and inflation caused a significant slowdown in
nents through the issuance of different types of notes, with
the M&A market, with banks and other traditional financers
senior secured notes eventually becoming structurally senior to
taking a conservative approach, becoming more selective in the
the subordinated notes. Despite this, the number of acquisitions
participation and tickets on the deals. This has led to a signifi-
entirely funded through a high-yield bond issuance is still limited
cant increase of private debt and unitranche financings – more
in the Italian market, but we expect a considerable increase of
expensive, but quicker in the delivery.
acquisition bond financing in the near future, in particular by
We have also seen an increase in the refinancing, add-ons
means of a combination of bridge to bond senior financings
and bridge financings aimed at consolidating capital struc-
granted by the arrangers for the purpose of completion of the
tures already in place (and maybe in initial financial tensions),
acquisition closing and their refinancing through bond issuance.
where the lenders seem to gain more contractual powers on the
borrower and be able to obtain more robust credit risk protec-
8.2 Are there any relevant legal requirements or tion (such as in terms of security package) than in the recent past.
restrictions impacting the nature or structure of the debt
financing (or any particular type of debt financing) of
private equity transactions?
92 Alternative Liquidity Solutions

9.1 How prevalent is the use of continuation fund

The main Italian law restrictions involve regulatory aspects, vehicles or GP-led secondary transactions as a deal type
financial assistance and corporate benefit issues. in your jurisdiction?
Regulatory provisions implies that only banks and other
authorised entity can enter into debt loans, while non-author-
In recent years, we have seen a significant growth in continua-
ised entities (such as the most part of the private debt funds and
tion funds and GP-led transactions. This is generally true for
other institutional investors) provide financing by means of bond
funds targeting their term of duration and is also driven by the
notes, having specific requirements imposed by Italian laws.
public markets’ volatility and uncertainty.
Financial assistance requirements restrict Italian companies
from directly or indirectly providing financial support (including
in the form of granting security to acquisition lenders) to buyers 9.2 Are there any particular legal requirements or
in the purchase of its shares. Any loan, guarantee or security restrictions impacting their use?
given or granted in breach of these provisions is null and void.
Although in certain cases a whitewash procedure is achiev- In continuation fund vehicles or GP-led secondary transactions,
able for targets to provide immediate support in acquisition the fiduciary duties and regulatory conflict of interest rules
financing, generally speaking in the context of leveraged buyout applying to Italian AIFMs will come into place.
(“LBO”) transactions, any financial assistance restriction would In particular, Italian AIFMs are required by law to act diligently,
cease to apply upon perfection of a debt push-down merger correctly and in a transparent manner in the best interests of the
between the NewCo/BidCo and the target made in compli- AIFs they manage, their investors and the integrity of the market.
ance with Italian law provisions related to LBO mergers (which Inter alia, they must: (1) be organised in a manner that mini-
also impose to follow a specific procedure contemplating a debt mises the risk of conflicts of interest and, in the event of a
sustainability test at the level of the combined entity) where, conflict, ensure the AIFs they manage receive fair treatment;
until the merger, the acquisition debt is likely to be supported and (2) adopt appropriate measures to safeguard the rights of the
only by means of a share pledge over the NewCo, as well as by investors in the AIFs they manage and have adequate resources
further security at the level of NewCo. In the second phase (i.e., and adopt appropriate procedures to ensure efficient perfor-
upon merger), in addition to the share pledge over the merged mance of their services.
entity, the financing could also benefit from further security Given that the Italian AIFM is on both sides of the deal in
interests created over significant assets of the combined entity. such transactions, the AIFM would need to comply with its
Corporate benefit requirements impose that Italian compa- fiduciary duties and regulatory conflict of interest rules, imple-
nies, providing upstream and/or cross-stream security inter- menting internal processes and structure to manage and monitor
ests and guarantees in the interest of their parent company these conflicts of interest.
financing, obtain a direct or indirect tangible benefit from the
secured transaction. The existence of a corporate benefit for 102 Tax Matters
an Italian entity is ultimately a matter of fact – rather than a
legal concept – to be carefully evaluated by the management of
10.1 What are the key tax considerations for private
the relevant Italian guarantor, and the guaranteed or secured
equity investors and transactions in your jurisdiction?
amount must not materially exceed the financial capability of Are off-shore structures common?
the Italian guarantor. The market practice has elaborated some
solutions for helping directors in evaluating the existence of
corporate benefit and its “translation” in the relevant financing Different key tax and structuring considerations may come into
documentation (such as, for instance, limiting the maximum play depending on the type of acquisition (minority vs 100% or
amount guaranteed by an Italian subsidiary to the amount of listed company vs private).
intragroup debt received by it). Nevertheless, the existence of In all circumstances, given the fairly significant amount of
the corporate benefit must be evaluated on a case-by-case basis. taxes still applicable in Italy on interest, dividends and capital
gains, special attention is devoted to efficient tax structuring in
order to manage those charges. Intermediate foreign (typically

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 Legance 101

EU) holding or finance companies generally play an impor- clarifications have been released by the tax authority that have
tant role in this attempt. One key aspect is always ensuring provided a much more relaxed (tax) environment for most LBO
maximum deductibility of interest expenses in combination transactions. It has been clarified that although the financing is
with no interest withholding tax on payments to lenders. Of not strictly linked to the target but is an acquisition financing, it
course, repatriation of dividends or capital gains on exit free will be deductible upon certain specific conditions. Similar to
from withholding tax are also key factors when structuring the other EU jurisdictions, interest will only be deductible within
acquisition in order to maximise return from the investments. the 30% EBITDA interest barrier rule.
Recent amendments to the Italian legislation introduced The current hot topics in Italian tax legislation are mostly
a total exemption on dividends and capital gains realised by connected to the recent changes in the EU tax system and
EU-based AIFs, thereby making investments in Italian targets connected attention to cross-border transactions. In particular,
much simpler and more efficient for those entities. restrictions set forth in the implementation of the Anti-Tax
Italy is one of the few countries that introduced measures to Avoidance Directive (including anti-hybrid rules) and the EU
incentivise capitalisation of companies vs leverage through the Directive on administrative cooperation need to be carefully
granting of a notional interest deduction (“NID”). Maximising addressed when structuring private equity deals.
the effect of the NID while still maintaining deductibility of the As to the 2019 so-called “Danish” cases (concerning the
interest on the acquisition financing is key. beneficial ownership of EU-based holding structures and abuse
Another area of interest is management plans, to make sure of EU Parent-Subsidiary/Interest and Royalties Directives),
their incentive schemes are designed to fit within the beneficial the European Court of Justice’s approach is mostly consistent
carried interest regime. with the long-standing position of the Italian tax administra-
tion. In other words, such cases cannot be deemed as signifi-
cantly affecting the Italian tax system, but rather as confirming
10.2 What are the key tax-efficient arrangements that a sound approach as to substance/beneficial ownership tests of
are typically considered by management teams in private EU intermediate holding companies.
equity acquisitions (such as growth shares, incentive The 2023 Italian Budget introduced the investment manage-
shares, deferred / vesting arrangements)?
ment exemption (“IME”), a provision according to which the
investment management activities carried out in Italy by asset
Italy has only recently introduced a somewhat safe harbour favour- managers should not give rise to a permanent establishment
able carried interest regime, which, in certain circumstances (“PE”) of the foreign investment vehicle (or its subsidiaries) if
(among which (i) minimum managers’ co-investment equal to 1% certain conditions are met.
of the value of the target, and (ii) minimum investment period), may Specifically, an Italian or foreign tax resident asset or invest-
ensure tax treatment as a financial investment (26%, as opposed ment manager operating in Italy, which habitually concludes
to employment income tax treatment up to 43%) to investment (or contributes to the conclusion of ) contracts for purchasing,
instruments (preferred shares or other preferred financial instru- selling or negotiating financial instruments (including deriva-
ment) providing “additional remuneration” above a certain hurdle tives, shares and receivables) in the name and/or on behalf of the
rate compared to ordinary equity investment. If the safe harbour foreign investment vehicle (or its subsidiaries), would not consti-
requirements are met, the more beneficial tax treatment will be tute a PE of the latter to the extent that:
guaranteed even if a clear link exists between the employment ■ the foreign investment vehicle and its subsidiaries are resi-
position and the entitlement to the “preferred remuneration”. dent in white-listed jurisdictions;
■ the foreign investment vehicle satisfies the independence
requirements indicated in a Decree to be issued by the
10.3 What are the key tax considerations for Ministry of Finance;
management teams that are selling and/or rolling over
■ the Italian or foreign tax resident asset/investment manager
part of their investment into a new acquisition structure?
operating in Italy is not a member of the foreign investment
vehicle’s (and its subsidiaries’) administration and control
Much depends on the actual co-investment scheme but, in general, bodies;
when simply selling their co-investment, management teams will ■ the Italian or foreign tax resident asset/investment manager
seek where possible to enjoy a particular tax scheme that allows operating in Italy is not entitled to more than 25% of the
an increase in the value of the investment by paying an 11% tax foreign investment vehicle’s economic results;
on the full fair market value of the instrument. Subsequent sales ■ the Italian asset/investment manager or the Italian PE of
would be carried out without realising any chargeable gain. the foreign asset/investment manager receive an arm’s-
In the context of a possible reinvestment, to the extent that length remuneration supported by appropriate transfer
(i) terms and conditions of the “new” scheme are not materi- pricing (“TP”) documentation (Italian tax authorities’
ally different from the old terms, and (ii) the purchaser is ready guidelines will be issued).
to cooperate, it is possible (although not common) under certain This legislation, as has happened in other jurisdictions that
circumstances to obtain a roll-over of the management teams’ have adopted similar provisions, should provide more comfort to
scheme into a new acquisition structure without realising a charge- the investment management industry willing to locate all or part
able gain. of their activities or managers in Italy.

10.4 Have there been any significant changes in tax

112 Legal and Regulatory Matters
legislation or the practices of tax authorities (including
in relation to tax rulings or clearances) impacting private 11.1 Have there been any significant legal and/or
equity investors, management teams or private equity regulatory developments over recent years impacting
transactions and are any anticipated? private equity investors or transactions and are any
anticipated?
Historically, acquisition structures have been severely challenged
by the Italian tax administration on the basis of non-deducti- Italian laws implemented Directive 2011/61/EU of the Euro-
bility of interest on acquisition financing. Since 2016, certain pean Parliament and of the Council of June 8, 2011 on

Private Equity 2023

102 Italy

alternative investment fund managers in 2015. In this context, exercise is very detailed, in particular if the parties decide to
Italian private equity fund managers have been impacted by the execute a W&I policy (since a very detailed due diligence report
following provisions: (i) rules prohibiting “asset stripping” by would be requested by the insurer). In other cases, it can be
private equity firms in the case of an acquisition of control over a carried out at a higher level. Of course, it varies case by case,
company having its registered office in the EEA (i.e., the AIFM also depending on the needs of the purchaser, the size of the
is not allowed, for a period of two years following the acquisi- target, and the type of investment.
tion of control, to facilitate, support, instruct, or vote in favour Another factor to be taken into account by private equity
of certain distributions, capital reductions, share redemptions players in the Italian market is that the surge of the presence of
and/or acquisitions of own shares by the relevant company, and global investors in the Italian private equity sector also raised the
must in fact use its best efforts to prevent any such transactions bar on environmental, social and governance (“ESG”) factors.
from taking place); (ii) the obligation for the AIFM to make As a consequence, sector organisations, strategic and financial
certain information available to investors before they invest in investors, and lawmakers are paying more attention to the ESG
the fund, including a description of the investment strategy; and factors (with particular regard to the health of the employees
(iii) the obligation for the AIFM to disclose, to the competent and workers), which nowadays must be taken into consideration
authorities as well as to shareholders and employees of target in performing an acquisition in Italy and must be covered by due
companies, information on the acquisition of control and their diligence exercises as well as by the terms of the relevant M&A
intentions on the future business of the company and repercus- contractual documentation.
sions on employment. If the target is sizeable, it is common for parties to agree
Moreover, it is worth mentioning that recent developments on materiality thresholds, in order to avoid a long and expen-
in the Italian anti-money laundering (“AML”) framework have sive due diligence activity. The magnitude of the contractual
required all Italian corporate entities to disclose to the Compa- warranties plays a fundamental role in such respect: if many
nies’ Register the identity and relevant information on the bene- material warranties are previously agreed, the due diligence may
ficial owners of the companies. The definition of beneficial become a smoother process.
owner is coherent with the EU framework and also applies to As per the timings, provided that it depends on the amount of
private equity funds holding interest in Italian corporate entities. documentation to analyse, three or four weeks might suffice to
complete the due diligence.
In certain cases, an additional or confirmatory due diligence
11.2 Are private equity investors or particular
transactions subject to enhanced regulatory scrutiny in between signing and closing may be agreed upon by the parties
your jurisdiction (e.g., on national security grounds)? and/or requested by the buyer, especially in the context of
competitive procedures.
Generally, Italian law does not set out any specific enhanced
restrictions applying to private equity investors. It remains 11.5 Has anti-bribery or anti-corruption legislation
understood that, in the case of transfers of equity interests, impacted private equity investment and/or investors’
the status and characteristics of the transferee are relevant in approach to private equity transactions (e.g., diligence,
contractual protection, etc.)?
the context of any authorisation procedure, where applicable.
Reference is made, in particular, to transactions involving banks
and re-insurance companies as well as other financial institu- Anti-bribery and anti-corruption legislation has a material
tions subject to the supervision and rigorous scrutiny of EU impact on private equity investments in Italy, especially for
and national supervisory authorities or companies subject to the certain types of acquisitions (e.g., where the target operates in
golden power regime. certain specific sectors or deals with the public administration).

11.3 Are impact investments subject to any additional 11.6 Are there any circumstances in which: (i) a private
legal or regulatory requirements? equity investor may be held liable for the liabilities of
the underlying portfolio companies (including due to
breach of applicable laws by the portfolio companies);
Recent key changes to the regulatory regime of Italian AIFMs and (ii) one portfolio company may be held liable for the
are mostly driven by EU legislation on sustainable finance. liabilities of another portfolio company?
After the entry into force of Regulation (EU) 2019/2088 on
sustainability-related disclosures in the financial services sector
A private equity investor could potentially be considered liable
(the Disclosure Regulation) and Regulation (EU) 2020/852
for the underlying portfolio companies in case of its exercise of
on the establishment of a framework to facilitate sustainable
“direction and coordination” activity.
investment (the Taxonomy Regulation), many funds are now
In particular, to be held liable, a company shall exercise direc-
being structured and promoted as being compliant with Article
tion and coordination activity and act in its own or another’s
8 or 9 of the Disclosure Regulation, also in view of the alloca-
business interest in violation of the principles of proper corpo-
tions that several institutional investors have reserved for funds
rate and business management of the controlled company.
in this category.
The foregoing may expose the directing company to liability
for damages towards the shareholders and creditors of the
11.4 How detailed is the legal due diligence (including controlled company.
compliance) conducted by private equity investors prior The above liability is excluded when the damage is non-
to any acquisitions (e.g., typical timeframes, materiality, existent in light of the overall result of the direction and coor-
scope, etc.)? dination activity, or is entirely eliminated, also further to action
taken specifically for such purposes.
The accuracy of the due diligence conducted by private equity
players depends on several factors. Generally, the due diligence

Private Equity 2023

 Legance 103

long-term effects on the community and the environment. The

122 Other Useful Facts NRRP’s impact might result in a big incentive for the Italian
business environment and M&A industry.
12.1 What other factors commonly give rise to concerns The ongoing implementation of the NRRP coupled with a
for private equity investors in your jurisdiction or should
renewed political stability, which will hopefully permeate the
such investors otherwise be aware of in considering an
investment in your jurisdiction?
year ahead strengthening the international investors’ confidence
in the Italian business environment and, at same time, encour-
aging Italian family-owned businesses to embrace generational
The continuing implementation of the NRRP has represented handovers and open their businesses to global markets.
a significant leverage in the private equity activity. This plan Another important driver for the private equity is the neces-
is intended to trigger a transformational economic and social sity for the Italian family-owned businesses to consolidate their
change in Italy, with the aim of resetting the “rules of the game business and/or open their capital to: (i) strategic business
in the Italian society”. It is based on three strategic axes: (1) digi- lines; or (ii) to financial sponsors. This will help for a stronger
talisation and innovation; (2) ecological transition; and (3) social growth/consolidation, internationalisation, managerialisation,
inclusion, with a clear environmental, social and governance (i.e. innovation, and generational change.
ESG) focus to promote sustainable development with positive

Private Equity 2023

104 Italy

Marco Gubitosi is the London Resident Partner and a Corporate Finance Partner at Legance, one of the Italian leading law firms, with more
than 300 fee earners and offices in Rome, Milan and London (https://www.legance.com).
Marco has been recognised by Leaders League in the tier “leading” of Private Equity lawyers – Italy.
Marco has been involved in several major transactions carried out on the Italian and international markets; in particular, in corporate finance,
LBOs, mergers, acquisitions (private and public), private equity buyouts, divestitures, real estate transactions and joint ventures.
He regularly advises Italian and foreign banks, financial institutions, private equity houses, real estate and sovereign funds, family offices as
well as large corporates and family-owned businesses..
Marco has earned an LL.M. in International Corporate and Commercial Law at King’s College London, and an LL.M. at Universitée Libre de
Bruxelles, Institute des Hautes Etudes Européennes, Bruxelles. He has also attended several other executive educational programmes,
including, among others: Mergers and Acquisitions: Structuring and Leading Deals, Harvard Law School; The Law and Economics of Mergers
and Acquisitions at The London School of Economics and Political Science; and Private Equity Masterclass, The London Business School.
Marco has developed his expertise both in Italy and abroad, working in New York, Beijing and London in particular.
Marco is a regular lecturer and speaker at conferences, workshops and seminars at professional associations and academic institutions,
both in Europe and the United States, as well as the author of publications and articles on corporate law, M&A, and private equity.

Legance Tel: +39 02 89 63 071

Via Broletto, 20 Email: mgubitosi@legance.it
20121, Milan URL: www.legance.com
Italy

Lorenzo De Rosa is Counsel at Legance. Lorenzo advises industrial investors and private equity funds in acquisitions and divestures,
mergers and demergers, joint ventures and other extraordinary transactions. Lorenzo specialises in M&A transactions with a focus on regu-
lated entities, as well as in real estate transactions.
Lorenzo earned an LL.M. in Banking, Corporate & Finance Law at Fordham University (New York City, New York) and a J.D. at Università
“LUISS – Guido Carli” (Rome, Italy).

Legance Tel: +39 06 93 18 271

Via di San Nicola da Tolentino, 67 Email: lderosa@legance.it
00187, Rome URL: www.legance.com
Italy

Legance is an independent law firm with offices in Milan, Rome and

London. Founded in 2007 by a group of acclaimed partners who began
their careers in the same law firm, Legance distinguishes itself in the legal
market as a point of reference for both clients and institutions.
Legance’s rapid growth is undisputed evidence of its strength in legal
services, and its achievements are the result of a consistent strategy
focused on creating value around the institutional nature of the firm.
Legance, thanks to the firm’s constant attention to clients’ needs, and an
unconventional approach, has positioned itself at the top of the national
and international market.
The name Legance evokes unity and excellence: these fundamental prin-
ciples have been at the foundation of the law firm and have supported its
standing. Legance, thanks to a strong international practice, can support
clients from several different geographical areas, and organise and coordi-
nate multi-jurisdictional teams.
www.legance.com

Private Equity 2023

 Chapter 13 105

Japan

Japan
Dai Iwasaki

Yusuke Takeuchi

Tokyo International Law Office Tomo Greer

with the average age of a CEO in Japan being 60. Combined

12 Overview with a shrinking population and educated younger generations
moving to Tokyo rather than taking over family businesses,
1.1 What are the most common types of private equity this has resulted in increasingly serious and pernicious Japan-
transactions in your jurisdiction? What is the current
wide succession problems. Small to medium-sized businesses
state of the market for these transactions?
(SMEs) account for 99.7% of Japan’s 3.8 million companies,
and government data shows over 40,000 SMEs are looking for
Buyout funds using leveraged financing, and start-up deals by a successor, indicating the succession M&A boom will continue
venture capital funds (VC), have become synonymous with to encourage PE investment.
private equity (PE) in Japan. By value, the Japanese PE market Geopolitical tension has also meant the “dry powder” raised
is dominated by buyouts. Japan generated 21 buyouts in 2021. for Asian deals, now less likely to be used in China, will be
Between 2014–2020, while PE deals were on average 1.3% used in Japan. Japan is a mature but politically stable economy,
of the US’s GDP and 1.5% of UK’s, they were only 0.2% of making it appealing as an alternative investment.
Japan’s. For VCs, while USD 329 billion was raised by VCs to
invest in US start-ups in 2021, Japan only raised USD 5.8 billion.
However, PE deals have steadily risen since the early 2000s. 1.3 Are you seeing any types of investors other
than traditional private equity firms executing private
2021 was a record year for PE deals, with a total of 132 deals and
equity-style transactions in your jurisdiction? If so,
total deal value of USD 8.9 billion. In 2022, however, the total please explain which investors, and briefly identify any
deal value for PE in Japan dropped by 28% from 2021, largely significant points of difference between the deal terms
due to exchange rate fluctuations caused by a weak yen. offered, or approach taken, by this type of investor and
that of traditional private equity firms.
1.2 What are the most significant factors currently
encouraging or inhibiting private equity transactions in While pension funds account for around a quarter of PE invest-
your jurisdiction? ments worldwide and constitute the biggest group of investors,
the biggest players in Japan are corporate investors and banks,
Japanese shares are well known for trading below market value, with pension funds accounting for only 10%.
and Japanese public companies’ price-to-earnings ratios are However, in 2020, the Government Pension Investment Fund
significantly cheaper than those of the US. (GPIF), the world’s biggest pension fund, published a five-year
Inflation has been low for decades and the yen is also weak. investment plan that outlined its intention to set aside up to 5%
Recent corporate governance code reforms put pressure on Japa- of its investments for “alternative investments”, including PE.
nese companies to restructure operations, leading to a prolifer- As at the end of March 2022, JPY 3 billion had been invested
ation of conglomerates making divestments and carveouts of into PE. In 2022, GPIF executed its first investment agreement
their non-core assets. The sale to PE of significant Japanese with a domestic start-up fund.
entities was unthinkable a decade ago.
Attitudes towards PE investors have changed too. PE is the 22 Structuring Matters
antithesis of stereotypes of how Japanese companies operate,
with institutional investors being passive and decision-making 2.1 What are the most common acquisition structures
being consensus-based. In addition, the COVID-19 pandemic adopted for private equity transactions in your
increased the pressure to accelerate change, especially digi- jurisdiction?
talisation. The dynamism, digitalisation expertise, and the
global network that PE can bring to Japanese companies have There are four main vehicles: investment limited partnerships
never been more attractive. This is especially true for CEOs (LPS) and foreign limited partnerships are the most common,
over 60 years old – Japan’s largest group of business owners, with general partnerships (GP) and silent partnerships (tokumei

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106 Japan

kumiai ) used in limited cases. The best vehicle depends on 2.6 For what reasons is a management equity holder
the nature of the fund’s contemplated transactions and other usually treated as a good leaver or a bad leaver in your
factors, including the number of partners and whether the fund jurisdiction?
will invest only in Japan.
The typical LPS acquisition structure involves the LPS estab- Good leavers are those who cease to be contracted because of
lishing a special purpose company (SPC) and acquiring common retirement, disability or death, or expiration of the term of office.
stock in the target company through the SPC. Bad leavers are those who have their management contract
terminated for a breach of contract or of a duty of care owed to
2.2 What are the main drivers for these acquisition the company.
structures?
32 Governance Matters
Tax benefits, limited liability of the limited partners and the ease
of setting up are drivers for PE choosing an LPS structure. 3.1 What are the typical governance arrangements
An LPS is prohibited from investing 50% or more of its assets for private equity portfolio companies? Are such
in foreign companies unless expressly permitted by the Ministry arrangements required to be made publicly available in
of Economy, Trade and Industry (METI) Minister. Thus, in your jurisdiction?
cases where the fund contemplates that more than half of its
investments will be in foreign companies, a foreign LPS estab- Governance arrangements including veto rights are agreed in
lished in tax-neutral countries is common. The pass-through SHAs or investment agreements that are not publicly disclosed.
status of a foreign LPS will be further discussed in question 10.4. However, the terms of different classes of shares must be regis-
On the other hand, in a GP, all partners would be liable for tered on the corporate registry that is publicly available.
the GP’s liabilities, and, in a silent partnership, an investment For VCs, in most cases, preference shares may be issued,
manager enters into individual agreements with “silent partners”, giving VCs a right to appoint a board director, preferential divi-
making it difficult to manage if the fund has numerous partners. dend payments, and/or preferential distribution of residual
assets, though less common for traditional PE funds.
2.3 How is the equity commonly structured in private
Alternatively, early VC shareholders may agree to a “deemed
equity transactions in your jurisdiction (including preferred stock” scheme. This is the Japanese solution to
institutional, management and carried interests)? common issues faced by issuing traditional “convertible notes”
that in other jurisdictions are usually used by angel investors in
the initial financing round. Deemed preferred stock is created
Buyouts are the most common in Japan for traditional PE
by issuing common stock and all shareholders agreeing to
investors, with 60% of buyouts using leveraged buyout (LBO)
convert it into preferred stock in the next financing. They can
financing for acquisitions in 2021, according to METI. Funds
be issued through the standard procedure of issuing common
collect investment from institutional investors and prefer to
stock, eliminate the need to hold meetings required under the
take majority equity. This control allows PE to execute its busi-
Companies Act for preferred stockholders, and have a positive
ness model; to restructure and implement dynamic change in an
effect on the company’s debt-equity ratio.
existing business.

3.2 Do private equity investors and/or their director

2.4 If a private equity investor is taking a minority
nominees typically enjoy veto rights over major
position, are there different structuring considerations?
corporate actions (such as acquisitions and disposals,
business plans, related party transactions, etc.)? If a
Like other jurisdictions, securing veto rights to fundamental private equity investor takes a minority position, what
decisions concerning the direction and operation of the target veto rights would they typically enjoy?
company in the shareholders agreement (SHA) is crucial.
Minority investors may want to negotiate appointing an observer If PE holds the majority of stock, veto rights are unnecessary.
to the board of directors and securing rights to obtain informa- For VCs (and traditional PE taking a minority position), veto
tion from the target company since, as a general rule under the rights are frequently agreed. These are decided on a case-by-
Companies Act, resolutions at shareholders meetings for the case basis, but may include rights over: (i) the constitution of
election or dismissal of officers must be passed by the majority the company, including amendment of governing documents
of shareholder votes. and organisation/reorganisation; (ii) those relating to capital,
including share buybacks, stock splits, and new shares; (iii) those
2.5 In relation to management equity, what is the
relating to the direction of the company such as business plans;
typical range of equity allocated to the management, and and (iv) those relating to day-to-day operations, such as the
what are the typical vesting and compulsory acquisition execution of material contracts, transfer of assets over a certain
provisions? amount, and taking on debt.

The equity given to management varies case-by-case. Ordi- 3.3 Are there any limitations on the effectiveness of
narily in buyouts, PE take majority control and only a minority veto arrangements: (i) at the shareholder level; and (ii) at
is allocated to management. the director nominee level? If so, how are these typically
Compulsory acquisition provisions often agreed between PE addressed?
and management equity holders in the SHA include drag-along
rights. Parties to SHAs are free to come to their own veto arrange-
ments, the contractual law caveat being that they cannot violate
public morals.

Private Equity 2023

 Tokyo International Law Office 107

However, the orthodox legal view is that a breach of SHA to carry out transactions that compete with the company, or a
veto provisions only allows damages as a remedy and is not a director wishes to receive a loan from the company), the Compa-
ground to invalidate shareholder resolutions. nies Act requires that such director obtain prior approval from
However, recent cases discussed the possibility that if the share- the board of directors (if the company has no board, then the
holders’ intentions are clear in creating a legally binding obliga- shareholders meeting) to conduct the transaction.
tion, and that all shareholders of the company are a party to such The Companies Act further prohibits a director who has a
SHA, such relief as an interim injunction of exercising of voting special interest in a resolution, including a director who intends
rights or invalidation of a shareholder resolution could be granted. to conduct a conflict-of-interest transaction as mentioned
above, from voting in the approval of the resolution, and such a
3.4 Are there any duties owed by a private equity
director will be excluded from the quorum.
investor to minority shareholders such as management
shareholders (or vice versa)? If so, how are these 42 Transaction Terms: General
typically addressed?
4.1 What are the major issues impacting the timetable
There are no legal duties specifically owed by a PE investor to for transactions in your jurisdiction, including antitrust,
minority shareholders. foreign direct investment and other regulatory approval
requirements, disclosure obligations and financing
issues?
3.5 Are there any limitations or restrictions on the
contents or enforceability of shareholder agreements
(including (i) governing law and jurisdiction, and (ii) Merger control regulations may require that buyers make a filing
non-compete and non-solicit provisions)? to the Japan Fair Trade Commission if (i) the annual turnover
of the acquiring parties and the target meet the relevant thresh-
olds, and (ii) the acquisition of shares by a party results in such
Although a company established in Japan must comply with the
party holding more than 20% or 50% of the total voting rights
Japanese Companies Act, parties to SHAs are free to choose
of the target.
foreign governing laws and jurisdictions. Parties are also free to
Under the Forex Act, if foreign investors either (a) acquire
include non-compete and non-solicitation provisions in SHAs. As
shares of a non-listed companies (except for purchases from
a rule of thumb and in practice, a restriction of two to three years
foreign investors), or (b) acquire shares of a listed companies
would be deemed as reasonable by the court, and what would be
deemed reasonable will depend entirely on the circumstances. whereby the shareholding or voting rights ratio of such foreign
investors after the acquisition is at least 1%, foreign investors
must submit a 30-day prior notification or file a post-closing
3.6 Are there any legal restrictions or other report to the Authorities, with some exemptions. The govern-
requirements that a private equity investor should ment can block potential investments but, to date, there has been
be aware of in appointing its nominees to boards of only one case where a suspension order was issued. While the
portfolio companies? What are the key potential risks
and liabilities for (i) directors nominated by private
government has an open-door attitude towards foreign inves-
equity investors to portfolio company boards, and (ii) tors, the recent regulatory reforms’ tightening grip on foreign
private equity investors that nominate directors to investments shows a slight shift in its attitude.
boards of portfolio companies? In 2021, Chinese tech giant Tencent Holdings acquired a
3.65% stake of Rakuten Group, Inc. The fact that such a polit-
The Foreign Exchange and Foreign Trade Act (Forex Act) restricts ically sensitive transaction was able to close without needing to
investments by foreign investors in certain sectors, and persons/ submit a prior notification shows the potential loopholes in the
entities from certain geographic areas. These include investments Forex Act, and highlights differences between rigid FDI regu-
relating to national security and protected domestic industries lations of other jurisdictions such as the Committee on Foreign
such as agriculture. If a foreign investor desires to appoint itself as Investment in the United States (CFIUS). While no prior filing
a director of the target company, that is engaged in these restricted was eventually required, a few days before the closing of the
sectors, then the Forex Act requires that a 30-day-prior notifi- transaction Rakuten announced that the closing may be delayed
cation is submitted through the Bank of Japan to the Minister due to procedures required under the Forex Act. Rakuten’s
of Finance and the minister having jurisdiction over the relevant sudden announcement served as a cautionary tale. We now see
transaction (hereafter abbreviated as “Authorities”). more foreign investors initiating pre-consultations with the Bank
Directors also owe a duty of care to the company that may of Japan if a notification obligation could possibly be triggered.
at times conflict with the PE investor’s interests. If a director Subsequently, in May 2022, the Economic Security Promo-
breaches their duty of care to the company they are on the board tion Act – Japan’s first comprehensive economic security legisla-
of, they can be held liable for resulting damages. tion to enhance national security – was enacted. The act provides
In some cases, to mitigate liabilities of directors (especially for four measures: (i) securing resilient supply chain for strategic
outside directors) the articles of association of a company may resources; (ii) securing safety and reliability of key infrastructures;
have a clause allowing to execute a contract limiting the liability (iii) research and development (R&D) aid for advanced technol-
of directors on the condition they do not partake in the daily ogies; and (iv) nondisclosure of sensitive patents. As a result, in
operation of the company. April 2023, additional sectors were added to the “core business
sectors” that require prior notification and review by the Japanese
government under the Forex Act, including manufacturing equip-
3.7 How do directors nominated by private equity
ment businesses of semiconductors and storage batteries.
investors deal with actual and potential conflicts of
interest arising from (i) their relationship with the party
nominating them, and (ii) positions as directors of other 4.2 Have there been any discernible trends in
portfolio companies? transaction terms over recent years?

In a conflict-of-interest transaction (e.g., when a director intends In general, since the recent arrival of PE in Japan, transactions

Private Equity 2023

108 Japan

terms have been investor friendly. This is because the PE Japanese deals are based on buyer-friendly US-style contracts
climate in Japan has been heavily influenced by investor-friendly and have become even more buyer-friendly than typically seen
US PE market. in US-style contracts. For instance, the definition of “mate-
rial adverse change” is often drafted to be simple and vague,
52 Transaction Terms: Public Acquisitions giving the buyer the right to invoke the clause in a range of
circumstances. Warranty clauses are more extensive if a foreign
5.1 What particular features and/or challenges apply company or PE is involved.
to private equity investors involved in public-to-private Typical warranties in relation to PE sellers include title to shares,
transactions (and their financing) and how are these capacity, required corporate procedures being met, and satisfac-
commonly dealt with? tion of necessary government filings. In relation to management,
they include warranties in relation to the target company’s finan-
The Financial Instrument and Exchange Act (FIEA) requires cial statements, bank borrowings, and compliance with laws.
any non-open market acquisition that results in investors Unique to Japan, it is standard to include that neither the
owning more than ⅓ of all issued stock in a public company to company nor the management are involved with “anti-social”
be conducted by a tender offer. forces, i.e., no dealings with organised crime groups such as
To squeeze out minority shareholders: (i) if PE investors the mafia.
already hold 90% or more of the total voting rights, they can
do so by demanding the minority transfer their shares, provided
6.3 What is the typical scope of other covenants,
that the prior approval of the board is obtained; and (ii) if not, undertakings and indemnities provided by a private
a special resolution of the shareholders meeting is required to equity seller and its management team to a buyer?
approve the squeeze-out process, such as a consolidation of
shares or a share exchange.
Further, the FIEA requires investors acquiring a shareholding Pre-closing covenants are in line with international standards
of more than 5% of shares in a listed company to file a report and include covenants to operate the business in the ordinary
to the local financial agency within five business days from course of business, or not to do anything that would materially
the acquisition. If new shares in a public company are issued adversely affect the business, although the definition of “mate-
to PE investors through a third-party allotment, the FIEA rial adverse effect” is rarely as detailed as in US-style contracts.
requires such a company to publicly disclose certain informa- If specific risks in relation to the target company are uncovered
tion concerning such investors. during the due-diligence process, indemnities and special indem-
nities are commonly included – often with a cap and time limit.
5.2 What deal protections are available to private
equity investors in your jurisdiction in relation to public 6.4 To what extent is representation & warranty
acquisitions? insurance used in your jurisdiction? If so, what are the
typical (i) excesses / policy limits, and (ii) carve-outs /
exclusions from such insurance policies, and what is the
Deal protection clauses are rare but available. Where a conflict
typical cost of such insurance?
of interest exists in the transaction (e.g., a management buyout),
METI’s Fair M&A Guidelines discourage any clause prohib-
iting the target company from interacting with other buyers. A Warranty and indemnity (W&I) insurance is a recent phenom-
break-up fee would be permissible, unless it is excessively high. enon in Japan. Many Japanese companies do not have expe-
The Supreme Court remarked in a case concerning a non-so- rience with W&I insurance, and foreign insurance companies
licitation clause in a MOU between Sumitomo Trust v UFJ Holdings dominate the market. Because calls with underwriters must be
that, if there is objectively no possibility of reaching a definitive conducted in English, and legal due diligence reports must be
agreement, there could be no binding non-solicitation obliga- translated for underwriters, thus creating additional costs, Japa-
tion. The court stated there was still a possibility of reaching nese companies are resistant to involve W&I insurance brokers
a definitive agreement in this case. Nonetheless, it rejected an for domestic deals. It is usually necessitated by a foreign PE.
interim injunction sought to prevent UFJ from approaching The excess and policy limit depends on the size of the trans-
Mitsubishi Tokyo Group, one reason being that damages action and the result of due diligence. Tax liabilities, especially
suffered by Sumitomo Trust were merely a loss of an expecta- secondary tax liabilities, are typically carved out.
tion that the parties would conclude a definitive agreement.
6.5 What limitations will typically apply to the liability
62 Transaction Terms: Private Acquisitions of a private equity seller and management team under
warranties, covenants, indemnities and undertakings?
6.1 What consideration structures are typically
preferred by private equity investors (i) on the sell-side,
and (ii) on the buy-side, in your jurisdiction? A limitation on PE’s liabilities with respect to the amount and
the period are typical. If W&I insurance is used for transactions,
more aggressive limitations may be set.
Unlike European deals, most Japanese deals adopt the closing The cap on the liability of sellers is much higher than jurisdic-
account structure. This applies to both buy-side and sell-side, tions such as the US and is set anywhere between 10% and 40%
and we rarely see locked box structures used in Japan. of the purchase price. The time period is in line with interna-
tional standards; it may be 10 years from closing for fundamental
6.2 What is the typical package of warranties / warranties, but shorter for general warranties that are typically
indemnities offered by (i) a private equity seller, and (ii) set for one to three years. In any event, Japanese buyers usually
the management team to a buyer? secure a period long enough to allow them to create a round of
financial statements to assess the financial status of the company.
Many of the warranties and representations typically seen in

Private Equity 2023

 Tokyo International Law Office 109

6.6 Do (i) private equity sellers provide security (e.g., 7.3 Do private equity sellers generally pursue a dual-
escrow accounts) for any warranties / liabilities, and track exit process? If so, (i) how late in the process are
(ii) private equity buyers insist on any security for private equity sellers continuing to run the dual-track,
warranties / liabilities (including any obtained from the and (ii) were more dual-track deals ultimately realised
management team)? through a sale or IPO?

It is uncommon for PE sellers to provide securities. Escrow Dual-track processes are not as common as in other jurisdic-
accounts are uncommon, as the law prohibits entities other tions, and potential sellers rarely run an M&A sale track along-
than trust banks, commercial banks, or lawyers from becoming side a potential IPO exit.
escrow agents.
82 Financing
6.7 How do private equity buyers typically provide
comfort as to the availability of (i) debt finance, and (ii) 8.1 Please outline the most common sources of debt
equity finance? What rights of enforcement do sellers finance used to fund private equity transactions in your
typically obtain in the absence of compliance by the jurisdiction and provide an overview of the current state
buyer (e.g., equity underwrite of debt funding, right to of the finance market in your jurisdiction for such debt
specific performance of obligations under an equity (including the syndicated loan market, private credit
commitment letter, damages, etc.)? market and the high-yield bond market).

In cash transactions, it is common to include a warranty on the For traditional PE funds, regardless of the size or type of trans-
solvency of the buyer. Where buyers use debt financing, condi- action, debt financing is typically in the form of a senior facility
tion precedents to closing may include the buyer’s submission of loan, often by Japan’s “megabanks”, increasingly combined with
a copy of a commitment letter issued by a financial institution. mezzanine financing, including subordinated loans, convertible
debt, or preferred shares. For larger deals, we see syndicated loans
6.8 Are reverse break fees prevalent in private equity
financed from several banks. In general, the value of these loans
transactions to limit private equity buyers’ exposure? If has been increasing, as seen in recent famous examples such as
so, what terms are typical? Japan Industrial Partners’ led consortium acquiring Toshiba.
The SPC set up by the PE typically takes out the loan to
acquire stocks in the target company. Bonds are rarely used as
In general, reverse break fees are not prevalent in Japan but
a source of financing, as the issuance of secured bonds is regu-
would be enforceable provided that the amount is reasonable.
lated under the Secured Bond Trust Law.
Due to the lack of assets and trustworthiness in the eyes of
72 Transaction Terms: IPOs institutional lenders, VCs face hurdles in obtaining bank loans,
and more extensive reviews are conducted by underwriters,
7.1 What particular features and/or challenges should resulting in mezzanine financing being more commonly used.
a private equity seller be aware of in considering an IPO
exit?
8.2 Are there any relevant legal requirements or
restrictions impacting the nature or structure of the debt
PE sellers considering an initial public offering (IPO) exit financing (or any particular type of debt financing) of
must comply with disclosure requirements set by the Financial private equity transactions?
Services Agency of Japan (FSA) under FIEA, as well as listing
regulations set by each stock exchange – including the Tokyo
The Money Lending Business Act regulates who can offer debt
Stock Exchange (TSE). For instance, TSE rules require compa-
financing and any person intending to engage in money-lending
nies to have at least one independent officer.
business must meet its requirements and register with the FSA.
Costs of IPOs include the listing examination fee and initial
Requirements include having a certain threshold of net assets
listing fee; in case of the TSE, JPY 4 million and JPY 15 million
and, in each office, having a person who passed examinations
respectively. There are many other fees such as to underwriters,
conducted by the FSA. This has the practical effect of limiting
auditors, and listing maintenance costs.
entities offering debt financing to banks and insurance companies.

7.2 What customary lock-ups would be imposed on

8.3 What recent trends have there been in the debt-
private equity sellers on an IPO exit?
financing market in your jurisdiction?

It is common for underwriters to impose lock-up periods in

While equity funds are commonplace, we have also seen the rise
underwriting agreements.
of debt funds – both general debt funds and those dedicated to
If PE investors wish to list on the TSE, its rules state that
financing start-ups – in acknowledgment of their benefits of being
investors who have been allotted shares within a one-year period
more secure than equity and better returns than traditional bank
prior to the IPO must not transfer their shares until the later of
loans. Recent examples include MUFG’s launch of a venture debt
(a) six months after the IPO, or (b) one year after such shares
fund worth USD400 million, as well as Money-Forward’s first
were allotted.
independent debt fund dedicated solely to start-ups.

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110 Japan

If all criteria are met for the qualified stock option plan, there
92 Alternative Liquidity Solutions will be no taxation at the time of exercising such right; however,
a capital gains tax of around 20% will be imposed on the differ-
9.1 How prevalent is the use of continuation fund ence between the strike price and the sale price.
vehicles or GP-led secondary transactions as a deal type
in your jurisdiction?
10.3 What are the key tax considerations for
management teams that are selling and/or rolling over
While secondary transactions have been rising globally, they are
part of their investment into a new acquisition structure?
less prevalent in Japan. The limited number of secondary trans-
actions in Japan are mostly LP-led. However, the recent launch
of funds such as Japan Private Equity Opportunity 2021 – a part- Capital gains tax will be imposed when shares are transferred.
nership between Alternative Investment Capital and WM Partners However, if certain exemptions are met, transactions such as a
that focuses on investments in the secondary market – shows there merger, share exchange or share transfer can be considered a
is an increasing appetite for transactions in the secondary market. qualified reorganisation and no capital gains tax will be imposed
under the Corporation Tax Act.

9.2 Are there any particular legal requirements or

restrictions impacting their use? 10.4 Have there been any significant changes in tax
legislation or the practices of tax authorities (including
in relation to tax rulings or clearances) impacting private
Japan’s Proprietary Trading Systems (PTS) – similar to that equity investors, management teams or private equity
of Alternative Trading Systems (ATS) in the US – have been transactions and are any anticipated?
prohibited from trading private company stock. In April 2023,
the FSA announced a draft bill that proposes to relax these The Supreme Court ruled in 2015 that a Delaware LPS was
regulations for transactions where the buyers are certain inves- deemed a corporation for Japanese tax law purposes instead of a
tors such as banks, brokerage firms and insurance companies, tax-transparent entity; however, after the ruling, the National Tax
with the view of fostering a domestic secondary market. Agency stated that it will no longer challenge the tax-transparency
status of a US LLP.
102 Tax Matters As for tax status of a Cayman LPS, the courts have in the past
affirmed that such LPS will be treated as tax-transparent.
10.1 What are the key tax considerations for private
equity investors and transactions in your jurisdiction? 112 Legal and Regulatory Matters
Are off-shore structures common?

11.1 Have there been any significant legal and/or

Foreign investors who have permanent establishment in Japan regulatory developments over recent years impacting
must file tax returns in Japan, and a fund must withhold tax private equity investors or transactions and are any
when making distributions to such foreign investors. anticipated?
If at least one general partner of the LPS has permanent estab-
lishment, other partners, including foreign limited partners, will In line with the international trend towards liberalising regula-
be deemed to have permanent establishment. However, if a tion concerning SPACs, the FSA’s working group is examining
foreign investor (i) is a limited partner, (ii) is not involved in the introduction of the “J-SPAC” system in Japan.
the operations or management of the LPS, (iii) owns an equity
interest in the LPS of less than 25%, (iv) does not have any
special relationship with the general partner, and (v) does not 11.2 Are private equity investors or particular
have any other permanent establishment in Japan, then such transactions subject to enhanced regulatory scrutiny in
your jurisdiction (e.g., on national security grounds)?
investor has no obligation to pay taxes on the income attributed
to the permanent establishment of the LPS.
However, foreign investors who sell 5% or more of shares The Forex Act regulates foreign direct investments from a
in a Japanese company and own 25% of such company’s shares national security perspective. In general, foreign investors
within the previous three years must pay taxes imposed on investing in Japan must submit an ex-post fact report to the
capital gain from the sale, even if such investor has no perma- Authorities. For certain investments involving particular types
nent establishment in Japan. of businesses and geographic areas or countries, however, a prior
notification is required.
Additionally, the government recently enacted legislation to
10.2 What are the key tax-efficient arrangements that
regulate the use of land viewed as important for national secu-
are typically considered by management teams in private
equity acquisitions (such as growth shares, incentive
rity, including remote islands and areas near Japan Self-Defence
shares, deferred / vesting arrangements)? Force bases.

If PE allocate stock options to management teams, they can 11.3 Are impact investments subject to any additional
elect between a non-qualified stock option plan or a qualified legal or regulatory requirements?
stock option plan: the difference being that, for non-qualified
stock option plans, if the stock option is exercised, it will be To tackle concerns around publicly offered trust funds green-
subject to income tax of up to 55% on the difference between washing and overstating their environmental impact, the FSA
the market price at the time of exercise and the strike price. It amended its guideline to define the scope of an “ESG invest-
will further be subject to a capital gain tax of around 20% on the ment trust”. Under the amended guideline, investment trusts
sale price from the market price at the time of exercise. cannot use words such as ESG, Impact or Sustainable in their

Private Equity 2023

 Tokyo International Law Office 111

name unless they are categorised as an “ESG investment trust”. the level of the company interactions with government officials
Funds that desire to do so must meet certain requirements, such and the industry and third-party contracts of the company.
as having ESG as a key factor in the selection of investment
assets and complying with disclosure requirements.
11.6 Are there any circumstances in which: (i) a private
equity investor may be held liable for the liabilities of
11.4 How detailed is the legal due diligence (including the underlying portfolio companies (including due to
compliance) conducted by private equity investors prior breach of applicable laws by the portfolio companies);
to any acquisitions (e.g., typical timeframes, materiality, and (ii) one portfolio company may be held liable for the
scope, etc.)? liabilities of another portfolio company?

This entirely depends on the risk appetite of PE investors and PE investors will not be responsible for the liabilities of its port-
the nature and size of the company/transaction. folio companies, nor will one portfolio company be liable for
Traditional PE acquiring stock in established companies may another portfolio company’s liabilities.
conduct detailed due diligence in line with international stand-
ards – on corporate, labour, licences and permits, data privacy, 122 Other Useful Facts
environmental, litigation and compliance issues, and, increas-
ingly, on human rights. Materiality thresholds are assigned 12.1 What other factors commonly give rise to concerns
based on deal-breaker considerations of the PE, nature of the for private equity investors in your jurisdiction or should
company, and the size of the deal. such investors otherwise be aware of in considering an
On the other hand, VCs investing in start-ups with no signif- investment in your jurisdiction?
icant assets may opt for a light due diligence.
Japan remains an attractive market for PE investors. It is investor-
11.5 Has anti-bribery or anti-corruption legislation friendly and a stable economy with a sophisticated professional
impacted private equity investment and/or investors’ service sector that can assist with PE acquisitions. Recent regu-
approach to private equity transactions (e.g., diligence, latory reforms concerning start-ups are promising in creating a
contractual protection, etc.)? start-up culture in Japan. In April 2023, as part of the Japanese
government initiative to foster FDI and increased M&A activity
Bribery and corruption issues are regulated for both domestic with foreign investors, METI published its first case study guide
and foreign corruption and bribery, respectively under the of M&A conducted by Japanese companies with foreign inves-
Criminal Code and the Unfair Competition Prevention Act. tors and foreign private equity. The guide introduces real exam-
To avoid inheriting bribery issues of target companies, PE ples of Japanese companies transacting with foreign investors
should conduct thorough due diligence to ensure compliance and private equity, giving advice, practical considerations, and
with anti-corruption and anti-bribery laws and secure representa- overall encourages Japanese companies to transact with foreign
tions regarding the company’s compliance. The degree of such investors. Other than the common roadblocks discussed in the
due diligence, and extensiveness of representations depends on preceding questions, there are currently no further issues that PE
investors face when investing in Japan.

Private Equity 2023

112 Japan

Dai Iwasaki has represented numerous local and foreign clients in a broad spectrum of businesses and industries. His scope of experience
includes assisting and representing clients in M&A and general corporate matters, antitrust matters (including merger filings and compli-
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has been recognised as a recommended lawyer of his field by Global Law Experts.

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Daido Seimei Kasumigaseki Bldg. 8F Email: dai.iwasaki@tkilaw.com
1-4-2 Kasumigaseki Chiyoda-ku URL: www.tkilaw.com
Tokyo 100-0013
Japan

Yusuke Takeuchi seeks to build long-term relationships with clients through sincere dialogue. He believes that working proactively enables
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1-4-2 Kasumigaseki Chiyoda-ku URL: www.tkilaw.com
Tokyo 100-0013
Japan

Tomo Greer provides strategic advice on a broad range of cross-border legal matters, including cross-border M&A, joint ventures, and compe-
tition law-related issues, as well as general corporate matters.

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Daido Seimei Kasumigaseki Bldg. 8F Email: tomo.greer@tkilaw.com
1-4-2 Kasumigaseki Chiyoda-ku URL: www.tkilaw.com
Tokyo 100-0013
Japan

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www.tkilaw.com

Private Equity 2023

 Chapter 14 113

Korea

Korea
Min Hoon Yi

Barun Law LLC Si Yoon Lee

12 Overview 1.3 Are you seeing any types of investors other

than traditional private equity firms executing private
equity-style transactions in your jurisdiction? If so,
1.1 What are the most common types of private equity please explain which investors, and briefly identify any
transactions in your jurisdiction? What is the current significant points of difference between the deal terms
state of the market for these transactions? offered, or approach taken, by this type of investor and
that of traditional private equity firms.
In South Korea, the most common type of private equity trans-
action is the Private Equity Fund (“PEF”) scheme. The private Globally, pension funds in each country are generally the largest
equity market in South Korea has grown more than five times in investors in their respective private equity markets. In South
size since 2021. Additionally, the number of PEF management Korea, however, Korean pension funds were unable to invest in
companies increased from 35 in 2007 to 394 in 2021, and the the private capital sector through institutional PEFs and were
number of registered PEFs grew from two in December 2004 only able to invest for the purpose of management participation
to 1,060 as of December 2021. Thus, the PEF market in South until 2021. Accordingly, pension funds invested in the private
Korea is consistently expanding. capital sector mostly through overseas PEFs or domestic hedge
funds (i.e., general PEFs other than institutional PEFs).
1.2 What are the most significant factors currently Amendments in PEF-related provisions of the Capital Markets
encouraging or inhibiting private equity transactions in Act in 2021, however, allowed Korean pension funds to invest
your jurisdiction? in various sectors through institutional PEFs without the need
to participate in management of target companies. The amend-
Recently, improvements in PEF-related regulations in South Korea ments created an environment in which pension funds and other
have resulted in a significant increase in PEF transactions. Origi- institutions can more actively invest in domestic PEFs. In fact,
nally, the market size of public offering funds was larger in South South Korea’s National Pension Service (“NPS”), in its manage-
Korea, but amendments to PEF-related provisions of the Finan- ment strategy, has expressed its intention to invest in PEFs and
cial Investment Services and Capital Markets Act (the “Capital other alternative investments in the coming years.
Markets Act”) in October 2015 enabled the market size of PEFs
to surpass that of public offering funds starting from 2016. These 22 Structuring Matters
amendments relaxed previously rigorous regulations on PEFs that
were similar to those applied to public offering funds. As a result, 2.1 What are the most common acquisition structures
the Assets Under Management (“AUM”) of PEFs grew approx- adopted for private equity transactions in your
imately four times from KRW 34 trillion at the end of 2015 to jurisdiction?
KRW 145 trillion in June 2020.
Furthermore, amendments to the Capital Markets Act in 2021 The most common acquisition structure adopted for private
changed the method of classifying PEFs. Originally, the classi- equity transactions in South Korea is the acquisition of shares
fication was based on operational purposes, but it is now based (e.g., acquisition of existing shares and/or subscription of new
on profiles of current investors. Through these amendments, the shares), and loans through convertible bonds (“CBs”) or bonds
limit on the number of investors in a PEF was expanded from with warrants (“BWs”). Typically, PEFs directly make invest-
a maximum of 49 investors to a maximum of 100 investors, ments on the target company, or establish investment vehicles
including 49 general investors, thereby making fundraising more like Special Purpose Companies (“SPCs”) to procure funds and
efficient. Additionally, restrictions were lifted for institutional execute investments (buy-outs) on the target company.
PEFs in which foreign investors equivalent to qualified institu-
tional investors could invest. Specifically, (i) the requirement to
acquire voting shares of 10% or more when investing in certain 2.2 What are the main drivers for these acquisition
companies was removed, and (ii) investments in institutional PEFs structures?
that do not participate in management of target companies became
possible. These relaxed regulations allowed investors to expand The primary driver of PEFs is to achieve high returns on invest-
their scope of investment to direct lending, purchase of loan obli- ment by actively participating in management, engaging in
gations, investments in minority shares under 10%, and invest- structural improvements, and selling the target company after
ments in real estate. Now, PEFs operate investments in private increasing its value.
credit, including direct lending and mezzanine capital fund.

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114 Korea

2.3 How is the equity commonly structured in private existing management continues to oversee the company’s oper-
equity transactions in your jurisdiction (including ations, while the PEF works to stabilise the company’s manage-
institutional, management and carried interests)? ment and implements changes to its governance structure.
For companies required to submit an annual business reports
(e.g., listed companies, and non-listed companies meeting
Private equity is composed of Limited Partners (“LPs”), such as
certain size or criteria thresholds), there is an obligation to
institutional investors, and General Partners (“GPs”) who are
disclose business reports that include information about the
responsible for the investment and management of the fund. LPs
ownership structure. There is no such a reporting requirement
hold most of the ownership stakes in PEF, with their respective
for companies falling outside of the aforementioned categories.
capital contributions determining their ownership shares. GPs,
on the other hand, typically hold less than 5% of the ownership
stake. The management fees and carried interest paid to GPs are 3.2 Do private equity investors and/or their director
determined through agreements between LPs and GPs. nominees typically enjoy veto rights over major
corporate actions (such as acquisitions and disposals,
business plans, related party transactions, etc.)? If a
2.4 If a private equity investor is taking a minority private equity investor takes a minority position, what
position, are there different structuring considerations? veto rights would they typically enjoy?

When a private equity investor is taking a minority position, Directors appointed by a private equity investor hold equal voting
the investor commonly employs mezzanine investment or rights as other directors on the board. Furthermore, in a share
share acquisition (common or preferred shares) involving loans subscription agreement or shareholders’ agreement, it is common
through CBs or BWs. to include provisions that require prior consultation or prior
In the case of minority stake investments, private equity inves- consent from the private equity investor regarding key manage-
tors often execute separate shareholder agreements with existing ment matters of the company. In such cases, the private equity
shareholders or exercise minority shareholder rights, such as a investor effectively holds veto rights over major corporate actions.
shareholder proposal, to constrain the actions of and exert influ-
ence over majority shareholders and/or management. 3.3 Are there any limitations on the effectiveness of
veto arrangements: (i) at the shareholder level; and (ii) at
the director nominee level? If so, how are these typically
2.5 In relation to management equity, what is the addressed?
typical range of equity allocated to the management, and
what are the typical vesting and compulsory acquisition
provisions? The matters are agreed upon between the contracting parties
and are not subject to specific restrictions. However, at the
shareholder level, the private equity investor can exercise voting
The amount of management equity very much depends on the
rights based on the number of shares at shareholder meetings,
specific deal size and structure. Usually, the residual stake of the and any shareholders’ agreements that violate the principle of
existing management is often around 10% but varies depending shareholder equality are not effective. Additionally, at the board
on the deal. level, each director holds one voting right. Therefore, if the
There are often tag-along, drag-along, and put/call options company violates provisions in the share subscription agree-
incorporated in the Shareholders’ Agreement or Share Subscrip- ment or shareholders’ agreement requiring prior consent from
tion Agreement. the investor and passes resolutions in shareholder meetings or
board meetings, the effectiveness of those resolutions cannot be
2.6 For what reasons is a management equity holder challenged. Instead, the company or existing shareholders may
usually treated as a good leaver or a bad leaver in your be held accountable for breach of contract.
jurisdiction?
3.4 Are there any duties owed by a private equity
Good leavers ensure a smooth transfer of management rights investor to minority shareholders such as management
to prevent any negative impact on the company’s business and shareholders (or vice versa)? If so, how are these
operation. The continued employment of key members, such as typically addressed?
founders, is an example.
On the other hand, bad leavers engage in unfair practices, While the details of each deal vary depending on the agreement
such as taking over a company through so-called “no-capital between parties, it is generally not common for private equity
M&A” using borrowed funds, then misappropriating or embez- investors to directly impose contractual obligations on minority
zling a large amount of funds procured through the company, shareholders. Minority shareholders, particularly management
or disseminating false information to obtain capital gains from shareholders, usually bear obligations to cooperate with the
the sale of acquired stocks. appointment of investor-designated directors, provide business
reports to investors, obtain prior consent from investors, adhere
to non-compete agreements, and abide by continuing employ-
32 Governance Matters ment obligations.

3.1 What are the typical governance arrangements

for private equity portfolio companies? Are such 3.5 Are there any limitations or restrictions on the
arrangements required to be made publicly available in contents or enforceability of shareholder agreements
your jurisdiction? (including (i) governing law and jurisdiction, and (ii)
non-compete and non-solicit provisions)?

Private equity portfolio companies often retain a portion of the

company’s ownership from the existing management, and the The matters are agreed upon between the contracting parties
and are not subject to specific restrictions. The governing law

Private Equity 2023

 Barun Law LLC 115

and jurisdiction can be agreed between the parties. Nonethe- Investment Promotion Act. Additionally, there may be sepa-
less, (i) corporate actions will be subject to the commercial code rate approval requirements based on the industry of the target
of the country in which the company is incorporated, and (ii) company, such as qualification reviews of major shareholders
the Supreme Court held that non-compete and non-solicitation under the Act on Corporate Governance of Financial Companies.
provisions that unreasonably limit competition or excessively Under the Fair Trade Act, if a company with assets or annual
restrict constitutionally protected freedom of occupation and sales exceeding KRW 300 billion acquires ownership of 20%
right to work are invalid. (or 15% in the case of a listed company) or more of the total
Typically, courts evaluate the validity of non-compete and issued shares of another company with assets or annual sales
non-solicitation provisions based the nature of the industry, exceeding KRW 30 billion, a corporate combination report must
independent economic value of the protected trade secrets, be submitted to the Fair Trade Commission within 30 days from
circumstances of the other party’s resignation, scope of the the date of such acquisition, with certain acquisition subject to
non-compete provision (duration, geographic area, and specific prior reporting. However, when a venture investment asso-
job roles), and the amount of compensation. Recently, the trend ciation, which is a type of PEF, acquires shares of a venture
was to limit the duration to around six months to one year. company, the reporting obligation is exempted.
According to the Foreign Investment Promotion Act, when
a non-resident foreigner invests more than KRW 100 million
3.6 Are there any legal restrictions or other
requirements that a private equity investor should and acquires 10% or more of the shares of a domestic corpora-
be aware of in appointing its nominees to boards of tion, or otherwise meets other criteria stipulated in the Foreign
portfolio companies? What are the key potential risks Investment Promotion Act, a foreign investment report must
and liabilities for (i) directors nominated by private be submitted. When a non-resident foreigner is not subject to
equity investors to portfolio company boards, and (ii) foreign investment reporting under the Foreign Investment
private equity investors that nominate directors to Promotion Act, the non-resident foreigner must submit a capital
boards of portfolio companies? transaction report under the Foreign Exchange Transactions
Act and Foreign Exchange Transaction Regulations stipulated
Directors appointed by private equity investors are often by the Ministry of Economy and Finance.
appointed as “non-executive directors” who do not work at
the company on a regular basis. There are generally no special
4.2 Have there been any discernible trends in
restrictions on qualifications of non-executive directors or ordi- transaction terms over recent years?
nary directors. However, when appointing external directors,
there are qualification restrictions based on the Commercial Act.
It is important to note that non-executive directors may bear According to the Financial Services Commission’s announce-
responsibilities towards the company or third parties as regis- ment in May 2023, global and Korean M&A markets in 2022
tered directors in accordance with the Commercial Act. For were affected by rising interest rates and global economic slow-
instance, directors can be held jointly liable with the company down. In response, the Korean government expressed its
for damages if they intentionally or negligently violate laws or intent to introduce corporate M&A policies to actively promote
articles of incorporation, or breach obligations. Directors who the economy and innovations in companies. These measures
voted in favour of such resolutions can also be held liable. There- include alleviating the burden of securing funds in advance of
fore, it is common for share subscription or shareholder’s agree- tender offers.
ments to include indemnification clauses for directors appointed
by private equity investors. 52 Transaction Terms: Public Acquisitions

5.1 What particular features and/or challenges apply

3.7 How do directors nominated by private equity
to private equity investors involved in public-to-private
investors deal with actual and potential conflicts of
transactions (and their financing) and how are these
interest arising from (i) their relationship with the party
commonly dealt with?
nominating them, and (ii) positions as directors of other
portfolio companies?
If a PEF possess more than 5% of voting shares in a listed
Private equity investors commonly possess the authority to company, it is required to report the ownership status and
appoint directors and to remove or replace directors. This allows purpose of the ownership to the Financial Services Commis-
private equity investors to replace or dismiss the directors they sion and the Korea Exchange (“KRX”) in accordance with
have nominated at any time, should a conflict of interest arise. the Capital Markets Act. Additionally, if there is a change of
1% or more in the ownership percentage or if there are signifi-
cant changes to the reported information, such changes must be
42 Transaction Terms: General
reported. The applicable regulatory requirements differ based
on whether the ownership of the shares is intended to influence
4.1 What are the major issues impacting the timetable the management of the portfolio company. Simplified regula-
for transactions in your jurisdiction, including antitrust,
tions apply when there are no such intents.
foreign direct investment and other regulatory approval
requirements, disclosure obligations and financing Furthermore, the Capital Markets Act stipulates that if an
issues? individual intends to acquire shares or certain securities from
10 or more individuals outside the exchange within a six-month
period, and the resulting combined ownership of the individual
In South Korea, with respect to M&A transactions, issues
and his or her related parties is to exceed 5% of the total issued
primarily arise in business combination reports under the
shares, the individual is required to purchase the shares or secu-
Monopoly Regulation and Fair Trade Act (the “Fair Trade Act”),
rities by tender offer.
capital transaction reports under the Foreign Exchange Trans-
In December 2022, the Financial Services Commission
actions Act, and foreign investment reports under the Foreign
pointed out that the existing tender offer regulations lacked

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116 Korea

protection for general investors of target companies because they adverse effects. Additionally, there may be covenant clauses
did not adequately ensure opportunities for the general share- that require the target company to obtain buyer’s prior consent
holders to sell their shares. As a result, the Financial Services before engaging in specific actions (such as issuing new shares/
Commission expressed its intention to introduce a mandatory bonds or making capital expenditures) prior to the closing.
public tender offer scheme. However, in May 2023, the Finan-
cial Services Commission announced that it would take a more 6.4 To what extent is representation & warranty
balanced approach in adjusting the proposed mandatory public insurance used in your jurisdiction? If so, what are the
tender offer scheme. typical (i) excesses / policy limits, and (ii) carve-outs /
exclusions from such insurance policies, and what is the
typical cost of such insurance?
5.2 What deal protections are available to private
equity investors in your jurisdiction in relation to public
acquisitions? Warranty and Indemnity (“W&I”) insurance was introduced in
South Korea around 2016 and is utilised in large-scale M&A
transactions.
A public tender offer is carried out by securities companies (tender
(i) The limit of liability is determined through negotiation
offer agent) as intermediaries, so there is not much concern about between the insurer and the buyer, taking into considera-
deal protection. However, during the tender offer period, share- tion the transaction size, potential for breach of representa-
holders can revoke their acceptance at any time, and private equity tions and warranties, and level of insurance premiums
firms cannot claim damages or penalties for such revocation. (typically around 10% to 20% of the transaction amount).
On the other hand, a typical M&A transaction in South (ii) Typical W&I insurance excludes risks that the buyer is
Korea does have deal protection mechanisms such as liquidated already aware of, environmental contamination, product
damages, penalty clauses, and exclusivity provisions. liability, underfunded pension obligations, evaluations or
estimation about the future, transfer price in related-party
62 Transaction Terms: Private Acquisitions transactions, and tax issues relating to rejection of unfair
act and calculation.
6.1 What consideration structures are typically Insurance premiums are usually set within the range of 1.5%
preferred by private equity investors (i) on the sell-side, to the upper 3% of the limit of liability, as determined by indi-
and (ii) on the buy-side, in your jurisdiction? vidual negotiations.

In South Korea, there are many M&A transactions that do not 6.5 What limitations will typically apply to the liability
include purchase price adjustment clauses. However, when there of a private equity seller and management team under
are purchase price adjustment clauses, completion accounts, warranties, covenants, indemnities and undertakings?
locked box and earned-outs are commonly used.
In South Korea, the liability of sellers in M&A transactions is
often limited by capping the amount of damages or setting a time
6.2 What is the typical package of warranties /
indemnities offered by (i) a private equity seller, and (ii)
limit for liability, as negotiated between the seller and the buyer.
the management team to a buyer? Various methods are used in capping the amount of damages.
These include setting a minimum threshold for individual losses
(e.g., claims for damages exceeding KRW 100 million are eligible),
Representation and warranty clauses in South Korea are largely requiring the total aggregate amount of claims to exceed a certain
adopted from commonly used representation and warranty threshold (e.g., only claims exceeding a total sum of KRW 1 billion
clauses in the UK and the U.S., and often include buyer-friendly are eligible), or establishing a maximum limit for the total amount
provisions. Generally, representations and warranties of minority of liability (e.g., the liability cap at 20% of the transaction value).
shareholders typically include clauses regarding the legal, valid It is commonly set one to three years from the closing date as
and complete ownership of shares, and the proper authority to timeframe for damages.
sell (although specifics may vary case by case). However, details
related to the management of the target company are usually not
6.6 Do (i) private equity sellers provide security (e.g.,
included or are included in a limited way.
escrow accounts) for any warranties / liabilities, and
On the other hand, representations and warranties of largest (ii) private equity buyers insist on any security for
shareholder or shareholders with influence on the manage- warranties / liabilities (including any obtained from the
ment of the target company typically include clauses regarding management team)?
non-existence of causes of share dilution, non-existence of share-
holders’ agreement, integrity of financial statement, attainment In M&A transactions in South Korea, it is not common to
of government approvals and compliance with laws, in addition require security deposits or similar measures to secure liabili-
to the clauses included in those of minority shareholders. ties arising from the breach of representations and warranties.

6.3 What is the typical scope of other covenants, 6.7 How do private equity buyers typically provide
undertakings and indemnities provided by a private comfort as to the availability of (i) debt finance, and (ii)
equity seller and its management team to a buyer? equity finance? What rights of enforcement do sellers
typically obtain in the absence of compliance by the
buyer (e.g., equity underwrite of debt funding, right to
Covenant clauses in South Korea are generally adopted from
specific performance of obligations under an equity
common covenant clauses from the UK and the U.S. Closing commitment letter, damages, etc.)?
covenants typically include clauses regarding ordinary busi-
ness activities under the normal course of business, compliance
with laws, and prohibition of actions that could have material If the acquirer secures funds for the acquisition through debt
financing, private equity buyers may be required to provide the

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 Barun Law LLC 117

seller with a comfort letter from a financial institution to verify

their ability to pay the purchase price as a pre-closing covenant.
82 Financing
This is done to ensure that buyers have the necessary funds for
the transaction. However, in equity finance transactions, it is 8.1 Please outline the most common sources of debt
not common to provide comfort letter. finance used to fund private equity transactions in your
jurisdiction and provide an overview of the current state
If the buyer fails to secure the necessary funds for the acqui- of the finance market in your jurisdiction for such debt
sition, the contract is typically terminated. In such cases, the (including the syndicated loan market, private credit
buyer may be required to pay a certain amount as a penalty for market and the high-yield bond market).
the breach of contract.
The most common source of debt financing used to raise funds
6.8 Are reverse break fees prevalent in private equity for private equity transactions in South Korea is a bank loan,
transactions to limit private equity buyers’ exposure? If which is usually low-risk, low-interest, and senior-ranking. Apart
so, what terms are typical? from banks, various financial institutions such as PEFs, securities
companies, savings banks, credit companies, insurance compa-
In South Korea, there are cases in which a certain amount of the nies, pension funds, and mutual aid associations also participate
earnest money is structured as reverse break fees, which are paid as lenders. Another method of raising funds is to issue bonds,
if the transaction is not completed. including CBs and BWs. It is also common to finance in combi-
nation with mezzanine financing with higher-risk, high-interest
subordinated loans. If the loan amount is substantial, syndicated
72 Transaction Terms: IPOs
loans are often used to spread the risk among financial institutions.
When conducting M&A, an SPC is usually incorporated to acquire
7.1 What particular features and/or challenges should the target company’s shares, and the SPC procures funds from
a private equity seller be aware of in considering an IPO
lending institutions. On the other hand, high-yield bonds are not
exit?
commonly used for raising funds in private equity transactions.

In South Korea, the primary stock markets are the KOSPI,

on which major companies are predominantly listed, and the 8.2 Are there any relevant legal requirements or
restrictions impacting the nature or structure of the debt
KOSDAQ, on which technology and growth-oriented compa- financing (or any particular type of debt financing) of
nies are predominantly listed. To be listed on these markets, private equity transactions?
companies need to undergo the listing review procedure of the
KRX. The specific listing criteria vary between these markets,
but companies must pass formal evaluation criteria (e.g., share If an SPC that has procured a loan from lending institutions
distribution, management performance) and qualitative eval- holds total assets of KRW 500 billion, the SPC would fall under
uation criteria (e.g., transparency in management, stability in the category of a holding company according to the Fair Trade
management, corporate governance). Assuming that all listing Act. As a result, the SPC would be subject to debt-to-equity
ratio regulation under the Fair Trade Act. However, the Capital
conditions are met, it generally takes around a year to a year-
Markets Act allows for structural subordination (layered SPC),
and-a-half to list a company from start to finish.
which can be used to comply with the debt-to-equity ratio regu-
lation imposed by the Fair Trade Act.
7.2 What customary lock-ups would be imposed on
private equity sellers on an IPO exit?
8.3 What recent trends have there been in the debt-
financing market in your jurisdiction?
If the seller is the largest shareholder of a newly listed corpora-
tion, the seller is required to hold the shares for one year from
Due to recent uncertainties stemming from higher interest rates,
the listing date in the KOSPI and six months from the listing
the debt financing market for private equity has been experi-
date in the KOSDAQ. Additionally, if the seller acquires shares
encing a slowdown. Over the past five years, securities companies
from the largest shareholder or its related parties prior to the
aggressively entered the corporate lending market for acquisition
listing, both the KOSPI and KOSDAQ require a holding period
financing and surpassed the market share of banks. However,
of six months from the listing date.
with recent rate hikes, increased cost of funding and crisis in the
If new shares are allotted by a third-party allotment paid-in
Korean real estate project financing market, securities companies
capital increase before listing, the holding period is as follows:
had to limit their aggressive business strategies. As a result, their
■ KOSPI: either one year from the issuance date or six
market share in the debt financing market has recently decreased.
months from the listing date, whichever comes later.
On the other hand, banks, which are considered to be more
■ KOSDAQ: a holding period of six months from the listing financially flexible and stable, have noticeably increased their
date. share in the debt financing market compared to that of the
previous year. In Q1 of 2023, the share of banks has risen by
7.3 Do private equity sellers generally pursue a dual- 15% compared to that of Q1 of 2022.
track exit process? If so, (i) how late in the process are
private equity sellers continuing to run the dual-track, 92 Alternative Liquidity Solutions
and (ii) were more dual-track deals ultimately realised
through a sale or IPO?
9.1 How prevalent is the use of continuation fund
vehicles or GP-led secondary transactions as a deal type
In South Korea, it is very rare to conduct a sale and an IPO in your jurisdiction?
simultaneously. Since the stability of management is evalua-
tion criteria for the listing review procedure, simultaneously
Amid an economic downturn, GP-led secondary transactions
conducting a sale with transfer of control and an IPO is highly
are increasingly gaining traction in South Korea. Given the
unlikely to happen in practice.

Private Equity 2023

118 Korea

heightened volatility, secondary deals are becoming attrac- Additionally, for employees of venture companies, the Act
tive options compared to new investments. This is because on Special Measures for the Promotion of Venture Businesses
secondary deals tend to have easier valuation and exit negoti- provides certain benefits related to stock options granted by
ations, and provide assurance of stable return on investment. venture companies. According to this law, (1) gains obtained
From the perspective of fund investors, there is also a growing from exercising stock options granted by venture companies are
incentive to secure liquidity through secondary deals. not subject to taxation if they are within KRW 200 million, (2)
Though continuation funds are not prevalent in South Korea, tax payments on gains obtained from stock options can be paid
there have been recent cases of continuation funds, and various in instalments over five years, and (3) there is an option to defer
PEF management firms are showing interest in operating the taxation point from the time of exercising the stock options
continuation funds. Continuation funds are therefore likely to to the time of transfer of the stocks.
be used more often in the future. The rationale behind this is
that, rather than immediately collecting or realising assets at a
10.3 What are the key tax considerations for
low price, renewing the maturity of a fund through a continua- management teams that are selling and/or rolling over
tion fund can maximise asset value. In other words, it is diffi- part of their investment into a new acquisition structure?
cult to value assets at a high price during the period of economic
downturn. Therefore, using continuation funds to extend the
For mergers and divisions, tax-exemption or tax reduction bene-
investment horizon becomes an appealing strategy.
fits may be provided if the requirements for special tax treat-
ment are met. The requirements include a period of conti-
9.2 Are there any particular legal requirements or nuity of business operation, perpetuity of ownership interest,
restrictions impacting their use? continuity of business, and employee retention. Therefore, it is
important to review whether such requirements are met.
GP-led secondary transactions and continuation funds are gener- For the transfer of a business unit, there are no tax deferral
ally subject to the same regulations as those governing conven- benefits in principle. However, when the consideration of busi-
tional funds, such as the Capital Markets Act, and there are no ness unit transfer is received in stock rather than in cash and
specific requirements or restrictions imposed by regulations for certain other conditions are met, tax deferral and tax reduction
these practices. benefits are granted as the transfer is regarded as a qualified
investment in kind.
102 Tax Matters
10.4 Have there been any significant changes in tax
10.1 What are the key tax considerations for private legislation or the practices of tax authorities (including
equity investors and transactions in your jurisdiction? in relation to tax rulings or clearances) impacting private
Are off-shore structures common? equity investors, management teams or private equity
transactions and are any anticipated?

Please note that if an offshore fund is deemed to have a fixed

place of business within South Korea, the offshore fund can be Starting from January 1, 2023, the Enforcement Decree of
subject to taxation in South Korea based on the applicable tax the Act on Restriction on Special Cases Concerning Taxa-
rates specified by the South Korean tax code. tion requires domestic PEFs to clearly distinguish and state the
The Supreme Court of South Korea has held that when a source of income (e.g., dividends, interest, capital gains) when
foreign corporation carries out substantial and essential busi- returning profits to foreign investors (e.g., LPs).
ness activities through its employees or individuals directed by In the past, profits returned to foreign investors from domestic
the employees in a fixed location in South Korea that it has the PEFs were considered entirely as dividends, which are subject to
right to use or dispose of, such as buildings, facilities or equip- dividend income tax of up to 20%. If the dividend income tax
ment, the foreign corporation is deemed to have a fixed place of rate of the foreign investor’s country of residence was lower than
business in South Korea. 20%, the Korean tax authorities withheld tax at such lower rate.
For PEFs, a key factor in this regard is determining whether
the significant decisions related to fundraising, investment and 112 Legal and Regulatory Matters
investment retrieval have been made within South Korea. If the
aforementioned significant decisions are deemed to have been 11.1 Have there been any significant legal and/or
made within South Korea, the offshore fund, despite its foreign regulatory developments over recent years impacting
profile, can still be subject to taxation in accordance with South private equity investors or transactions and are any
Korean tax code. anticipated?

10.2 What are the key tax-efficient arrangements that Until 2021, the Capital Market Act classified PEFs into “profes-
are typically considered by management teams in private sional investment type” (hedge funds) and “management partic-
equity acquisitions (such as growth shares, incentive ipation type” (PEFs) based on their purpose of investment.
shares, deferred / vesting arrangements)? Different asset management regulations were applied based on
PEF’s investment purposes.
In South Korea, there are no major tax-saving measures specif- However, with the amendment of the Capital Market Act in
ically for executive compensation. It is common to provide October 2021, the requirement to purchase 10% or more of
incentives to executives through stock options. When stock target company’s ownership interest with the purpose of partic-
options are exercised, the capital gain (the difference between ipation in management (10% rule) was abolished, and regula-
the market price at the time of exercise and the exercise price) tions restricting the type of investment were lifted. As a result,
is subject to taxation as either earned income or other income. PEFs no longer need to have the purpose of management partic-
ipation when investing but can pursue creative and self-driven

Private Equity 2023

 Barun Law LLC 119

types of investment, such as minority stake acquisitions, loans, Generally, legal due diligence is conducted on matters related
structured bonds, and real estate. The change is expected to to general corporate affairs, human resource and labour, permits
contribute to enhancement of corporate governance and busi- and licences, contracts, data protection, and legal compliance.
ness efficiency among domestic companies.
11.5 Has anti-bribery or anti-corruption legislation
11.2 Are private equity investors or particular impacted private equity investment and/or investors’
transactions subject to enhanced regulatory scrutiny in approach to private equity transactions (e.g., diligence,
your jurisdiction (e.g., on national security grounds)? contractual protection, etc.)?

The Foreign Investment Promotion Act restricts foreign invest- Compliance with anti-bribery and anti-corruption laws is a prereq-
ment when it poses a threat to the national security and public uisite not only for PEF investments and/or transactions, but also
order (Foreign Investment Promotion Act §4, Enforcement for most investments and transactions in South Korea. When
Decree of Foreign Investment Promotion Act §5). Specifi- engaging in PEF investments and transactions, legal due dili-
cally, foreign investment that acquires management control over gence is conducted to ascertain whether there are any violations
an established domestic company through purchase of shares on relevant laws, including anti-bribery and anti-corruption laws,
or other assets is subject to review by the foreign investment and to secure a representation that there are no such violations.
committee upon the request of relevant minister or head of The extent of the legal due diligence and the scope of representa-
intelligence agency if there are concerns related to: tion vary depending on each case (e.g., bargaining power of the
1. hindrance to the production of defence industry materials; contracting parties, business risks, etc.).
2. items or technologies subject to export permits or approvals While the Foreign Corrupt Practices Act (“FCPA”) is a
under the Foreign Trade Act that may likely to be used for U.S. law, U.S. PEF investors often perform detailed legal due
military purposes; diligence to determine whether a Korean target company is
3. risk of disclosing classified state secrets such as contracts; compliant with the FCPA or requires representation that it is in
4. hindrance to international efforts of the United Nations, compliance with the FCPA.
etc. to maintain international peace and security; and
5. risk of leakage of critical national technology; 11.6 Are there any circumstances in which: (i) a private
Moreover, there is pending legislation (Act on Prevention equity investor may be held liable for the liabilities of
and Protection of Leakage of Industrial Technologies) that the underlying portfolio companies (including due to
requires domestically established PEFs effectively controlled by breach of applicable laws by the portfolio companies);
a foreign individual to undergo government review and obtain and (ii) one portfolio company may be held liable for the
approval from the Minister of Trade, Industry, and Energy liabilities of another portfolio company?
when acquiring or merging with companies that possess critical
national technologies. In principle, PEF investors are not liable for the PEF’s debt
beyond the purchase price of the PEF ownership interest already
11.3 Are impact investments subject to any additional paid. Similarly, PEF investors are not responsible for the debts
legal or regulatory requirements? of portfolio companies. Additionally, portfolio companies are
generally not liable for the debts of other portfolio companies.
We did not find any additional legal or regulatory requirements
that apply to impact investments. 122 Other Useful Facts

12.1 What other factors commonly give rise to concerns

11.4 How detailed is the legal due diligence (including for private equity investors in your jurisdiction or should
compliance) conducted by private equity investors prior such investors otherwise be aware of in considering an
to any acquisitions (e.g., typical timeframes, materiality, investment in your jurisdiction?
scope, etc.)?

South Korea is an attractive market for PE investors. Particu-

The extent of legal due diligence varies depending on the risk larly, when compared to neighbouring countries, there are lots
appetite of PEF investors, the size of the transaction, and the of transactions of management shares, and PEFs are taking
nature and complexity of the target company. Legal due dili- the leading role such transactions. Additionally, the consid-
gence is typically conducted by external law firms and generally erable size of the economy (ranked around the top 10 glob-
takes around one to two months. ally), ongoing improvements in PE-related regulations, and the
strong competitiveness of sectors like semiconductors make
South Korea an attractive destination for investment.

Private Equity 2023

120 Korea

Min Hoon Yi is a partner at Barun Law LLC’s Corporate Advisory Group. He received his J.D. from Kyounghee University Law School and B.A.
from Seoul National University. He passed the Korean Bar Exam in 2012.

Barun Law Tel: +82 2 3479 7846

92 gil 7, Teheran-ro, Gangnam-gu Email: minhoon.yi@barunlaw.com
Seoul, 06181 URL: ww.barunlaw.com
Korea

Si Yoon Lee is an associate at Barun Law LLC’s Corporate Advisory Group. He received his J.D. from Indiana University Maurer School of Law
and B.A. from the Johns Hopkins University. He is admitted to the New York Bar.

Barun Law Tel: +82 2 3479 7573

92 gil 7, Teheran-ro, Gangnam-gu Email: siyoon.lee@barunlaw.com
Seoul, 06181 URL: www.barunlaw.com
Korea

Barun Law is a premier full-service law firm in South Korea. As one of the
“Big Firms” in South Korea, Barun Law’s dispute resolution and litigation
practice is second-to-none in Korea and its corporate advisory practice has
exceptional expertise in cross-border legal matters. As the fasting growing
law firm in South Korea, Barun Law provides effective legal solutions for
our clients while demonstrating an unrelenting commitment to excellence.
www.barunlaw.com

Private Equity 2023

 Chapter 15 121

Luxembourg

Luxembourg
Holger Holle

José Pascual

Eversheds Sutherland (Luxembourg) S.C.S. Rafael Moll de Alba

of private equity firms. Due to recent substance requirements,

12 Overview more private equity firm offices are growing in Luxembourg.
Luxembourg has positioned itself as one of the jurisdictions likely
1.1 What are the most common types of private equity to benefit from Brexit by attracting private equity houses and
transactions in your jurisdiction? What is the current
asset managers, thanks to its distinctively private equity-friendly
state of the market for these transactions?
environment. The following factors are typically mentioned as
encouraging private equity transactions in Luxembourg: polit-
Luxembourg is one of the most pre-eminent jurisdictions globally ical and economic stability; an attractive tax framework with a
for the structuring of private equity transactions, both in the regu- large number of double tax treaties; the modern and pragmatic
lated and the unregulated space. Luxembourg has developed an legal framework with a wide array of available structures; a multi-
impressive toolbox of structuring solutions to accommodate invest- lingual and technically skilled workforce; and, finally, the strong
ments in both spaces. Besides the “all time classic”, non-regulated governmental commitment towards the private equity sector.
Société de Participations Financiéres (SOPARFI, participation holding
companies in any form available for commercial companies under
the Luxembourg law of 10 August 1915 on commercial compa- 1.3 Are you seeing any types of investors other
than traditional private equity firms executing private
nies (1915 Law)), the most significant examples are the creation of:
equity-style transactions in your jurisdiction? If so,
the sociétés d’investissement en capital à risque (SICAR, regulated invest- please explain which investors, and briefly identify any
ment companies in risk capital) in 2004; the specialised investment significant points of difference between the deal terms
fund (SIF, a regulated alternative investment fund (AIF) vehicle offered, or approach taken, by this type of investor and
used for any type of investment, including private equity) in 2007; that of traditional private equity firms.
or the reserved alternative investment fund ((RAIF), not subject
to supervision by the Luxembourg financial supervisory authority On the regulated side, there is a tendency for the pension funds
(Commission de Surveillance du Secteur Financier (CSSF)), but to and insurance companies to become more active in the Luxem-
be managed by an authorised external alternative investment fund bourg private equity market; however, the most remarkable recent
manager (AIFM) within the meaning of the Alternative Invest- development in that respect is the increasingly frequent involve-
ment Fund Managers Directive). On the regulated side, recent ment of family offices. Pursuant to a recent survey conducted
years have seen an increasing use of the RAIF. by the LPEA amongst Luxembourg family offices, on average,
On the unregulated side, recent years have seen an increasing 35% of the assets in portfolios managed by Luxembourg family
use of the overhauled Luxembourg limited partnerships (S.C.S.) offices were alternative investments and 73% of those investing
and now well-established Luxembourg special limited partner- in this asset class expect private investments to deliver higher
ships (S.C.Sp.) types of limited partnerships (LPs); the latter was returns than public investments. Further, also in light of recent
created in 2013 as a flexible structure without its own legal person- crises such as the COVID-19 pandemic and the Ukraine war,
ality, similar to an English LP to accommodate investors from an family offices appreciate the greater control and visibility offered
Anglo-Saxon background. Both types of legal form have known by private equity compared with public investments.
a significant success and now have become a popular part of the In that sense, deal terms are likely to be no different from those
“Luxembourg Toolbox”. required by a traditional private equity firm taking a minority
stake. Differences exist, however, e.g. financing contingency
1.2 What are the most significant factors currently clauses are rarely required by a family office investor and there is
encouraging or inhibiting private equity transactions in less appetite in getting involved on the operational level. Family
your jurisdiction? offices often also have a longer investment horizon and exit plans
may be less prescriptive than for a traditional private equity firm.
Luxembourg has been a major hub in the private equity industry
for over 20 years and continues to attract an increasing number

Private Equity 2023

122 Luxembourg

equity sponsor to acquire the management’s equity upon termi-

22 Structuring Matters nation of the manager’s employment with the relevant portfolio
company. The management’s exit upon exit of the sponsor is
2.1 What are the most common acquisition structures typically ensured by drag-along provisions, combined with share
adopted for private equity transactions in your
pledges or call options in the sponsor’s favour. Alternatively,
jurisdiction?
management equity is structured in a separate vehicle investing
alongside the main acquisition vehicle, often in the form of an
Acquisition structures typically include one or more Luxem- LP managed by the sponsor.
bourg unregulated SOPARFI companies that in turn acquire
and hold the target shares or assets. In secondary buy-out situ-
ations, the original acquisition structure is typically sold as part 2.6 For what reasons is a management equity holder
usually treated as a good leaver or a bad leaver in your
of the transaction. In recent years, LP structures have become
jurisdiction?
a preferred choice of structuring investments in private equity
transactions. LPs can be unregulated SOPARFIs or established
as one of the (directly or indirectly) regulated types (SICAR, SIF A management equity holder would typically be considered a
or RAIF). In both alternatives, the LP regime benefits from a good leaver if leaving for reasons of permanent incapacity or
large degree of flexibility. Unregulated LPs are often used for illness or death and, in some instances if dismissed without
feeder funds, carried interest vehicles or “club deal” types of cause. A management equity holder dismissed for cause of
co-investment constellations. resigning voluntarily would be considered a bad leaver.

2.2 What are the main drivers for these acquisition

32 Governance Matters
structures?
3.1 What are the typical governance arrangements
for private equity portfolio companies? Are such
The main motivators are tax efficiency and considerations linked arrangements required to be made publicly available in
to the investors in the transaction (sole investor or co-investment your jurisdiction?
by two or more sponsors) and the financing of the transaction.
International banks providing leveraged finance are familiar
Governance arrangements such as the right to appoint nominee
with the typical Luxembourg acquisition structures and very
directors, restrictions of transfer of shares, tag-along and drag-
comfortably accept security over these structures as collateral.
along rights, pre-emption rights, matters requiring shareholder
consent, distribution of proceeds and exit provisions, are typi-
2.3 How is the equity commonly structured in private cally part of shareholders’ agreements or LP agreements. Neither
equity transactions in your jurisdiction (including agreement is required to be made public, but as a way of easing
institutional, management and carried interests)? enforcement it is common to reflect certain key provisions, e.g.
those governing transfer of shares, in the articles of association
Under Luxembourg law, equity in the strict sense of the term can of the company that are public in order to make the provisions
be structured as issued share capital, founder shares or contribu- of the shareholders’ agreements enforceable against third parties.
tion into the capital reserves. Shareholder loans or hybrid instru-
ments such as preferred equity certificates are another common 3.2 Do private equity investors and/or their director
means for private equity sponsors of providing equity. Manage- nominees typically enjoy veto rights over major
ment participations and carried interests are commonly structured corporate actions (such as acquisitions and disposals,
in separate LP structures specifically put in place for that purpose. business plans, related party transactions, etc.)? If a
private equity investor takes a minority position, what
veto rights would they typically enjoy?
2.4 If a private equity investor is taking a minority
position, are there different structuring considerations?
It is common to provide for veto rights for private equity inves-
tors in shareholders’ agreements over major corporate actions.
A minority private equity investor will typically aim to mitigate
The scope of the veto rights will, to a large extent, depend on the
the lack of control by other mechanisms protecting it against the
overall influence, i.e. the share percentage held, with minority
majority investor, e.g. veto rights in major decisions, anti-dilution
investors typically enjoying veto rights only over fundamental
provisions, share transfer restrictions, exit provisions, comprehen-
actions and less over business planning and strategy matter.
sive and regular provision of information, etc. These provisions
are usually included in shareholders’ agreements or LP agreements.
3.3 Are there any limitations on the effectiveness of
veto arrangements: (i) at the shareholder level; and (ii) at
2.5 In relation to management equity, what is the the director nominee level? If so, how are these typically
typical range of equity allocated to the management, and addressed?
what are the typical vesting and compulsory acquisition
provisions?
Veto arrangements both at shareholder level and at board level
are generally effective as an expression of the prevailing prin-
Management equity will typically represent a small percentage of
ciple of freedom of contract as long as they are not contrary to
the equity and management equity holders will undertake either
public policy rules in Luxembourg (e.g. by depriving a shareholder
not to vote or to vote as the sponsor directs. The typical vesting
entirely of its voting rights or by completely excluding a director
and compulsory provisions are similar to what can be seen in
from board deliberations). Voting arrangements typically address
other European jurisdictions, and transaction documents usually
these limitations by including the appropriate exceptions.
include (good leaver/bad leaver) provisions allowing the private

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3.4 Are there any duties owed by a private equity 3.7 How do directors nominated by private equity
investor to minority shareholders such as management investors deal with actual and potential conflicts of
shareholders (or vice versa)? If so, how are these interest arising from (i) their relationship with the party
typically addressed? nominating them, and (ii) positions as directors of other
portfolio companies?
Private equity investors do not have any specific fiduciary duties
towards the minority shareholders. As a general rule, however, Under Luxembourg corporate law, a director who has, directly or
a majority shareholder shall, at all times, refrain from abusing indirectly, a monetary interest that is opposed to the company’s
its majority rights by favouring its own interests against the interest, is under the obligation to notify the existence of such
corporate interest of the company. Luxembourg law also clearly conflict of interest to the board of directors, have it recorded
distinguishes between interests of the shareholder(s) and interest in the minutes of the board meeting and refrain from partici-
of the company; a director, albeit a nominee of a shareholder, pating in the deliberation with respect to the transaction in which
needs to act in the company’s interest and not in that of the the impacted director has a conflicting interest. Finally, the next
nominating shareholder. general meeting of shareholders must be informed by the board
of directors of the existence of such conflicts of interest. The
fact that a nominee director is, at the same time, director of
3.5 Are there any limitations or restrictions on the
another portfolio company does not create a conflict per se, but
contents or enforceability of shareholder agreements
(including (i) governing law and jurisdiction, and (ii) the director needs to be mindful that the notion of group interest
non-compete and non-solicit provisions)? is applied very restrictively in Luxembourg and, as a general prin-
ciple, only the interest of the individual company itself is relevant.
As an expression of the overarching principle of freedom of
contract, the parties may agree what they commercially deem 42 Transaction Terms: General
appropriate, with certain restrictions applying under Luxem-
bourg public policy rules, e.g. clauses excluding the risk of loss 4.1 What are the major issues impacting the timetable
for one party or the right to a share in the profits for another for transactions in your jurisdiction, including antitrust,
party would be ineffective. The parties are generally free to foreign direct investment and other regulatory approval
requirements, disclosure obligations and financing
choose the governing law and jurisdiction. Historically, English
issues?
or New York law and courts have been the preferred choice;
however, more recently, there has been a clear shift to using
Luxembourg law and courts or arbitration. Non-compete and Traditionally, private equity transactions in Luxembourg do not
non-solicit provisions are common and not subject to specific usually require any antitrust or regulatory clearances in Luxem-
restrictions (assuming that none of the shareholders are, at the bourg itself. However, if the transaction concerns a target in
same time, an employee of the company). a regulated sector such as the financial sector, the approval of
the regulatory authorities, such as the CSSF, will be required.
Such approval requirements may also apply to the funding of the
3.6 Are there any legal restrictions or other acquisitions of a regulated business.
requirements that a private equity investor should
However, in line with recent trends in other European juris-
be aware of in appointing its nominees to boards of
portfolio companies? What are the key potential risks
dictions, Luxembourg Parliament on 13 June 2023 voted the law
and liabilities for (i) directors nominated by private implementing Regulation (EU) 2019/452, establishing a foreign
equity investors to portfolio company boards, and (ii) direct investment control regime in Luxembourg. Under the
private equity investors that nominate directors to new framework, the Ministry of Economy will be able to scruti-
boards of portfolio companies? nise and evaluate proposed foreign investment (i.e. by a natural
person or an undertaking of a country outside the European
A director nominated by a shareholder does not owe any particular Economic Area) in order to determine whether a foreign invest-
duty to that shareholder from a company law perspective. To ment is likely to affect public security and public order or essen-
the contrary, the directors of a Luxembourg company have the tial national or European interests. The Ministry of Economy
duty to fulfil their mandate in good faith and to carry out their will be able to impose conditions or prohibit a proposed trans-
duties in the best corporate interest of the company itself, which action altogether if public security and public order or essential
is not necessarily in line with, or even contrary to, the interest of national or European interests are affected.
the private equity investor. Moreover, the directors are bound The potential effects on the following elements will be
by confidentiality duties and cannot easily disclose sensitive and particularly decisive for the Ministry’s assessment:
confidential information related to the business of the company (a) critical infrastructure, whether physical or virtual,
to the shareholders. This somewhat delicate position may, in including infrastructure relating to energy, transport,
practice, expose nominee directors to increased liability risks; water, health, communications, media, data processing
generally, their obligations do not differ from those of any other or storage, aerospace, defence, electoral or financial infra-
director, but the nominee director should be aware of potential structure and sensitive facilities, as well as land and real
conflicts of interest, and agree with the nominating shareholder estate essential for the use of such infrastructure;
in advance on procedures or mechanisms, should such conflicts (b) critical technologies and dual-use items within the meaning
of interest arise during the nominee director’s mandate. Private of Article 2(1) of Council Regulation (EC) No. 428/2009
equity investors are generally not liable for the acts and omis- of 5 May 2009;
sions of their nominee directors, as long as they do not interfere (c) the supply of essential inputs, including energy or raw
directly with the company’s management, in which case they may materials, and food or health safety;
be held liable as de facto directors. (d) access to or the ability to control sensitive information,
including personal data; and
(e) freedom and pluralism of the media.

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124 Luxembourg

The law will enter into force on 1 September 2023. While

some aspects are still unclear, it can be expected that the foreign
62 Transaction Terms: Private Acquisitions
investment regime, once implemented, will be in line with the
recent trend of renewed protectionism seen in neighbouring 6.1 What consideration structures are typically
preferred by private equity investors (i) on the sell-side,
countries such as France and Germany, including the ability of
and (ii) on the buy-side, in your jurisdiction?
the authorities to impose coercive measures and administrative
fines up to EUR 5.
The vast majority of private equity M&A transactions realised
in Luxembourg have a cash-for-shares type of consideration.
4.2 Have there been any discernible trends in Arrangements including shares-for-shares types of considera-
transaction terms over recent years?
tion or merger arrangements are possible, but fairly rare. A sell-
side private equity investor will naturally prefer a full payment of
The modernisation of the 1915 Law and the constant thriving of the cash consideration at closing, while a buy-side private equity
the Luxembourg legislator to expand the “toolbox” of available investor will attempt to retain a portion of the purchase price
structuring alternatives (including the transposition of Anglo- as collateral for potential warranty/indemnity claims. Earn-out
Saxon style instruments into local law such as the new LP), components are also seen more frequently than in the past as a
coupled with the wealth of experience and understanding by means of bridging high seller side valuation expectations and the
courts and other authorities for the particularities of the private uncertainties in the current environment.
equity industry, have led to an increasing readiness by private
equity investors to submit the transaction documents to Luxem-
6.2 What is the typical package of warranties /
bourg law as the governing law, while, historically, English law
indemnities offered by (i) a private equity seller, and (ii)
or New York law would have been the preferred choice. To a the management team to a buyer?
certain extent, this tendency also applies to the choice of Luxem-
bourg as the place of jurisdiction (often coupled, however, with
the submission to an arbitral tribunal instead of state courts), The package of warranties/indemnities is similar to the ones
with the arbitration procedure being held in Luxembourg. typically given by a private equity seller in other European juris-
Recent developments on the global stage, such as the dictions, i.e. a private equity seller will usually provide warran-
COVID-19 pandemic, the war in Ukraine and sanctions imposed ties only with respect to title, capacity and authority and certain
by the West in response are now reflected in proposed material tax matters. A private equity seller will typically resist against
adverse change (MAC) clauses and price adjustment clauses. giving any operational or business warranties. Management
Like in many other places in the world, ESG matters are now teams may be pressured to give operational warranties if they
of paramount concern for private equity investors in Luxembourg co-sell their shares alongside the private equity seller.
and are also reflected as a standard in transaction documentation.
6.3 What is the typical scope of other covenants,
52 Transaction Terms: Public Acquisitions undertakings and indemnities provided by a private
equity seller and its management team to a buyer?
5.1 What particular features and/or challenges apply
to private equity investors involved in public-to-private Similar considerations as in other jurisdictions apply to covenants
transactions (and their financing) and how are these regarding the conduct of business in the period between signing
commonly dealt with? and closing and would depend on the nature of the business, the
length of the pre-closing period and on whether the management
Due to the very small number of Luxembourg companies team will be taken over by the buyer. Non-leakage provisions
publicly listed in Luxembourg itself that may be potential will be found in any purchase agreements using a “locked box”
targets of private-to-public transactions, it is difficult to iden- purchase price model. Restrictive covenants (non-compete,
tify a genuine market standard for this type of transaction. non-solicit) are common. Indemnities will typically be given for
From a strictly legal perspective, such transactions are subject to tax matters relating to periods pre-signing/pre-closing.
the Luxembourg securities law, the takeover law implementing
the EU Takeover Directive and the squeeze-out law provision 6.4 To what extent is representation & warranty
imposing specific restrictions, a stringent procedural framework insurance used in your jurisdiction? If so, what are the
and a strict timetable. typical (i) excesses / policy limits, and (ii) carve-outs /
exclusions from such insurance policies, and what is the
typical cost of such insurance?
5.2 What deal protections are available to private
equity investors in your jurisdiction in relation to public
acquisitions? Warranty and indemnity (W&I) insurances are increasingly
common in Luxembourg. However, while it is too early to
As a general principle in Luxembourg law, the parties have identify a genuine market standard for Luxembourg, the likely
contractual freedom to negotiate and to abort the negotiations providers of W&I insurances are the same players as in other
at any point during the process unless the negotiation is so European jurisdictions and it may be expected that similar limi-
advanced that one party can legitimately expect from the coun- tations, carve-outs and exclusions will become market practice
terparty that the deal is about to be done. standards as in other European jurisdictions, although this is
That said, it is possible for the parties to contractually provide always subject to negotiation. The premium for W&I insurances
for specific deal protections, such as break-up fees, provided that for Luxembourg acquisition agreements typically ranges from
the amount of the break-up is proportionate to the size of the deal. 0.9% to 1.8% of the insured sum.

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 Eversheds Sutherland (Luxembourg) S.C.S. 125

6.5 What limitations will typically apply to the liability supervision of the CSSF and subject to the provisions of the
of a private equity seller and management team under Luxembourg prospectus law. IPOs at foreign stock markets,
warranties, covenants, indemnities and undertakings? including by listing of instruments such as American Depositary
Shares, are observed occasionally.
The limitations are similar to the ones applied in other European
jurisdictions, i.e. general limitations include time limits within 7.2 What customary lock-ups would be imposed on
which the claims can be brought (typically between 12 and 24 private equity sellers on an IPO exit?
months) and limitation of financial exposure to a capped amount.
With respect to the latter, depending on the bargaining position A standard is not easily identifiable due to the small number of
of the seller, caps of 30% up to 100% of the purchase price can IPO transactions in the country, but from what could be observed
be observed. Indemnities for particular risks identified in the due in the recent past, a lock-up period of up to 180 days would
diligence exercise may, in very exceptional cases, be uncapped. appear to be a standard period in an IPO exit in Luxembourg.

6.6 Do (i) private equity sellers provide security (e.g., 7.3 Do private equity sellers generally pursue a dual-
escrow accounts) for any warranties / liabilities, and track exit process? If so, (i) how late in the process are
(ii) private equity buyers insist on any security for private equity sellers continuing to run the dual-track,
warranties / liabilities (including any obtained from the and (ii) were more dual-track deals ultimately realised
management team)? through a sale or IPO?

Private equity sellers will generally resist providing security Dual-track exits combined with an IPO in Luxembourg are not
for any warranties/liabilities due to their interest to distribute common in Luxembourg due to the reasons set out above. As
proceeds to their sponsors. Escrow arrangements for a (small) the overall number of dual-track exits involving Luxembourg
proportion of the purchase price are seen occasionally, but private entities is very small and the possible timeframe for continuing
equity sellers will rather tend to resolve warranty matters as part the dual track depends largely on the procedural requirements
of purchase price discussions. Management teams, if at all liable of the IPO pursued in another jurisdiction, a common standard
for warranty or indemnity claims, will typically not be asked to cannot be identified at this time.
provide personal security (other than possibly the vesting of
shares in the target if the management team is taken over and a 82 Financing
management incentive programme is put in place at the target).
8.1 Please outline the most common sources of debt
finance used to fund private equity transactions in your
6.7 How do private equity buyers typically provide jurisdiction and provide an overview of the current state
comfort as to the availability of (i) debt finance, and (ii) of the finance market in your jurisdiction for such debt
equity finance? What rights of enforcement do sellers (including the syndicated loan market, private credit
typically obtain in the absence of compliance by the market and the high-yield bond market).
buyer (e.g., equity underwrite of debt funding, right to
specific performance of obligations under an equity
commitment letter, damages, etc.)? Traditional bank-led leveraged loan financing remains the
most common source of debt finance used. Bank financing is
typically sourced from outside of Luxembourg, with UK and
Equity commitment letters by the private equity fund to the SPV’s
German banks, and to a lesser extent, US and French banks,
benefit are a frequent means for private equity buyers to provide
being amongst the most frequent lenders.
financial comfort. Less frequently, the private equity fund itself,
High-yield bonds that are usually listed on the Luxembourg
or an affiliate with proven financial wealth, may become party to Stock Exchange are another frequent source of financing.
the transaction documents as a guarantor for the SPV. In either
alternative, the liability is limited to contractual damages and no
specific performance of the SPV’s obligations may be claimed. 8.2 Are there any relevant legal requirements or
restrictions impacting the nature or structure of the debt
financing (or any particular type of debt financing) of
6.8 Are reverse break fees prevalent in private equity private equity transactions?
transactions to limit private equity buyers’ exposure? If
so, what terms are typical?
There are no particular legal requirements or restrictions that
would affect the nature or structure of the debt financing.
Reverse break fees have not (yet) been observed as a standard There is no specific legislation regarding thin capitalisation but,
practice in the Luxembourg market. generally, a debt-to-equity ratio of 85:15 is accepted by the tax
authorities in Luxembourg. From a corporate law perspective,
72 Transaction Terms: IPOs however, in dealing with debt financing, the corporate interest
of the borrowing or guaranteeing company needs to be taken
into account and special attention should be given to the rather
7.1 What particular features and/or challenges should
a private equity seller be aware of in considering an IPO restrictive rules governing financial assistance and upstream or
exit? cross-stream guarantees.

Initial public offering (IPO) exits are not frequently seen in 8.3 What recent trends have there been in the debt-
Luxembourg due to the small stock exchange and as there are financing market in your jurisdiction?
very few companies in Luxembourg that would be eligible.
However, the legal and regulatory framework exists and an IPO Luxembourg, through the law of 5 August 2005 on collat-
initiated by a private equity seller would be carried out under eral arrangements (2005 Law), offers a legal framework that is

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126 Luxembourg

likely the most lender friendly in any European jurisdiction and directive 2017/952 (ATAD 2) are applicable. As a general rule,
international lenders increasingly opt to use Luxembourg as a LPs should not be subject to Luxembourg municipal busi-
convenient jurisdiction to secure the financing, irrespective of ness tax, provided that the LP does not carry out a commer-
the governing law of the loan documents and irrespective of cial activity in Luxembourg and provided that the LP’s general
the location of the underlying assets. On 15 July 2022, a new partner holds, at all time, less than 5% interest in the LP.
law was adopted, which aims to add flexibility to contractual SIFs, irrespective of the legal form, are not subject to corpo-
arrangements and includes an overhaul of the system of public rate income tax and municipal business tax on capital gain or
auction of the pledged assets. income in Luxembourg. Distributions made by the SIFs are not
subject to withholding tax. The normal tax due is a subscription
92 Alternative Liquidity Solutions tax of 0.01% based on the quarterly net asset value of the SIF. In
addition, SIFs owning real estate assets located in Luxembourg,
either directly or indirectly through tax-transparent entities,
9.1 How prevalent is the use of continuation fund
vehicles or GP-led secondary transactions as a deal type are subject to a 20% real estate levy on (i) gross rental income
in your jurisdiction? arising from the real estate asset located in Luxembourg, (ii)
capital gain resulting from the alienation of the real estate asset
located in Luxembourg, and (iii) capital gains resulting from the
The use of continuation fund vehicles or GP-led secondary trans-
alienation of interests in tax-transparent entities holding the real
actions is an alternative that is at considered relatively frequently
estate asset located in Luxembourg.
by some of the leading private equity houses in Luxembourg
RAIFs are subject to the same tax regime as SIFs but can
when a private equity fund reaches its culmination point. Given
opt for the SICAR regime if the constitutive documents of the
Luxembourg’s globally market-leading position as a funds juris-
RAIF state that its sole objective is to invest in securities repre-
diction generally, it is little surprising that the country is also an
senting risk capital.
attractive location for initiators of secondary funds and contin-
uation vehicles.
10.2 What are the key tax-efficient arrangements that
are typically considered by management teams in private
9.2 Are there any particular legal requirements or equity acquisitions (such as growth shares, incentive
restrictions impacting their use? shares, deferred / vesting arrangements)?

The framework and legal requirements largely depend on the Management teams may have income derived from carried
intentions and structuring priorities of the fund initiator. In interest that can be structured with units, shares or securities
principle, all Luxembourg vehicles, from the special limited issued by an opaque alternative investment fund. Such carried
partnerships and RAIFs, to SIFs and SICAR, are available, each interest can be conceived in a tax-neutral manner in Luxembourg.
coming with its specific well-established and tested legal and Management teams also considered Luxembourg tax-trans-
regulatory framework. parent and tax-neutral partnerships in order to structure their
carried interests.
102 Tax Matters
10.3 What are the key tax considerations for
10.1 What are the key tax considerations for private management teams that are selling and/or rolling over
equity investors and transactions in your jurisdiction? part of their investment into a new acquisition structure?
Are off-shore structures common?

Capital gains realised by non-Luxembourg resident managers on

The tax framework in Luxembourg is considered among the most shares issued by a Luxembourg company are, in principle, only
stable and business-friendly in Europe for companies, their share- taxable in Luxembourg if the capital gains are realised upon the
holders and their employees alike. Luxembourg is not, and does disposal of a substantial participation (roughly speaking, more
not aim to be, a tax haven, but it offers one of the most flexible than 10% over the five years prior to the date of the disposal)
and attractive tax regimes within the EU. Luxembourg has bilat- within six months from the acquisition of the shareholding.
eral tax treaties with all EU Member States and with a number Generally speaking, Luxembourg has concluded bilateral tax
of other countries (including almost all OECD Member States). treaties with certain countries stipulating that capital gains real-
Joint-stock companies are subject to normal corporate taxation ised on shares issued by a Luxembourg company are only taxable
(corporate income tax and municipal business tax) on their world- in the jurisdiction of the alienator (i.e. except for a real estate-rich
wide income but benefit from Luxembourg’s extensive network company). In this respect, managers resident in such jurisdictions
of double-taxation treaties and from the EU Parent-Subsidiary should not be subject to any Luxembourg income taxation for the
Directive. Despite it being fully taxable, various structuring capital gains realised on shares issued by a Luxembourg company.
alternatives are available for joint-stock companies, allowing for In addition, Luxembourg resident managers may benefit
the exemption of certain types of income and exit tax charges for from tax relief or tax exemptions on the capital gains realised on
private equity investment. shares issued by a Luxembourg company.
SICARs (other than LPs) are subject to normal corporate
taxation (corporate income tax and municipal business tax), but
income derived from transferable securities held by a SICAR does 10.4 Have there been any significant changes in tax
not constitute taxable income. Capital gains realised by non-resi- legislation or the practices of tax authorities (including
in relation to tax rulings or clearances) impacting private
dent shareholders in relation to the disposal of the interest held in equity investors, management teams or private equity
SICARs are not subject to tax in Luxembourg. Dividend distri- transactions and are any anticipated?
butions made by SICAR are exempt from withholding tax.
LPs (under the legal form of an S.C.S. or an S.C.Sp.) are
tax-transparent and not subject to corporate income tax, save for As from 2022, the reverse hybrid rules introduced by anti-tax
when the reverse hybrid rules introduced by anti-tax avoidance avoidance directive 2017/952 (ATAD 2) are applicable in

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 Eversheds Sutherland (Luxembourg) S.C.S. 127

Luxembourg. According to these new rules, under certain Europe is playing a central role in shaping this market in the
conditions, the Partnership could be considered a resident future. In terms of legal framework, since March 2021, invest-
corporate taxpayer and taxed on its income to the extent that ment funds and asset managers have had to comply with the
this income is not otherwise taxed under Luxembourg law or the Regulation (EU) 2019/2088 of the European Parliament and
laws of any other jurisdiction. of the Council of 27 November 2019 on sustainability-related
On 22 December 2021, the European Commission made avail- disclosures in the financial services sector (SFDR). Under
able a proposed Directive, which sets out minimum substance SFDR, all investment funds are required, inter alia, to describe
requirements for companies within the EU, with the goal of in their prospectuses how sustainability risks are integrated into
preventing such undertakings from being used for tax evasion and the fund’s investment decisions. Further, asset managers and
avoidance (ATAD 3). It remains to be seen if this proposal will be fund promoters wishing to offer investment products with a
adopted and how the final text of the directive will look like. core focus on sustainability have two options to have their prod-
ucts classified with different reporting requirements, i.e. as an
112 Legal and Regulatory Matters investment fund, which promotes environmental and/or social
characteristics (Art. 8 SFDR), or as an investment fund with a
11.1 Have there been any significant legal and/or focus on sustainability (Art. 9 SFDR).
regulatory developments over recent years impacting
private equity investors or transactions and are any
anticipated? 11.4 How detailed is the legal due diligence (including
compliance) conducted by private equity investors prior
to any acquisitions (e.g., typical timeframes, materiality,
There are no specific laws or regulations applicable to the private scope, etc.)?
equity investors. In structuring their deals, the private equity
investors must comply with the provisions applicable in the Similar to other European jurisdictions, private equity investors
context of corporate transactions, e.g. company law in Luxem- typically conduct a relatively detailed legal due diligence. The
bourg, anti-money laundering laws, and the Alternative Invest-
timeframe depends on the complexity and the number of docu-
ment Fund Manager Directive. That said, there are some signif-
ments to be covered within the scope of the due diligence. The
icant developments in the recent past worth being reported:
due diligence process is usually conducted by outside legal and
we have already heard about the new foreign direct investment
tax advisors alongside the auditors conducting the financial due
regime (see question 4.1 above). Another potentially significant
diligence. If the focus in Luxembourg is on the holding struc-
development in Luxembourg is to be expected with respect to
ture, this necessarily impacts the scope of the due diligence, i.e.
merger control procedures. Currently, Luxembourg is the only
due diligence will typically be limited to title, corporate govern-
EU Member State without a merger control regime in place
ance and financing arrangements.
on a national level, with only the EU Merger Control Regula-
tion (EUMR) providing a framework for prior merger control
above for concentrations above the relevant thresholds. Luxem- 11.5 Has anti-bribery or anti-corruption legislation
bourg now seems to take steps to join other EU Member States impacted private equity investment and/or investors’
in taking a more active role in merger control proceedings and approach to private equity transactions (e.g., diligence,
in establishing a merger control regime on national level, too: contractual protection, etc.)?
on 30 January 2023, the Luxembourg Competition Authority
joined for the first time an Article 22 EUMR referral request Bribery is not considered to be of major concern when it comes
by other Member State competition authorities related to a to private equity transactions in Luxembourg. On the 2022
proposed merger, which falls below EU and Member State noti- Corruption Perceptions Index issued by Transparency Inter-
fication thresholds, but which raised concerns due to the trans- national, Luxembourg scored 77 on a scale from 0 (“highly
action affecting a certain niche market. On the legislation side, corrupt”) to 100 (“very clean”) and Luxembourg ranked 10th
a proposed bill of law is expected to be introduced to Parliament among the 180 countries in the index. Luxembourg has strong
by the Government in July 2023. Observers expect that the bill anti-bribery legislation in place, e.g. the Luxembourg Criminal
will introduce a mandatory prior notification regime in line with Code has been amended already in 2011 to implement some of
the legislation of many of Luxembourg’s neighbouring countries. the OECD and European Council recommendations against
bribery issued at that time. Luxembourg is also party to two
11.2 Are private equity investors or particular United Nations conventions against bribery and transnational
transactions subject to enhanced regulatory scrutiny in organised crime. Anti-corruption legislation has been strong
your jurisdiction (e.g., on national security grounds)? for decades and transparency has been fostered by a number of
reforms over the years. In that respect, it is worth noting that
Private equity transactions are not subject to any particular Luxembourg has now largely implemented the 4th AML Direc-
restrictions; as a large part of the transactional activity in tive. A private equity investor shall, throughout the life cycle
Luxembourg consists of the involvement of Luxembourg struc- of an investment in Luxembourg, comply with applicable anti-
tures ultimately holding assets in other jurisdictions, specific or money laundering legislation. While sometimes burdensome
regulatory scrutiny often originates from such other jurisdic- for an investor in the context of a fast-moving transaction, the
tions. See, however, question 4.1 above with respect to the new stringent AML legislation has contributed to Luxembourg’s
regime on foreign direct investments generally. reputation as a transparent and trustworthy jurisdiction for
transactions of any scale. In terms of enforcement, the public
prosecutor as well as the CSSF, the Luxembourg regulator
11.3 Are impact investments subject to any additional
legal or regulatory requirements?
for the financial sector, are typically intervening in situations
where bribery can be an issue. The CSSF has the authority to
conduct its own investigations and to issue administrative orders
Sustainable finance is certainly one of the megatrends of recent and administrative fines as a sanction for breaches of the anti-
years and Luxembourg as the preeminent funds jurisdiction in bribery legislation. On a contractual level, typically compliance

Private Equity 2023

128 Luxembourg

with anti-bribery legislation is part of the usual set of W&Is in amount of its share capital contribution. Similarly, a shareholder
any acquisition or investment documentation. of a private/public limited liability company becoming person-
ally involved in the management of the company and commit-
ting management faults may be held liable as a de facto manager.
11.6 Are there any circumstances in which: (i) a private
equity investor may be held liable for the liabilities of
the underlying portfolio companies (including due to 122 Other Useful Facts
breach of applicable laws by the portfolio companies);
and (ii) one portfolio company may be held liable for the
12.1 What other factors commonly give rise to concerns
liabilities of another portfolio company?
for private equity investors in your jurisdiction or should
such investors otherwise be aware of in considering an
As a general principle, it is not possible for a third party to pierce investment in your jurisdiction?
the corporate veil, i.e. the liability of the private equity investors
in their capacity as shareholders or limited partners of private/ Luxembourg has long since created an environment and legal
public limited liability companies or partnerships is limited to framework showing a clear commitment to promote the private
their contribution to the share capital of the company. However, equity sector. Private equity firms should not face any particular
in the case of partnerships, if a private equity investor in its issues or concerns apart from those indicated specifically in this
capacity as limited partner gets involved in the active manage- chapter.
ment of the partnership, its liability can be sought beyond the

Private Equity 2023

 Eversheds Sutherland (Luxembourg) S.C.S. 129

Holger Holle is a partner in our Corporate Group. He divides his time between our Luxembourg office, where he leads the corporate practice,
and our Munich office. Holger focuses on corporate and finance law and particularly specialises in national and cross-border M&A and
private equity transactions. His clients include major banks, international private equity houses and large corporates. His sector focus is
TMT and diversified industrials transactions.
Holger has been recommended as a “Foreign Expert – Luxembourg” by Chambers Global. Furthermore, he is recommended by Best Lawyers
and The Legal 500 for corporate law. Holger graduated from Ludwig Maximilian University, Munich and University Paris II (Pantheon-Assas)
and holds an L.LM. from Stellenbosch University.

Eversheds Sutherland (Luxembourg) S.C.S. Tel: +352 278 646 96

33, rue Sainte-Zithe Email: holgerholle@eversheds-sutherland.com
L-2763 URL: www.eversheds-sutherland.com
Luxembourg

José Pascual specialises in investment funds formation work, advising domestic and foreign clients on matters relating to the structuring,
setting-up and organisation of AIFs (whether regulated or non-regulated). This includes contracts, company law, regulatory matters and
operating arrangements, with a specific focus on private equity funds, real estate funds, infrastructure funds, hedge funds, debt funds and
any other type of alternative assets funds, as well as the related acquisition structures. He is also deeply involved in the corporate and trans-
actional aspects relating to such alternative funds and the structures set up for acquisition purposes.
José holds a postgraduate degree (Mastère Spécialisé) in international business law and management from the École des Hautes Études
Commerciales (HEC), Paris (France) in partnership with the École Supérieure de Commerce de Paris (ESCP) (France), and a Master’s degree
in foreign affairs from the Universidad Complutense de Madrid (Spain) in partnership with the Spanish School of Diplomacy, Madrid (Spain).

Eversheds Sutherland (Luxembourg) S.C.S. Tel: +352 278 646 95

33, rue Sainte-Zithe Email: josepascual@eversheds-sutherland.com
L-2763 URL: www.eversheds-sutherland.com
Luxembourg

Rafael Moll de Alba is a Luxembourg tax lawyer and a member of the Tax Group of Eversheds Sutherland. Rafael is also the chair of Eversheds
Sutherland Latin America Alliance (ESLAA) Tax Group, comprising 28 highly regarded law firms spread across 19 LATAM countries.
Rafael has a special focus on tax structuring for investment funds, corporations and private clients. He also advises in M&A transactions,
finance transactions and in tax-reporting compliance matters (such as CRS, FATCA and DAC 6).
Before joining Eversheds Sutherland, Rafael was a tax partner in an international law firm. He also gained experience in the tax departments
of a leading Benelux law firm and of an international accounting firm. Rafael has been recognised as a New Generation Partner in The Legal
500 EMEA 2022 guide.

Eversheds Sutherland (Luxembourg) S.C.S. Tel: +352 691 226 122

33, rue Sainte-Zithe Email: rafaelmolldealba@evershedssutherland.com
L-2763 URL: www.eversheds-sutherland.com
Luxembourg

Eversheds Sutherland is one of the largest full-service law firms in the Our Investment Funds team is experienced in advising clients on the struc-
world, acting for the public and private sectors. We have thousands of turing, formation and management of investment funds, corporate trans-
people working worldwide and 72 offices in 35 jurisdictions across Europe, actions and regulatory or compliance matters. As part of the Eversheds
the United States, the Middle East, Africa and Asia. Our Luxembourg office Sutherland global network, we hold an excellent understanding of local
focuses on corporate clients and investment funds. We advise domestic Luxembourg law within a wider commercial context.
and international clients (including large corporates, private equity houses www.eversheds-sutherland.com
and fund managers) on private equity transactions and M&A as well as the
structuring, setting-up and organisation of all types of AIFs, UCITS funds
and corporate entities. We also advise on regulatory issues relating to
investment funds and portfolio managers.
Eversheds Sutherland’s global private equity practices have extensive expe-
rience advising on all areas of specialist private equity transactions and
across every major jurisdiction. In addition to longstanding relationships
with many providers of private equity on both national and international
levels, we also regularly advise management teams, corporate and indi-
vidual vendors and providers of debt finance on private equity transactions.

Private Equity 2023

130 Chapter 16

Mexico
Mexico

Jorge Cervantes Bernardo Reyes

Trejo Retana Krieger

Daniel Guaida Jerónimo Ramos

González Calvillo, S.C. Azar Arozarena

12 Overview 22 Structuring Matters

1.1 What are the most common types of private equity 2.1 What are the most common acquisition structures
transactions in your jurisdiction? What is the current adopted for private equity transactions in your
state of the market for these transactions? jurisdiction?

At a fund formation level, managers typically structure the funds As a general rule, equity investments in Mexican assets are typi-
either through a publicly traded vehicle (in the form of a trust) cally structured as either (i) investing through a local corpo-
or a private corporation serving as the investment vehicle. It is ration, or (ii) investing through a trust, which could provide
also common for managers to choose foreign jurisdictions to tax-transparency benefits to investors (if certain tax require-
form the fund prior to a local investment. At a transaction level, ments are met). The investment is typically made at a holding
private equity funds are actively participating in both equity and company level. For local companies, it is common for the
loan financing structures. holding to also serve as an operating company.
Although private equity vehicles may invest directly in the
holding company, it is common for such firms to set up special
1.2 What are the most significant factors currently
encouraging or inhibiting private equity transactions in purpose vehicles (“SPVs”) intended to perfect the investment.
your jurisdiction? This is common for foreign firms (which would prefer having
a wholly owned local subsidiary that would in turn perfect the
investment), as well as publicly traded trust funds like Certificados
One of the most significant factors encouraging private equity
de Capital de Desarrollo (“CKDs”) and investment project trust
transactions in Mexico is the continuous investment by pension
certificates (“CERPIS”). The use of an SPV is directly linked to
funds in the private equity market, through the acquisition of
the tax structure of the fund and the investment.
securities issued by publicly traded trusts that serve as private
equity funds. Traditional private equity firms have the option of
structuring a local fund that will receive investment from local 2.2 What are the main drivers for these acquisition
institutional and qualified investors (which include pension structures?
funds). In order for such pension funds to allocate resources
to publicly traded private equity vehicles, such investment vehi- An investment structured through a corporation typically uses
cles must comply with strict structural requirements (including a the form of a Sociedad Anónima Promotora de Inversión de Capital Vari-
specific investment period, rules for a distribution of dividends/ able (“SAPI”). The SAPI is a flexible corporate governance struc-
interest, allocation of the investments in local assets, etc). ture that offers alternatives for investors to assume a controlling
participation holding a minority stake in the company.
1.3 Are you seeing any types of investors other Mexican income tax legislation allows certain types of trusts
than traditional private equity firms executing private to act as transparent vehicles for its investors. In order for inves-
equity-style transactions in your jurisdiction? If so, tors to claim such benefits, both the trust and the investment
please explain which investors, and briefly identify any would need to comply with certain structural rules. Investments
significant points of difference between the deal terms in real estate assets are commonly structured through a trust.
offered, or approach taken, by this type of investor and
that of traditional private equity firms.
2.3 How is the equity commonly structured in private
equity transactions in your jurisdiction (including
In recent years, there has been more active participation from institutional, management and carried interests)?
family offices and asset manager firms structuring transactions
in a manner consistent to that of a traditional private equity firm.
In terms of the investments, the corporate flexibility that a
Mexican SAPI offers, allows for multiple investment structures.
With a SAPI, the company may issue several series of shares,
allocating different characteristics to each one.

Private Equity 2023

 González Calvillo, S.C. 131

2.4 If a private equity investor is taking a minority 3.2 Do private equity investors and/or their director
position, are there different structuring considerations? nominees typically enjoy veto rights over major
corporate actions (such as acquisitions and disposals,
business plans, related party transactions, etc.)? If a
The threshold for statutory minority rights in an SAPI are the private equity investor takes a minority position, what
lowest available for any type of business corporation in Mexico, veto rights would they typically enjoy?
starting at 10% of the float. In addition to such statutory rights,
minority investors are able to add additional rights to their stake.
In the case of an equity transaction and depending on whether
These minority rights are documented in the by-laws and in stand-
the acquisition is for a minority or majority stake, sponsors usually
alone shareholders’ agreements entered into by all shareholders. It
seek presence on the board, veto powers over certain super-
is common for minority shareholders to negotiate certain rights
majority matters at the shareholder and board levels (e.g., mergers,
(such as a preferred distribution, appointment of directors and
disposal of assets, indebtedness, change of business line, etc.), as
officers, veto rights for certain corporate matters, etc.).
well as other protections regarding their exit from the investment,
ranging from tag-along and drag-along rights, as well as prefer-
2.5 In relation to management equity, what is the ential rights in a potential initial public offering (“IPO”). The
typical range of equity allocated to the management, and foregoing is either documented in a shareholders’ or subscription
what are the typical vesting and compulsory acquisition agreement or is reflected in the by-laws of the acquired company.
provisions? Regarding debt transactions, investors and lenders are also
likely to request board presence and will want to have a say over
Equity allocated to management varies considerably from deal certain corporate and business matters – this is typically struc-
to deal. Large local corporations in Mexico are usually family tured through representations and warranties and affirmative
owned and historically managed by members of the family. and negative covenants in the loan agreement. Likewise, if the
In recent years, a trend for external professionals assuming deal involves a syndicate of lenders, the relationship between the
management duties has been seen, but most of these companies members of the syndicate and their rights with respect to the debt
would maintain some family members as officers or directors. will likely be set forth in an intercreditor agreement.
Please note that labour laws in Mexico are very protective of
employees. Such laws could have an impact in equity structures 3.3 Are there any limitations on the effectiveness of
offered to managers in Mexico. A case-by-case review is recom- veto arrangements: (i) at the shareholder level; and (ii) at
mended for every management equity arrangement. the director nominee level? If so, how are these typically
addressed?
2.6 For what reasons is a management equity holder
usually treated as a good leaver or a bad leaver in your As explained, so long as such veto arrangements are duly docu-
jurisdiction? mented in the entity’s corporate by-laws, no limitations of the
effectiveness of these would apply.
As mentioned above, labour relationships are highly regulated in
Mexico. The terms of employment (including those of manage- 3.4 Are there any duties owed by a private equity
ment) shall provide minimum statutory benefits and will be investor to minority shareholders such as management
subject to legal protections for termination process and sever- shareholders (or vice versa)? If so, how are these
ance payments. Under such rules, generally, an employee will typically addressed?
have limited scenarios that would give the right to terminate the
employment. Mexican law does not provide for such duties. Nonetheless,
As a result of such legal provisions, labour courts and prec- these duties may be agreed upon via the entity’s corporate
edents could have an impact in any valuation changes that are by-laws and/or shareholders’/partners’ agreements (i.e., contrac-
applied due to leaver clauses. tual duties rather than statutory duties).

32 Governance Matters 3.5 Are there any limitations or restrictions on the

contents or enforceability of shareholder agreements
3.1 What are the typical governance arrangements (including (i) governing law and jurisdiction, and (ii)
for private equity portfolio companies? Are such non-compete and non-solicit provisions)?
arrangements required to be made publicly available in
your jurisdiction?
Generally speaking, Mexican law allows for broad contractual
freedom (except when agreements conflict with law or social
Corporate by-laws and/or shareholders’/partners’ agreements measures). Moreover, Mexican corporate law expressly prohibits
would normally include special rights for private equity inves- contractual arrangements that contradict the minimum rights
tors (in the form of minority rights), which typically include, afforded to minority shareholders/partners by law. Having
among others: (1) preferred stock and dividends; (2) board said this, provisions included in entities’ corporate by-laws will
appointment rights; (3) voting/veto rights in respect of speci- always prevail over contractual arrangements – in any case, care
fied matters (see question 3.2 below); (4) rights of first refusal should be taken as to avoid contradictions between by-laws and
in respect of equity transfers or increases; and (5) drag-along contractual arrangements.
and tag-along rights. Corporate by-laws for Mexican entities are As such, governing law/jurisdiction and non-compete/
registered before the Public Commerce Registry for the relevant non-solicitation clauses are legal under Mexican law. However
entity’s corporate domicile – these registries are publicly avail- (and as to avoid antitrust issues), non-compete arrangements
able. Other agreements are private. should be limited in scope (to specific goods/services), time
(generally, two to three years, and up to five years in specific
scenarios) and territory (limited to specified areas).

Private Equity 2023

132 Mexico

3.6 Are there any legal restrictions or other agencies (e.g., nuclear energy generation, exploration and extrac-
requirements that a private equity investor should tion of oil and hydrocarbons, currency printing, coin minting);
be aware of in appointing its nominees to boards of (2) Mexican companies with no foreign investment (e.g., land
portfolio companies? What are the key potential risks passenger or freight transportation); and (3) Mexican compa-
and liabilities for (i) directors nominated by private nies where foreign capital ownership is limited to a certain
equity investors to portfolio company boards, and (ii) percentage (e.g., manufacturing of explosives or firearms, radio
private equity investors that nominate directors to
broadcasting). Foreign investment in other specialised sectors
boards of portfolio companies?
may be subject to prior authorisation by the National Foreign
Investment Commission (e.g., private education).
Mexican law bars (1) entities, and (2) individuals that are barred As a rule, private equity investors are not required to register
from carrying out business activities from serving as directors. before (or obtain clearance from) the securities regulator in
In the case of publicly traded entities, statutory auditors are also Mexico (Comisión Nacional Bancaria y de Valores (“CNBV”)).
barred from acting as directors within the 12 months following Moreover, private offers are not subject to clearance from the
the date on which their auditor appointment expires. CNBV so long as these (among others): (1) are exclusively
As a rule, directors are not liable for any losses incurred by made available to institutional or qualified investors, and, when
entities, unless such losses or damages are the result of wilful dealing with equity/membership interests or unregistered secu-
misconduct or gross negligence by such directors. Directors rities representing the corporate capital of companies, if such
shall be jointly liable with entities for the following matters: (1) securities are offered to less than 100 investors; and (2) are not
payment of equity contributions by shareholders/partners; (2) solicited, offered or promoted to an indetermined person or by
compliance with payment of dividends; (3) existence and main- mass media communication platforms, and such solicitation,
tenance of accounting and records; and (4) compliance with offering or promotion is not conducted on a professional or
shareholder/partner resolutions. regular basis.
A breach of these duties would entail liability by directors.
Notwithstanding, directors shall not be liable, nor will any claim
be exercisable against them, if, during the deliberation of the 4.2 Have there been any discernible trends in
transaction terms over recent years?
act for which a liability is being claimed, such directors voted
against the execution or transaction, unless there is evidence of
fault or wrongdoing by such director. There is no specific official data in Mexico to determine these
Special liability also exists for directors under Mexico’s civil trends. That said, based on our experience, private equity in
and criminal codes, and tax, antitrust, data protection, envi- Mexico has recently increased, specifically with respect to
ronmental, anti-money laundering/anti-bribery and corruption venture capital, growth and leveraged buyouts, and real estate.
(“AML”/“ABC”) and insolvency laws. We have also seen an increase in minority investments under-
taken by financial sponsors (equity investments with certain
minority protections or debt-like investments with rights to
3.7 How do directors nominated by private equity
participate in the equity upside) or a mixture thereof.
investors deal with actual and potential conflicts of
interest arising from (i) their relationship with the party
nominating them, and (ii) positions as directors of other 52 Transaction Terms: Public Acquisitions
portfolio companies?
5.1 What particular features and/or challenges apply
Mexican law requires directors to: (1) to refrain from voting in to private equity investors involved in public-to-private
matters in which they have a conflict of interest; and (2) treat transactions (and their financing) and how are these
all information and matters that come to their attention as commonly dealt with?
confidential, unless such information is publicly available or if
required to disclose the information by a judicial or administra- The most relevant challenge for this type of transactions would
tive authority. be that the acquisition of a public company would require to be
conducted by means of a public tender offer. For such purposes,
42 Transaction Terms: General the transaction will be subject to disclosure in the relevant stock
exchange of information regarding the transaction and, like-
wise, would be subject to a lengthy scrutiny and authorisation
4.1 What are the major issues impacting the timetable
for transactions in your jurisdiction, including antitrust, process from the CNBV. Such disclosure and approval require-
foreign direct investment and other regulatory approval ments represent significant delays and costs associated to the
requirements, disclosure obligations and financing purchase and sale process. Furthermore, additional regulatory
issues? requirements may apply considering the transaction’s structure
and market share of potential buyers.
Generally speaking, transaction timetables will vary depending
on the nature of the transaction and the underlying business. 5.2 What deal protections are available to private
Merger clearance is required to the extent the transaction meets equity investors in your jurisdiction in relation to public
certain thresholds (deal value, participant size, and concentration acquisitions?
of assets). Merger clearance is almost always jointly requested
by both parties to a transaction and is typically structured as a Regarding acquisitions of public companies, Mexican law allows
condition to closing. This is based on the understanding that to provide for no-shop protections in the transaction documents.
“hell or high water” mechanisms are not common in Mexico. Most common protections for this type of deals range from
With respect to foreign investment limitations, Mexican piggyback registration rights for investors, to even (less common)
law sets forth certain restrictions applicable for few strategic break-up fees or obligations to cover aborted deal costs.
activities and sectors, which are reserved to: (1) government

Private Equity 2023

 González Calvillo, S.C. 133

usually tied to statutes of limitations and/or representation and

62 Transaction Terms: Private Acquisitions warranty survival periods.

6.1 What consideration structures are typically

preferred by private equity investors (i) on the sell-side, 6.7 How do private equity buyers typically provide
and (ii) on the buy-side, in your jurisdiction? comfort as to the availability of (i) debt finance, and (ii)
equity finance? What rights of enforcement do sellers
typically obtain in the absence of compliance by the
There is no general rule in Mexico with respect to pricing mech- buyer (e.g., equity underwrite of debt funding, right to
anisms; that said, traditional pricing mechanisms to closing specific performance of obligations under an equity
accounts are seen more often than “locked box” mechanisms. commitment letter, damages, etc.)?

6.2 What is the typical package of warranties / The structuring of acquisitions by private equity investors
indemnities offered by (i) a private equity seller, and (ii) through SPVs is common in Mexico. To provide comfort to
the management team to a buyer? buyers, guarantees (obligación solidaria) by parent companies or
ultimate beneficial ownership are often put in place, giving
Representations, warranties and indemnities are given by the sellers a direct claim in case of a breach by buyer.
target company and seller, and are usually fully fledged when Equity and debt commitment letters are also used to provide
involving a material equity percentage, and include, among comfort to sellers that investors will ultimately have the funds
others, title to assets, capacity, compliance, due authorisation, no required to carry out the acquisition.
contravention, tax, financial information, litigation, labour, etc.
On the buy-side, these are usually limited to capacity, due authori-
sation, and financial solvency. Representations and warranties are 6.8 Are reverse break fees prevalent in private equity
transactions to limit private equity buyers’ exposure? If
also usually subject to the existence of a “material adverse effect”.
so, what terms are typical?

6.3 What is the typical scope of other covenants, Seller (reverse) break fees are uncommon in Mexico. Breaches
undertakings and indemnities provided by a private
equity seller and its management team to a buyer?
to seller’s obligations are usually covered by the seller’s indem-
nification obligations.

In transactions where signing and closing are differed, conduct

of business clauses, whereby the target company and seller
72 Transaction Terms: IPOs
agree to comply with certain positive and negative covenants to
protect buyer, are common. 7.1 What particular features and/or challenges should
Indemnity clauses are usually divided into those arising from a private equity seller be aware of in considering an IPO
breaches to fundamental representations and warranties, and all exit?
other breaches. The caps, baskets (deductible and de minimis) and
claim periods will depend on such type of breaches. Breaches The most relevant features or challenges to be considered by
will typically be exempt if fully disclosed. Sandbagging/ private equity sellers in an IPO exit would be: (i) the liquidity
anti-sandbagging mechanisms can also be included. of the Mexican equity securities market; (ii) disclosure and scru-
tiny process; (iii) applications and approvals required from the
6.4 To what extent is representation & warranty CNBV; and (iv) timing and costs associated and connected with
insurance used in your jurisdiction? If so, what are the the IPO process.
typical (i) excesses / policy limits, and (ii) carve-outs /
exclusions from such insurance policies, and what is the
typical cost of such insurance? 7.2 What customary lock-ups would be imposed on
private equity sellers on an IPO exit?

The use of representation and warranty insurance is not common

in Mexico. When seen, it is usually in the context of larger cross- It is customary to see lock-up agreements imposed on private
border transactions with foreign investors. equity sellers limiting or restricting the sale of shares for
a certain period following the IPO. In our experience, such
period typically ranges 180 days.
6.5 What limitations will typically apply to the liability
of a private equity seller and management team under
warranties, covenants, indemnities and undertakings? 7.3 Do private equity sellers generally pursue a dual-
track exit process? If so, (i) how late in the process are
private equity sellers continuing to run the dual-track,
As explained in question 6.3 above, caps, baskets (deductible and (ii) were more dual-track deals ultimately realised
and de minimis) and claim periods are usually negotiated and through a sale or IPO?
required by sellers.
Even though a dual-track exit process is allowed in Mexico, this
6.6 Do (i) private equity sellers provide security (e.g., type of alternative for equity sellers is not common in our market.
escrow accounts) for any warranties / liabilities, and Some of the main factors are markets conditions, size, and
(ii) private equity buyers insist on any security for
resources to prepare for both, an IPO and third-party exit process.
warranties / liabilities (including any obtained from the
management team)?

Holdback mechanisms and escrow accounts are commonly

used in respect of indemnities. Release mechanics for these are

Private Equity 2023

134 Mexico

82 Financing 102 Tax Matters

8.1 Please outline the most common sources of debt 10.1 What are the key tax considerations for private
finance used to fund private equity transactions in your equity investors and transactions in your jurisdiction?
jurisdiction and provide an overview of the current state Are off-shore structures common?
of the finance market in your jurisdiction for such debt
(including the syndicated loan market, private credit
market and the high-yield bond market).
There are no transfer taxes or value-added taxes payable in respect
of share acquisitions. Nonetheless, a seller may be required to
pay income tax on the capital gains arising from the sale. The
When debt financing is structured locally, the most common tax rate and potential withholding obligations for a buyer will
form would be a term loan granted by a local party. Having said apply on a case-by-case basis depending on the particular charac-
that, the finance market in Mexico is not limited to local institu- teristics of the parties (e.g., individual or corporation, residency,
tions. Access to the offshore finance market is very common for equity participation, access to tax reliefs or exemptions pursuant
Mexican transactions. Syndicated loans are regularly seen with a to double taxation treaties, etc.).
wide range of international parties participating in the syndicate. Potential investors may also acquire shares of target compa-
A local high-yield bond market, even when developed, faces nies via a direct subscription of (new) stock. This is a structure
different challenges due to the timing and costs associated to where one or more investors decides to participate in the equity
the approvals required by the CNBV. Nonetheless, issuers and of a Mexican company without a transfer of stock by the current
investors can also access offshore markets for these purposes. shareholders, only their dilution, which generally should not
trigger a tax event.
8.2 Are there any relevant legal requirements or Offshore structures remain common in the Mexican private
restrictions impacting the nature or structure of the debt equity industry; however, as a result of recent changes to local
financing (or any particular type of debt financing) of law, as of fiscal year 2021, fund managers have favoured the use
private equity transactions? of local vehicles to structure private equity funds (trust or joint
venture agreements) in order to preserve tax transparency for
We do not identify relevant legal requirements or restrictions to private equity investors.
structure debt financing. Private equity investors are usually required to provide diverse
information to fund managers in order to apply tax treaty benefits
or claim tax exemptions (i.e., tax residence certificate, granting
8.3 What recent trends have there been in the debt- of a tax payments on account (POA), incorporation documents,
financing market in your jurisdiction? among other requirements).

A very notorious trend for debt-financing market in our jurisdic-

10.2 What are the key tax-efficient arrangements that
tion would be environmental, social and governance (“ESG”) are typically considered by management teams in private
financing. Since 2020, Mexico has seen a significant increase equity acquisitions (such as growth shares, incentive
in the number of transactions involving ESG financing and shares, deferred / vesting arrangements)?
ESG bonds. As a result, relevant regulatory efforts are already
in place (Taxonomía Sostenible de México), as well as the devel- Management compensation arrangements usually involve
opment and sophistication of a special ESG financing market the granting of stock options, warrants, earn-out payments
being on the rise. and other forms of performance-based compensation to key
members of management.
92 Alternative Liquidity Solutions
10.3 What are the key tax considerations for
9.1 How prevalent is the use of continuation fund management teams that are selling and/or rolling over
vehicles or GP-led secondary transactions as a deal type part of their investment into a new acquisition structure?
in your jurisdiction?

In general, the sale or roll-over of stock owned by Mexican

For investments made by publicly traded funds (in particular tax-resident employees creates a tax event. The applicable tax
CKDs or CERPIs), continuation vehicles are somewhat used due rate will hinge on the income bracket of the specific executive,
to the fact that delaying liquidity for a long period could have a but it will usually range between 30–35%. Likewise, executives
material adverse effect on the tax structure of the legacy fund. that are tax residents in Mexico and who hold on to stock will be
subject to a 10% withholding tax on dividends received.
9.2 Are there any particular legal requirements or Any other form of incentive scheme involving a cash payment to
restrictions impacting their use? management such as earn-out or performance-based compensa-
tion will likely be subject to income tax at a 30–35% rate.
For CKDs, it is common for the fund to have detailed rules on
how assets should be valued and divested, further limiting the 10.4 Have there been any significant changes in tax
manager’s options in the use of continuation funds (use of third legislation or the practices of tax authorities (including
parties, external auditors, disclosure to the markets, etc). in relation to tax rulings or clearances) impacting private
In all cases, typical conflicts of interest restrictions should be equity investors, management teams or private equity
transactions and are any anticipated?
observed.

The tax reform bill enacted for the year 2021 modified tax-
transparency rules for private equity funds, thus, many funds

Private Equity 2023

 González Calvillo, S.C. 135

migrated to the use of local vehicles (trust or joint venture agree- due-diligence exercises will cover corporate, contractual,
ments) to maintain their tax-transparent status. financing, tax, labour and employment, IP, environmental and
Private equity funds that are effectively managed from abroad regulatory, and AML/ABC compliance matters.
are generally able to apply a tax incentive available in Mexico in
order to maintain transparency for Mexican tax purposes.
11.5 Has anti-bribery or anti-corruption legislation
Other significant changes were incorporated in the Mexican impacted private equity investment and/or investors’
rules applicable for the granting of a tax POA by non-residents. In approach to private equity transactions (e.g., diligence,
general, if foreign investors of a private equity fund are required contractual protection, etc.)?
to grant a POA to a Mexican resident in order to pay taxes in
Mexico on their behalf, solvency requirements must now be met
Recent amendments and additions to Mexico’s legal and regula-
for the POA to be valid for tax purposes (this includes scenarios
tory framework in respect of AML/ABC have increased investor’s
where tax treaty benefits are being sought).
focus on broad diligence requirements. Moreover, detailed cove-
nants and policies in respect of compliance, AML/ABC, fraud
112 Legal and Regulatory Matters prevention and compliance with sanctions are commonly adopted.

11.1 Have there been any significant legal and/or

11.6 Are there any circumstances in which: (i) a private
regulatory developments over recent years impacting
equity investor may be held liable for the liabilities of
private equity investors or transactions and are any
the underlying portfolio companies (including due to
anticipated?
breach of applicable laws by the portfolio companies);
and (ii) one portfolio company may be held liable for the
Yes. In Mexico, multiple legal and regulatory developments liabilities of another portfolio company?
have happened over recent years, impacting private equity inves-
tors. For instance, in 2023, different guidelines applicable to Generally speaking, there is no piercing of the corporate veil,
pension funds (principal institutional investors in the Mexican except in certain cases for specific tax and criminal situations (i.e.,
securities market) came into effect forcing such pension funds shareholders’/partners’ liability is limited to their equity contribu-
and their managers Retirement Funds Administrators (Admin- tions). Note that the corporate veil is afforded to shareholders/
istradoras de Fondos para el Retiro “AFORES”) to have specific partners and not to directors, who, as explained above, are person-
guidelines and policies to considering ESG factors in their ally liable towards the entity and its shareholders/partners.
portfolios and investments. Likewise, different amendments
to our labour laws and regulations have passed in connection
122 Other Useful Facts
with outsourcing structures, labour unions, minimum wages
and personal time-off representing different cost implications
and legal challenges to investors. In addition, the most rele- 12.1 What other factors commonly give rise to concerns
for private equity investors in your jurisdiction or should
vant amendment to the Securities Market Law (Ley del Mercado
such investors otherwise be aware of in considering an
de Valores) since 2014 is expected to pass in September of 2023, investment in your jurisdiction?
which will introduce, among other things, a new type of public
offerings in Mexico called “simplified public offerings” (ofertas
públicas simplificadas), which are intended to boost the Mexican A relevant factor in private equity operations in the Mexican
securities market and the number of issuers in Mexico by securities market and key to raising capital relates to CKDs.
providing a more flexible regime to conduct public offerings of CKDs are fixed-term equity instruments that represent a prop-
equity or debt registered securities. erty right over assets that a trust vehicle has obtained through a
restricted public offering on a stock exchange for institutional
investors (mainly pension funds) and qualified investors (with
11.2 Are private equity investors or particular capital invested in securities in the last year greater than approxi-
transactions subject to enhanced regulatory scrutiny in mately USD 8.5 million). The CKDs are issued by a trust consti-
your jurisdiction (e.g., on national security grounds)?
tuted under the laws of Mexico through a banking institution
that acts in its capacity as fiduciary entity.
No enhanced regulatory scrutiny for private equity investors is In general, a specific period is foreseen to carry out investments
yet applicable in Mexico. and, once said period is over, the CKD can no longer carry out new
investments and enters a phase of divestment. Once the certificate
11.3 Are impact investments subject to any additional expires, the investor will receive the face value of his security, plus
legal or regulatory requirements? any outstanding yield. Compared to floating or variable income
securities, income depends on the returns of the projects in which
the CKD invests. Although profitability is not guaranteed, it is
No detailed legal or regulatory framework exists in Mexico in
expected that the asset will maintain constant flows.
respect of impact investment strategies.
The CKD trust may invest the proceeds of the issuance in
various non-exclusive assets, such as technology, infrastructure,
11.4 How detailed is the legal due diligence (including energy, real estate, among others, through the acquisition of
compliance) conducted by private equity investors prior participation in companies or trusts tax residents in Mexico (the
to any acquisitions (e.g., typical timeframes, materiality, “Project Companies”) owning the same assets, as well as can
scope, etc.)? grant loans to the Project Companies if their investment thesis
provides for it, in this case considering the collection rights as
Due diligence requirements and timeframes will vary depending assets of the CKD.
on the scope of the underlying business and specific require- It is possible that the sponsor participates in the issuance by
ments of the relevant private equity investor. Bare minimum holding or acquiring a portion of the CKDs. The trust may
issue different series of CKDs.

Private Equity 2023

136 Mexico

In relation to corporate governance, the trust issuer of CKDs

has a holders’ meeting in charge of approving the changes and
investment policy of the trust. The assembly has the power to
approve investments that they intend to make when they repre-
sent 10% or more of the trust’s assets. Additionally, the tech-
nical committee has the power to approve the proposals of the
administration to carry out investments.

Private Equity 2023

 González Calvillo, S.C. 137

Jorge Cervantes Trejo specialises in mergers and acquisitions (“M&A”), private equity, project finance, energy and infrastructure, offering
clients exceptional legal counsel and representation in Mexico’s dynamic and challenging business environment. Mr. Cervantes has broad
experience advising clients in complex and high-profile national and cross-border projects, representing sponsors, developers, investors,
financial institutions, banks and lenders on all kinds of investments, M&A, sales, joint ventures, projects and financings.

González Calvillo, S.C. Tel: +52 55 5202 7622

Montes Urales 632, Lomas de Chapultepec Email: jcervantes@gcsc.com.mx
11000, Mexico City URL: www.gcsc.com.mx
Mexico

Bernardo Reyes Retana Krieger has over 19 years of professional experience and has focused his practice on both private and public offerings
of securities, advising issuers, investors, underwriters and credit agencies, as well as on domestic and cross-border complex transactions, mostly
with respect to financings, capital and debt markets, ESG financing, CKDs, REITs, FIBRA-Es, CERPIs, and M&A transactions.

González Calvillo, S.C. Tel: +52 55 5202 7622

Montes Urales 632, Lomas de Chapultepec Email: breyes@gcsc.com.mx
11000, Mexico City URL: www.gcsc.com.mx
Mexico

Daniel Guaida Azar has focused his practice on domestic and cross-border project finance, M&A and structuring publicly traded private equity
funds, representing clients from a wide range of industries. He has developed expertise in the fintech space advising start-ups venturing into
newly authorised banking and financial activities in Mexico and in regulatory authorisations to operate as fintechs. Daniel’s experience also
includes advising technology start-ups in their initial structuring, funding at different stages and buyouts.

González Calvillo, S.C. Tel: +52 55 5202 7622

Montes Urales 632, Lomas de Chapultepec Email: dguaida@gcsc.com.mx
11000, Mexico City URL: www.gcsc.com.mx
Mexico

Jerónimo Ramos Arozarena focuses on infrastructure and energy project finance, structured finance, M&A and private equity transactions. He
has represented several sponsors, financial institutions, suppliers and contractors in transactions related to the infrastructure sector (energy, oil
and gas, highways and toll roads, airports and ports) in Latin America (with a key focus on Mexico), including in connection with due-diligence
processes, project structuring, financing document negotiation and implementation and, in general, legal and security documentation for projects.

González Calvillo, S.C. Tel: +52 55 5202 7622

Montes Urales 632, Lomas de Chapultepec Email: jramosarozarena@gcsc.com.mx
11000, Mexico City URL: www.gcsc.com.mx
Mexico

Gonzalez Calvillo has been at the forefront of the legal market in Mexico for
over 35 years, operating as a full-service leading law firm thanks to its transac-
tional core and expertise in a wide range of practice areas. The firm is recog-
nised for its ability to build cross-disciplinary teams for the most complex
legal challenges and long track record of successfully providing ground-
breaking legal, business and regulatory advice to high-profile domestic and
international companies. Often described as a pioneer of the Mexican legal
services industry, the firm is known for its commitment to doing things differ-
ently, finding bespoke solutions, and creating transformational legal changes
that enable clients to achieve their objectives.
www.gcsc.com.mx

Private Equity 2023

138 Chapter 17

Nigeria
Nigeria

Ayodele Adeyemi-Faboya

Mavis Abada

Banwo & Ighodalo Ibiyemi Ajiboye

corporate structures such as the LPs and LLPs by the Compa-

12 Overview nies and Allied Matters Act of 2020 (“CAMA”); and increased
governance flexibility with single member and single director
1.1 What are the most common types of private equity companies, amongst others. In addition, the Federal Govern-
transactions in your jurisdiction? What is the current
ment’s Ease of Doing Business Initiative (“EoDBI”) with the aim
state of the market for these transactions?
to improve the business climate in Nigeria has driven the enact-
ment of the Business Facilitation (Miscellaneous Provisions) Act,
The most common forms of private equity (“PE”) transactions 2022 (“BFA”), which amends principal business-related provi-
in Nigeria have traditionally been leveraged buyouts (by way of sions in legislations such as the CAMA, the Financial Reporting
share or asset acquisitions), and expansion/growth capital. The Council Act, Foreign Exchange (Monitoring and Miscella-
market has, however, seen an uptick in venture capital (“VC”) neous Provisions) Act (“FEMMA”), Investment and Securities
and bolt-on acquisitions in the last couple of years, particularly Act (“ISA”), Nigerian Investment Promotion Commission Act
in the fintech space. (“NIPC Act”), Nigerian Oil and Gas Industry Content Devel-
Despite the worsening macro-economic indices (the National opment Act, National Office for Technology Acquisition and
Bureau of Statistics (“NBS”) in fact reported that the investment Promotion Act amongst others. The enactment of the Nigerian
inflow in 2022 was at its lowest in six years), PE transactions in Start-up Act 2022 creates a favourable business environment for
Nigeria maintained an upward trajectory in 2022, with investor startups by providing incentives and developing an ecosystem for
activity in sectors ranging from telecommunications, banking, startups to thrive.
waste management (recycling), financial services, fintech, infor- From a tax perspective, tax reform also continues to be targeted
mation technology, oil and gas, and projects, amongst others. In at encouraging investment. The Finance Act 2021 designates Real
2022, 320 deals worth US$5.7 billion were recorded in the afore- Estate Investment Trust Scheme (“REITS”) and Unit Trusts as
mentioned sectors. Seed/Series funding and Venture rounds pass-through vehicles for tax purposes, to encourage investment
were the most popular, with 86 deals valued at US$886.3 million through those asset classes, while the Finance Act 2019, had earlier
and 37 deals valued at US$50 million, respectively. Notably, the introduced exemptions to Excess Dividend Tax rule, to avoid
fintech sector recorded the highest deals valued at US$777.3 double taxation. The Venture Capital Incentives Act, whilst not
million. Whilst Q1 2023 showed a dip in activity, largely due to new, has recently re-entered the spotlight as it provides significant
the uncertainties around the elections as well as foreign exchange tax incentives in relation to start-up investments. The dispute reso-
(“FX”) liquidity challenges, market indices suggest a rally, post lution framework also continues to evolve with the Lagos Court of
elections, and increased investor confidence. Arbitration emerging as the highest ranked court of arbitration in
Africa, in a study by White & Case and the Queen Mary Univer-
1.2 What are the most significant factors currently sity of London. A revised Arbitration and Mediation Act has also
encouraging or inhibiting private equity transactions in recently been passed by the legislature and is expected to improve
your jurisdiction? the seamlessness of the arbitration process in Nigeria.
Despite the overall positive outlook, the general global trend
Factors encouraging PE investor activity in Nigeria include: of rising inflation, geopolitical risks and other fiscal pressures
large population size, growing consumer demographics and continue to be a hindrance and to influence the way transactions
increasing regulatory clarity – via restructuring of the oil and gas are executed. For instance, there has been an increasing shift to
sector under the Petroleum Industry Act of 2021; operational debt and quasi-equity transactions, as investors attempt to hedge
reformation of the landscape for financial technology by the their risks. It is also expected that more investment activities
Central Bank of Nigeria (“CBN”); reform by the competition will be witnessed following the 2023 Nigerian general elections.
commission by the introduction of various guidelines and guid- Regulatory-wise, regulatory bottlenecks as well as steep fees
ance notes, thus bringing certainty to mergers and acquisitions for regulatory approvals (sometimes running into hundreds of
(“M&A”) and antitrust processes; recognition of PE-friendly millions) continue to be an issue. Additionally, the Finance Act

Private Equity 2023

 Banwo & Ighodalo 139

2021 removed the exemption of share transfers from capital post-acquisition group; FX liquidity issues; risk mitigation; exit
gains tax, imposed excise duty on non-alcoholic, carbonated, prospects and ease of exit, lender requirements; and, in certain
and sweetened beverages (aimed at discouraging excessive cases, sector-specific regulatory requirements, such as local
consumption of beverages associated with excess sugar-related content restrictions.
illnesses), and increased the Tertiary Education Tax to 2.5%,
amongst others; it remains to be seen how these changes will
2.3 How is the equity commonly structured in private
impact deal structuring going forward. equity transactions in your jurisdiction (including
institutional, management and carried interests)?
1.3 Are you seeing any types of investors other
than traditional private equity firms executing private The equity capital structure for equity contributed by PE inves-
equity-style transactions in your jurisdiction? If so, tors typically consists of a combination of one or more of ordi-
please explain which investors, and briefly identify any
nary share capital, shareholder loans (which may be convertible),
significant points of difference between the deal terms
offered, or approach taken, by this type of investor and and preference shares.
that of traditional private equity firms. Management equity is usually structured as ordinary shares,
usually subsidised in the form of sweat equity or management
incentive scheme, although there are cases in which manage-
Angel investors, family offices, institutional investors such as
ment will inject capital.
sovereign wealth funds and development finance institutions,
Carried interest is typically dealt with as part of the fund
and more increasingly, VC firms, execute PE-style transactions
formation and structuring and does not typically form part of
across the value chain, with VCs and Angel Investors focusing
the equity structuring at the portfolio company level. Manage-
on start-ups, whilst family offices and institutional investors are
ment incentives tied to performance or returns for the PE
more interested in growth-stage investments. We have seen an
investor at exit are, however, common.
increase in PE/VC partnerships – for instance the Verod-Kepple
Africa Ventures; as well as in co-investments. This has allowed
PE firms to broaden their investment appetite by leveraging on 2.4 If a private equity investor is taking a minority
the expertise that VC firms have in early-stage valuation/invest- position, are there different structuring considerations?
ment. There has also been increased focus on crowdfunding as
alternative financing, particularly with the introduction of the The structuring considerations are the same as those outlined
SEC Rules on Crowdfunding. However, given that only micro, in question 2.2 above. The measures put in place to achieve
small and medium-sized enterprises can raise funds under the control will, however, differ, as transaction documentation and
SEC Crowdfunding Rules and the maximum that can be raised constitutional documents, will typically be required to entrench
is NGN 100 million, we do not view crowdfunding, as currently standard minority protections, including prescriptions as to
structured, as a viable alternative. It remains an area to be watched voting and quorum arrangements, information and access rights,
though, with Obelix, a SEC-regulated Crowdfunding Interme- rights to appoint key management team, membership and nomi-
diary, fundraising NGN 100 million for three small and medium- nation rights in boards and committees of the target company,
sized enterprises (“SMEs”) in just 10 days earlier this year. board members’ and shareholders’ rights (including those that
Some of these alternative financing sources can take longer- translate into veto rights) in certain key decisions.
term positions than the traditional PE firms with five to seven Such restrictions may also have an impact on transaction
years’ investment lifespan. The VC and HNI investments are approvals, as minority protections that are deemed to confer an
also characterised by reduced due diligence investigations and ability to materially influence the policy of the target will trigger
speed of execution. control thresholds pursuant to the Nigerian antitrust commis-
sion, Federal Competition and Consumer Protection Commis-
22 Structuring Matters sion (“FCCPC”) regulations and bring such transaction under
its purview.
2.1 What are the most common acquisition structures
adopted for private equity transactions in your 2.5 In relation to management equity, what is the
jurisdiction? typical range of equity allocated to the management, and
what are the typical vesting and compulsory acquisition
Transactions are typically structured as bilateral acquisitions provisions?
implemented via an offshore-registered special purpose vehicles
(“SPVs”), which act as the holding company for a chain of port- The range of equity allocated to management is between 5–10%;
folio companies. As noted earlier, worsening macroeconomics, however, this usually varies from transaction to transaction and is
election uncertainty, and risk management concerns have also generally lower in larger transactions. Provisions in the transaction
recently led to an increase in quasi-equity and debt transactions documents may provide for compulsory acquisition triggers tied to
or equity/debt combinations. whether a management officer holding equity is a good leaver or a
In early-stage investments, there is also increasing acceptance of bad leaver. Also, vesting triggers typically include achievement of
the use of standard form agreements such as Simple Agreements key performance indicators, successful exits, or length of service.
for Future Equity (“SAFEs”), for convenience and flexibility.
2.6 For what reasons is a management equity holder
2.2 What are the main drivers for these acquisition usually treated as a good leaver or a bad leaver in your
structures? jurisdiction?

Main drivers for acquisition structures remain: control; In Nigeria, a management equity holder is regarded as a good
profit maximisation; tax efficiency for investors and/or the leaver where his/her employment is terminated by reason of

Private Equity 2023

140 Nigeria

retirement, death, or disability, and regarded as a bad leaver Similarly, the CAMA prescribes minority shareholder rights
where the employment is terminated on the grounds of breaches that may be invoked notwithstanding existing veto arrange-
such as fraud, specified grounds of misconduct, other criminal ments. Section 343 of the CAMA specifically sets out acts in
or civil offences. respect of which a minority shareholder may bring an action to
restrain a controlling shareholder from abusing its dominant
32 Governance Matters position. These include: entering into any transaction that is
illegal or ultra vires; purporting to do by ordinary resolution any
act that by its articles of association or the CAMA requires to
3.1 What are the typical governance arrangements
for private equity portfolio companies? Are such be done by special resolution; any act or omission affecting the
arrangements required to be made publicly available in applicant’s individual rights as a shareholder; committing fraud
your jurisdiction? on either the company or the minority shareholders; where a
company meeting cannot be called in time to be of practical
These arrangements are usually set out in the shareholder agree- use in redressing a wrong done to the company or to minority
ment or other investment agreement. Typical governance provi- shareholders; where the directors are likely to derive a profit or
sions include board and committee nomination and composi- benefit or have profited or benefitted from their negligence or
tion, appointment and removal of management team, quorum from their breach of duty; and any other act or omission, where
for board and shareholder meeting, information and access the interest of justice so demands.
rights, veto rights and reserved matters, and shareholding In addition to the foregoing, Section 353 and Section 354 of
control rights, amongst others. the CAMA also allow a minority shareholder to bring a petition
There is no requirement for the governance arrangements to the court on the grounds that: the affairs of the company are
set out in transaction documents to be made publicly avail- being conducted in a manner that is oppressive, unfairly prejudi-
able. Whilst disclosure of such documents to the regulator may cial to, or unfairly discriminatory against a member or members,
be required in connection with obtaining regulatory approvals or in a manner that is in disregard of the interests of a member
or notifications, (including antitrust and sector-regulatory or members as a whole; or that an act or omission was or would
approvals), other than the summary of the transactions, which be oppressive or unfairly prejudicial to, or unfairly discrimina-
might be published by such regulator, confidential transaction tory to a shareholder or shareholders.
details including any governance arrangement will typically not Also, at the director nominee level, every director stands in a
be published. fiduciary relationship towards the company and is expected to
However, the constitutional documents (memorandum and observe utmost good faith towards the company in any trans-
articles of association) of the portfolio companies are public action with it or on its behalf and act in the best interest of the
documents. Critical governance arrangements/provisions company. This is so even when such a director is acting as the
(board composition, quorum, notice period, etc.) that are typi- agent of a particular shareholder; specifically, a director is not to
cally included in the articles of association are thus matters of fetter his/her discretion to vote in a particular way. The statu-
public record. tory duties and fiduciary relationship imposed on directors are
not relieved by any provisions in the articles of association or
any contract.
3.2 Do private equity investors and/or their director In addition to the foregoing, Nigerian law does not recognise
nominees typically enjoy veto rights over major weighted or non-voting shares.
corporate actions (such as acquisitions and disposals, Parties can protect the enforceability of veto arrangements
business plans, related party transactions, etc.)? If a
by ensuring that critical veto arrangements are included in the
private equity investor takes a minority position, what
veto rights would they typically enjoy? articles of association (to the extent permissible in the CAMA);
equally considered at shareholders’ level (to avoid fettering
directors’ discretion), and in line with applicable law.
PE investors and nominee directors are usually conferred with
veto rights as part of the governance arrangement for deci-
sions on acquisitions and material disposals, mergers, capital 3.4 Are there any duties owed by a private equity
raise (debt or equity), business plans, related party transactions, investor to minority shareholders such as management
shareholders (or vice versa)? If so, how are these
appointment and removal of auditors, incentive arrangement for
typically addressed?
the management team, amongst others.
The above are the typical veto rights taken by PE investors
with a majority and minority shareholding interest of at least PE investors may owe contractual duties and obligations to
15% and above for private or unlisted public companies. For minority shareholders such as management shareholders arising
shareholding interest below 15% in private companies (which is from and as agreed in relevant investment agreements. Statu-
unusual for PE transactions), there are rarely veto rights avail- torily, a PE investor owes no direct statutory duties or obliga-
able to the PE investor. tion to any other shareholder; however, the CAMA, other appli-
cable laws, and constitutional documents of portfolio companies
confer individual rights on every shareholder (e.g., right to notice,
3.3 Are there any limitations on the effectiveness of dividends, voting rights, etc.) and provide mandatory rules for
veto arrangements: (i) at the shareholder level; and (ii) at
management and operation of companies. Non-compliance with
the director nominee level? If so, how are these typically
addressed? these by a company (through a controlling/majority shareholder)
will provide any shareholder with a cause of action. Please refer
to question 3.3 above.
The contractual agreement of parties (including veto rights) In addition, relevant corporate governance codes require the
will generally be respected. This is, however, subject to statu- protection of rights of all shareholders including minority share-
tory restrictions. Any veto arrangements that prescribe a lower holders’ rights.
threshold than that prescribed by the CAMA and the constitu-
tional documents of portfolio companies cannot be enforced.

Private Equity 2023

 Banwo & Ighodalo 141

3.5 Are there any limitations or restrictions on the Sanctions Regime applicable to banks and OFIs, impose specific
contents or enforceability of shareholder agreements liability (both civil and criminal) on directors of the company
(including (i) governing law and jurisdiction, and (ii) for specific breaches.
non-compete and non-solicit provisions)? For PE investors, liabilities of its nominated director will not
be imputed to it. However, by agreement, the shareholders may
Generally, Nigerian courts will recognise and enforce the provi- agree for a nominating shareholder to be liable for loss incurred
sions of shareholder agreements based on the principle of by its nominee director.
contractual autonomy of parties. However, there are instances
where the enforceability of the provisions of a shareholder 3.7 How do directors nominated by private equity
agreement will be subject to mandatory provisions of applicable investors deal with actual and potential conflicts of
Nigerian law, such as highlighted under question 3.3 above. In interest arising from (i) their relationship with the party
this regard, only damages for breach of agreement may be the nominating them, and (ii) positions as directors of other
most successful outcome of an enforcement action. portfolio companies?
With regard to governing law, Nigerian courts will generally
enforce parties’ choice of law. However, where the choice of law A director’s statutory duties and fiduciary relationship with the
is a foreign law, the courts have held that such foreign law must company trumps his/her obligation to a nominating shareholder
not be unreasonable, absurd, or capricious and must have some and directors must always act in the best interest of the company.
relationship to and be connected with the realities of the agree- Where a director occupies more than one directorship posi-
ment. Choice of foreign law will not be applied in domestic tion, he/she must not derogate from his/her statutory duties
subject matters such as tax, environment, antitrust, manage- and fiduciary relationship with each company. Such director is
ment and operation of corporations, etc. Similarly, based on not to use the property, opportunity or any information derived
precedents, courts will generally respect parties’ choice of juris- during his/her management of one company for the benefit of
diction, save for where it is considered an attempt to oust the the other company. In anticipation of conflict of interest from
jurisdiction of the Nigerian courts over a matter or there are multiple directorships, the Nigerian Code of Corporate Govern-
strong reasons to suggest that justice would not be done (consid- ance and sector-specific codes generally discourage multiple
ering such factors as the jurisdiction where evidence is avail- directorships and require disclosure where they exist.
able, parties’ choice of law, the connection of the court to the Typically, where either actual or potential conflict of interest
parties, contractual limitation period, procedural advantage by arises, the affected director is expected to disclose and, where
either party, enforcement of judgment, etc.). applicable, recuse himself from voting on such transaction.
Non-compete and non-solicitation provisions are equally
enforceable subject to terms imposed by appropriate competition 42 Transaction Terms: General
and consumer protection laws in respect of non-compete provi-
sions. For instance, the Federal Competition and Consumer
4.1 What are the major issues impacting the timetable
Protection Act, 2018 (“FCCPA”) limits non-compete provisions
for transactions in your jurisdiction, including antitrust,
to a period of two years, and prohibits any provision that would foreign direct investment and other regulatory approval
operate to prevent, restrict, or distort competition. requirements, disclosure obligations and financing
issues?
3.6 Are there any legal restrictions or other
requirements that a private equity investor should The major issue that typically impacts transaction timelines relates
be aware of in appointing its nominees to boards of to regulatory approvals and/or wait periods. For instance: merger
portfolio companies? What are the key potential risks control approvals from the FCCPC may take between four and
and liabilities for (i) directors nominated by private
18 weeks depending on the classification of the merger/scope of
equity investors to portfolio company boards, and (ii)
private equity investors that nominate directors to
filing; barring any bureaucratic delays, approvals from the Securi-
boards of portfolio companies? ties and Exchange Commission (“SEC”) may take between six and
eight weeks; approvals from the CBN may take between 12 and 16
weeks; approvals from the Nigerian Exchange Group (“NGX”)
The CAMA and corporate governance codes have specific qual- may take between one and two weeks; approvals from the National
ifications and requirements to be satisfied prior to appointing Insurance Commission may take between 10 and 12 weeks; and
any nominee/person to the board of a Nigerian company. These approvals from the Nigerian Communications Commission may
range from mental ability, age, absence of fraudulent acts, to take between four and 12 weeks. Often, these approvals are also
bankruptcy status. In addition, certain sectors, such as finan- contingent on having obtained a prior approval or require notice or
cial services, require minimum qualifications and regulatory wait periods, thus further lengthening time periods. Other factors
approval for persons nominated as directors. There are also that typically cause transaction delays include delays with raising
restrictions on multiple directorship positions and dual role, e.g., transaction financing or conducting due diligence. Transac-
licensed financial institutions are most times required to sepa- tions can be completed fairly quickly where they are not complex,
rate the role of a chief executive officer and chairman on the involve parties and professional advisers with sector expertise,
board. This is also a general restriction in most codes of corpo- network and compliant/organised targets (with up-to-date and
rate governance. In addition, the BFA places a restriction on the available records), and require few or no regulatory approvals.
number of public companies a person can act as director for and
provides that the required numbers of independent directors in a
public company shall be at least one-third of the size of its board. 4.2 Have there been any discernible trends in
As highlighted in question 3.3 above, directors have statutory transaction terms over recent years?
(fiduciary) duties to the company. A breach of any of the stat-
utory duties can result in personal liabilities for such a director. In recent times, there is a trend towards a risk-based approach
In addition, certain regulations, like the CBN Administrative to due diligence. PE investors are also increasingly taking a

Private Equity 2023

142 Nigeria

minority stake, with terms allowing them to increase their stake adopted structure. There is, however, a recent push for a
as events pan out. Transactions are being increasingly struc- completion accounts consideration structure by buyers, which
tured as a mix of equity and debt or quasi-equity as PE inves- may not be unrelated to the trend towards red flag due diligence.
tors attempt to de-risk these transactions in response to foreign Share swaps representing a portion of the consideration are also
currency volatility, global macro-economic and other challenges. not uncommon, particularly where the expertise rests on or the
In addition, there has been increased attention paid to Material brand is associated with the seller. Earnout arrangements are
Adverse Change/Effect (“MAC”/“MAE”) clauses, liquidation also being increasingly proposed and adopted in primary acqui-
preferences and the extent of the potential impact on and protec- sitions (i.e., from the founder/managers).
tion for the governance and financials of portfolio companies
and the investment at large. Deferred consideration structures
6.2 What is the typical package of warranties /
are also being more creatively packaged in the form of earnouts, indemnities offered by (i) a private equity seller, and (ii)
etc., rather than the traditional escrow structures. the management team to a buyer?

52 Transaction Terms: Public Acquisitions PE sellers will typically push back on anything but fundamental
warranties – title, capacity, authority, and pre-closing tax liabil-
5.1 What particular features and/or challenges apply ities – and may insist that founders/managers provide any busi-
to private equity investors involved in public-to-private ness warranties required. This is, however, subject to nego-
transactions (and their financing) and how are these tiation, and it is not unusual for a buyer to push back and to
commonly dealt with?
elicit business warranties from PE sellers, particularly where
they have a controlling stake. Management who are “founder/
Challenges prevalent in public-to-private acquisitions include: managers” are typically required to and do provide both funda-
(i) regulatory consents and authorisations required for mental and business warranties. It is, however, unusual for the
such transactions, including the cost and the timing for management team in its capacity as management simpliciter to
obtaining same; offer warranties.
(ii) the cost of the transactions as well as the funding structure
(for example a public-to-private transaction is usually more
6.3 What is the typical scope of other covenants,
costly where a leveraged buy-out structure is used);
undertakings and indemnities provided by a private
(iii) shareholders’ voting/approval (i.e., minority shareholders equity seller and its management team to a buyer?
engagement/management); and
(iv) employee and employee associations interests.
Deal timing, due diligence, transaction structure/documen- This is subject to negotiation but would usually be expected
tation, and consideration (all-cash offer, part-cash/part-equity, to include interim period undertakings as to actions between
escrow, etc.) are other hurdles to surpass. To navigate these signing and completion, undertakings as to “no-leakages” (for
issues effectively, parties tend to engage the respective regula- locked box transactions), undertakings to cooperate in relation
tors at the beginning of the transaction to discuss structure and to regulatory filings, and in certain circumstances, information
transaction exigencies. Furthermore, parties sometimes adopt undertakings. Generally, PE sellers will resist any covenants
transaction structures that assure transaction certainty, such as or undertakings creating restrictions on their capacity to freely
a scheme of arrangement. The quality of advisers engaged by invest in competing businesses, whilst founder/managers would
the parties and the pricing of the deal also assist in mitigating typically expect to be required to give such covenants.
completion risks. Finally, public to private transactions gener- Seller indemnities are commonplace, although PE sellers will
ally entail extensive stakeholder engagement across the diverse typically push for the buyer to price most of the risk in, and
interests particularly minority shareholders and employees. thus seek to limit the scope of those indemnities. Please refer
to question 6.5.

5.2 What deal protections are available to private

equity investors in your jurisdiction in relation to public 6.4 To what extent is representation & warranty
acquisitions? insurance used in your jurisdiction? If so, what are the
typical (i) excesses / policy limits, and (ii) carve-outs /
exclusions from such insurance policies, and what is the
Generally, aside from the specific issues that may be uncov- typical cost of such insurance?
ered upon carrying out detailed due diligence, PE investors typi-
cally protect themselves by adopting deal structures that isolate
Taking out representations and warranties insurance is not
portfolio liabilities. A number of the protections are negotiated
common in Nigeria, although it has been utilised in some deals
directly with the selling shareholder(s) and include representations
by offshore PE investors and is increasingly being consid-
and warranties, indemnities, the use of escrow structures, the use
ered a risk mitigant, particularly for larger transactions. The
of custodian arrangements, deferred consideration, insurance,
cost is, however, quite high, and the time implications (from a
participation rights, information rights, break fees, exclusivity, etc.
due diligence perspective) can also be discouraging. Standard
exclusions include known risks identified during the due dili-
62 Transaction Terms: Private Acquisitions gence, fraud or misrepresentation, tax liabilities, consequential
losses, environmental matters, AML/CFT compliance, amongst
6.1 What consideration structures are typically others. Other than fraud-related exclusions, parties are typically
preferred by private equity investors (i) on the sell-side, able to negotiate to price in excluded risks. Policy limits, typi-
and (ii) on the buy-side, in your jurisdiction? cally, are in line with what has been agreed in the SPA.

Cash structures have been traditionally preferred by both buy

and sell sides, with the locked box structure being the most

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 Banwo & Ighodalo 143

6.5 What limitations will typically apply to the liability 72 Transaction Terms: IPOs
of a private equity seller and management team under
warranties, covenants, indemnities and undertakings?
7.1 What particular features and/or challenges should
a private equity seller be aware of in considering an IPO
Exiting PE investors and management typically seek to contract exit?
out of statutory time limitations by inserting limited periods by
which claims can be made (usually between six and 24 months,
A PE seller should be aware of exit timing, regulatory require-
for non-tax warranties). Other limitations include floors/materi-
ments, the cost of effecting the initial public offering (“IPO”),
ality threshold and de minimis claim levels (individual and aggre-
the valuation of shares following changes in share capital and
gate), caps on financial exposure, knowledge and materiality qual-
the underwriting of shares not taken up. Furthermore, political
ifiers, disclosures and liabilities being on a several ( pro rata) basis.
risks, the macroeconomic conditions in the country, including
the weakening of the Naira and shortage of foreign currency, and
6.6 Do (i) private equity sellers provide security (e.g., the impacts of the pandemic on businesses may also pose chal-
escrow accounts) for any warranties / liabilities, and lenges to a PE seller considering an IPO exit. Indeed, in recent
(ii) private equity buyers insist on any security for years, companies such as Interswitch, seeking to create exit via
warranties / liabilities (including any obtained from the an IPO have had to postpone or consider alternative exit routes.
management team)?

7.2 What customary lock-ups would be imposed on

PE buyers will usually insist on security where the seller is not
private equity sellers on an IPO exit?
considered creditworthy or claims might otherwise be diffi-
cult to redeem (for example, an individual, trust or SPV entity,
or entity domiciled in an “unfriendly” jurisdiction). PE sellers Pursuant to the provisions of the NGX Rulebook, promoters
and management will usually push back on providing security; and directors of companies intending to undertake an IPO
subject to the considerations stated above; however, security and list on any board of the exchange must hold a minimum
that might be provided includes retention amounts in escrow, of 50% of their shares in the company for a minimum period
security over founder/manager shares (where their exit is not of 12 months from the date of listing and will not directly or
total), and (in rare cases) personal guarantees. Some institu- indirectly sell or offer to sell such securities during the said
tional buyers such as investment funds (and particularly infra- period. Accordingly, PE sellers on an IPO exit will be required
structure funds) also tend to request bank guarantees to secure to comply with this provision of the NGX Rulebook, unless the
their investments in infrastructure-based portfolio companies. requirement is waived by the NGX. Furthermore, agreements
regarding the lock-up period and other management/transi-
tional matters are usually entered into between the PE sellers
6.7 How do private equity buyers typically provide and the listed company. PE sellers usually seek to avoid or mini-
comfort as to the availability of (i) debt finance, and (ii)
equity finance? What rights of enforcement do sellers
mise this requirement.
typically obtain in the absence of compliance by the
buyer (e.g., equity underwrite of debt funding, right to 7.3 Do private equity sellers generally pursue a dual-
specific performance of obligations under an equity track exit process? If so, (i) how late in the process are
commitment letter, damages, etc.)? private equity sellers continuing to run the dual-track,
and (ii) were more dual-track deals ultimately realised
Comfort in relation to the availability of debt and equity funding through a sale or IPO?
may be provided by way of (i) escrow of committed funds (this
was traditionally the primary form of security but is becoming The most common exit process in Nigeria is secondary sales
less common), (ii) evidence of “certain funds” in the form of to trade buyers. However, there have been instances where
signed debt term sheets, (iii) equity commitment letter from PE sellers have pursued dual-track exit process. A PE seller
the sponsor/parent (particularly where an SPV is utilised by may continue to run a dual-track deal until it binds itself to a
the buyer), (iv) comfort letters in respect of debt financing from particular exit process (i.e., either a sale or an IPO). For instance,
reputable third-party lenders, and, in fewer cases (v) letters of the terms of acceptance of a binding offer in respect of a sale
credit. Ultimately though, reliance is usually given to the repu- transaction may preclude the PE seller from exploring other exit
tation and financial standing of the buyer, and such evidence options. Given the drought of IPOs in the Nigerian market in
may not be required where the buyer is reputable and of good recent years, it can be garnered that PE sellers who considered/
standing, in which case the seller may choose to rely on appro- pursued dual-track routes ultimately exit through sales.
priate financial capacity warranties in the SPA.
Seller remedies will typically lie in damages and, where nego- 82 Financing
tiated, reverse break fees.
8.1 Please outline the most common sources of debt
6.8 Are reverse break fees prevalent in private equity finance used to fund private equity transactions in your
transactions to limit private equity buyers’ exposure? If jurisdiction and provide an overview of the current state
so, what terms are typical? of the finance market in your jurisdiction for such debt
(including the syndicated loan market, private credit
market and the high-yield bond market).
Reverse break fees are not historically prevalent in the Nige-
rian market but are becoming more common as buyers shy away
from traditional protections such as escrow, and where sellers Debt finance for PE transactions has traditionally been by way
have committed time and resources to the deal. of external debt/leverage provided by syndicate banks, insti-
tutional financiers and a range of alternative private credit
providers. Credit support instruments and mezzanine financing

Private Equity 2023

144 Nigeria

are also common sources of debt finance. Less common, but that have meant that GPs have been unable to maximise returns
still applicable sources for PE investors include commercial during the hold period on otherwise well-performing invest-
papers (CPs), loan notes, bonds and investments in relatively ments, we expect that we may begin to see the use of contin-
high-yield instruments including treasury bills. The market has uation fund vehicles, particularly in sectors such as education.
seen an increase in recourse to private credit as bank financing
tightens, which is also due to the trend towards debt investment
9.2 Are there any particular legal requirements or
or a mix of debt and equity by PE investors. restrictions impacting their use?

8.2 Are there any relevant legal requirements or Please refer to our response to question 9.1 above. Besides
restrictions impacting the nature or structure of the debt the CAMA, ISA and rules, regulations and guidelines of the
financing (or any particular type of debt financing) of
National Pension Commission regulating the establishment and
private equity transactions?
operation of funds in Nigeria, we are not aware of any particular
legal requirements or restrictions impacting the use of continua-
Nigerian law guarantees the ability to repatriate principal and/ tion fund vehicles or GP-led secondary transactions.
or interest on foreign loans outside Nigeria utilising the offi-
cial FX market, subject to having obtained an electronic certifi-
102 Tax Matters
cate of capital importation from a CBN-authorised dealer when
the original equity investment or loan capital is inflowed into
Nigeria. This has given investors the ability to structure their 10.1 What are the key tax considerations for private
equity investors and transactions in your jurisdiction?
capital inflow in accordance with their objectives/risk appe-
Are off-shore structures common?
tite. However, the Finance Act 2019 introduced clear thin capi-
talisation rules in Nigeria in the form of interest deductibility
restrictions, restricting interest deductibility to 30% of EBITDA. The overriding tax focus for PE investors is the need to mitigate
Excess interest can also only be carried forward for five years, tax leakage, and to the extent possible, ensure that structures are
and we expect that this will have an impact on equity/debt mixes. flow-through in nature. More specific considerations include:
In addition, the CAMA expanded the scope of exceptions to (a) Available tax incentives. Some of the tax reliefs available in
the rule against financial assistance by Nigerian companies, thus Nigeria include double taxation relief – investors in coun-
granting parties greater flexibility in capital structuring. tries with which Nigeria has a double taxation treaty enjoy
tax reliefs of up to 2.5%, and exemption of capital gains
tax (“CGT”) from business reorganisations or transfers
8.3 What recent trends have there been in the debt- of assets within a group in the course of reorganisations,
financing market in your jurisdiction?
subject to a one-year minimum holding requirement.
(b) Taxes payable in connection with the investment, including
Borrowers have continued to search for cheaper debt in the taxes/charges payable in relation to the capital invested,
wake of the continued rise in interest rates. There has thus been taxes payable on the income or capital gains received on
a slow-down in syndicated lending, and more focus on alter- the investment or goods or services supplied in respect
native credit such as private credit. Telecoms, infrastructure, thereof, such as withholding tax on income, CGT, and
and sustainable investment such as renewable energy, recy- value-added tax.
cling and upcycling have enjoyed popularity in this regard. (c) Applicable corporate income taxes.
Borrowers searching for cheaper debt have also led to a number (d) Taxes payable for perfection of security/transaction docu-
of refinancings. ments such as stamp duties, and registration fees.
The Nigerian CP market has remained a viable funding (e) Transfer-pricing-related risks. Where there are transfer
option for corporate entities seeking to finance their short- pricing-related risks, the relevant tax authorities may flag
term expenditure, including working capital shortfalls. The the transaction and subject it to tax adjustments, which may
FMDQ Exchange reported that the value of quoted CPs on the increase the tax exposure of the investors in the transaction.
Exchange stood at N 539.22 billion at the end of Q1 2023, with Offshore structures are common to minimise tax exposures
the total outstanding value of CPs rising to N 669.36 billion at and benefit from double taxation reliefs.
the end of the same period.
Documentation wise, a number of banks are resorting to
10.2 What are the key tax-efficient arrangements that
short-form documentation to reduce legal costs.
are typically considered by management teams in private
equity acquisitions (such as growth shares, incentive
92 Alternative Liquidity Solutions shares, deferred / vesting arrangements)?

9.1 How prevalent is the use of continuation fund Management teams will usually be exposed to tax on two fronts
vehicles or GP-led secondary transactions as a deal type – personal income tax at a proportional graduating scale, with
in your jurisdiction? rates ranging from 7–24% payable in respect of income received
from the investment; and transfer taxes/CGT at 10% in rela-
The use of continuation fund vehicles or GP-led secondary trans- tion to management’s participation in equity growth through
actions remains uncommon in Nigeria. However, given: (1) the partial exits.
rise in popularity in other markets; (2) the fact that such vehi- There is no tax exposure to management at the point of acqui-
cles are no longer globally viewed simply as a means of moving sition of its equity whether upfront or by way of deferred/vesting
unrealised (and difficult to exit) portfolio investments out of a arrangements, nor are there any special waivers or incentives in
fund that was at the end of its lifespan, but as healthy vehicles to relation to management disposals. Management may be able to
extract more value from their best performing assets; and (3) the obtain some tax relief by structuring returns on equity interests
impact of the pandemic as well as macro-economic conditions as service-linked gratuity payouts, although this is not common.

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 Banwo & Ighodalo 145

The Finance Act 2020 also exempts compensation for loss of records a loss, the loss accruing from the disposal of those
office up to NGN10 million from capital gains tax. shares can be deducted against the gains derived by the
company from the sale of other shares.
■ Introduction of Digital Assets as Chargeable Assets under
10.3 What are the key tax considerations for
management teams that are selling and/or rolling over the CGTA.
part of their investment into a new acquisition structure? ■ Increase in the Tertiary Education Tax (“TET”) rate from
2.5% to 3%. It is instructive that the rate was only recently
increased from 2% to 2.5% via the 2021 Finance Act.
The primary consideration would be to avoid triggering transfer
■ Expansion of scope of excise duty to cover services other
taxes in relation to the transfer, particularly for roll-overs, given
than telecommunications.
that no gains will actually come into their hands at this point.
■ Removal of the investment allowance of 10% currently
For business reorganisations involving disposal or transfer of
applicable to capital expenditure incurred on plant and
shares in a Nigerian company, 10% CGT applies except where
equipment under section 32 of the CITA.
the share disposal proceeds are: (i) reinvested within the same
■ Removal of the rural investment allowance ranging from
year of assessment, in the acquisition of shares in the same or
15% to 100% applicable to capital expenditure incurred on
other Nigerian company; or (ii) the share disposal proceeds,
the provision of certain facilities such as electricity, water
in aggregate, are less than NGN100 million in any 12 consec-
or tarred road for the purpose of a trade or business that
utive months, provided that the person making the disposal
is located at least 20 kilometres away from such facilities
shall render appropriate returns to the Federal Inland Revenue
provided by the government.
Service (“FIRS”) on an annual basis. Partial reinvestment will
■ Removal of the income tax exemption applicable to 25% of
attract CGT proportionately. Re-investment offshore (as is often
incomes in convertible currencies derived from tourists by
the case with management roll-overs) will not, however, attract
companies engaged as hoteliers.
this concession (except any of the other exemptions applies).
■ Provision for unrestricted deductions of capital allow-
(It may nonetheless be possible to engage the FIRS in the case
ances from assessable profits, for companies engaged in
of roll-overs, with a view to clarify that the same is simply an
upstream or midstream gas operations.
exchange of shares and therefore any transfer of shares ought to
be exempted from CGT). This is a relatively new development
and it is interesting to see how the market will respond. 112 Legal and Regulatory Matters

11.1 Have there been any significant legal and/or

10.4 Have there been any significant changes in tax regulatory developments over recent years impacting
legislation or the practices of tax authorities (including private equity investors or transactions and are any
in relation to tax rulings or clearances) impacting private anticipated?
equity investors, management teams or private equity
transactions and are any anticipated?
Yes. The last few years have seen a plethora of regulatory inter-
ventions, particularly as related to the ease of doing business, the
The Fiscal Policy Measure 2023 (“FPM 2023”) took effect from
financial services sector and competition and merger control.
May 1, 2023. The FPM 2023 provides for some operational tax
Some of such developments include:
that impacts investments in portfolio companies:
■ Amendments to 21 business-related laws, by the BFA in
■ Supplementary Protection Measures for the implementa-
February 2023, removing bureaucratic constraints to doing
tion of the ECOWAS Common External Tariff (“CET”).
business in Nigeria. Of specific note are the provisions
■ Import Adjustment Tax (“IAT”) list, with additional taxes
introduced to foster transparency, certainty and speed,
on 189 tariff lines of the extant ECOWAS CET.
such as the requirement for all MDAs to publish clearly
■ Import Prohibition List (Trade), applicable only to certain
the processes, timelines and requirements for obtaining
goods originating from non-ECOWAS Member States.
approvals, as well as the deemed approval provisions in
■ A National List consisting of items with reduced import
which a regulator fails to communicate an approval or
duty rates to promote and stimulate growth in critical
rejection within the prescribed timeline. The BFA is
sectors of the economy.
expected to introduce yearly updates as a more efficient
Worthy of note are the provisions to encourage climate
way of introducing amendments that ease bottlenecks.
change interventions (green tax provisions), comprising:
■ The release of the Nigerian Startup Act, 2022, which
■ excise duty of 10% on single-use plastics, including
supports startups through the provision of access to
containers, films, and bags;
funding, tax breaks and intellectual property protection.
■ increase in IAT on the importation of other plastic items
■ Amendments to regulatory capital for microfinance banks
such as sheets, foils, polymers, and photocopying papers; and
and insurance companies, which spawned a number of
■ prescription of IAT of 2% on motor vehicles of 2,000cc
M&A in the sector in 2020 and 2021.
to 3,999cc – while vehicles of 4,000cc and above will be
■ The release of the Merger Review (Amended) Regulations,
taxed at 4% – and exemption of vehicles of below 2,000cc,
2021 by the FCCPC hot on the heels of the Merger Review
mass transit buses, electric vehicles and locally manufac-
Regulations and Merger Review Guidelines released in 2020.
tured vehicles from IAT.
■ Regulatory focus on contracts or relationships in restraint
The Nigerian Senate passed (and recommitted) the Finance
of trade and market dominance abuse, through the issu-
Bill 2022 (the previous version passed in December 2022 by
ance of the Restrictive Agreements and Trade Practices
both houses had been amended by the presidency and re-sent
Regulations, 2021 and the Abuse of Dominance
for approval). Below are the relevant changes that pertain to PE
Regulations, 2022, by the FCCPC.
transactions in Nigeria:
■ Expansion of investment options for PFA “dry powder”
■ Deduction of losses arising from sale of one asset from
through the release of the National Pension Commission’s
the gains derived from the sale of another asset of the
Operational Framework for Co-Investment by Pension
same class. Accordingly, where a company sells shares and

Private Equity 2023

146 Nigeria

Fund Administrators, 2022 (historically, one of the asset AML/CFT compliance have become more robust and typically
classes with the lowest allocation by PFAs has been PE). extend to compliance with international requirements, such as
Tax reforms via the Finance Acts of 2019–2022 have also the UK Bribery Act and the American Foreign Corrupt Prac-
impacted PE investment, particularly exemptions to the excess tices Act.
dividend tax rule. (Please also refer to the response to ques- Compliance/know-your-customer/integrity due diligence is
tion 10.4.) also a more common phenomenon in PE transactions.

11.2 Are private equity investors or particular 11.6 Are there any circumstances in which: (i) a private
transactions subject to enhanced regulatory scrutiny in equity investor may be held liable for the liabilities of
your jurisdiction (e.g., on national security grounds)? the underlying portfolio companies (including due to
breach of applicable laws by the portfolio companies);
and (ii) one portfolio company may be held liable for the
100% foreign ownership of Nigerian businesses is permitted liabilities of another portfolio company?
under Nigerian law, except in certain sectors where local content,
such as in shareholding or makeup of workforce, is mandated by
law. Some of these sectors include shipping, aviation, oil and gas, Generally, a shareholder in a limited liability company only
private security, broadcasting, and advertising, amongst others. bears liability to the extent of shares in his/her interest paid or
Also, investing in the production of certain goods (e.g., arms and yet to be paid. Nigerian law generally respects the concept of
ammunitions, narcotic drugs, military, or paramilitary wear, etc.) separate corporate legal personality, and it is only under limited
is strictly prohibited by law for Nigerians or foreigners. circumstances that the courts would lift a corporate veil so that
a director or a company may be considered liable for the acts
of another company. Circumstances where executive manage-
11.3 Are impact investments subject to any additional ment, designated officers of the company or the board of direc-
legal or regulatory requirements? tors may be held responsible and sanctioned, include offences
under the CBN Administrative Sanctions regime, which stip-
The legal and regulatory framework for general investments in ulates penalties for senior management and in some cases,
Nigeria also applies to impact investments and there are no addi- members of the board, in addition to the company. Also, in the
tional legal or regulatory requirements to be complied with. The case of unlimited companies, the liability of the members for the
regulatory framework is, however, evolving to encourage impact debt of the company is unlimited.
investment with laws such as the Climate Change Act, 2021, and
the provisions on Host Communities Development Trust under 122 Other Useful Facts
the Petroleum Industry Act of 2021. Older tax incentives such
as the Pioneer Status Incentive also indirectly encourage impact
12.1 What other factors commonly give rise to concerns
investment. for private equity investors in your jurisdiction or should
such investors otherwise be aware of in considering an
investment in your jurisdiction?
11.4 How detailed is the legal due diligence (including
compliance) conducted by private equity investors prior
to any acquisitions (e.g., typical timeframes, materiality, One of the major obstacles for PE investment in Nigeria is the
scope, etc.)? infrastructure deficit, which impacts the operations, profitability
and ability to scale portfolio companies. However, the Infra-
This is relative to several factors, such as the scope of the trans- structure Corporation of Nigeria (touted as “Nigeria’s Infra-
action, nature and size of target, parties’ objectives, and time- structure Game Changer) debuted in February 2022. Infracorp
lines of the transaction, amongst others. Key areas typically was established with a start-up funding of NGN1 trillion for the
covered include the corporate structure, regulatory compliance, construction of critical infrastructure projects to help accelerate
material contracts, debt and security, employment issues, intel- growth in the country by originating, structuring, executing and
lectual property and other assets, insurance, tax and litigation managing end-to-end bankable projects. Its funding is expected
profile. The market has seen an increasing shift to high-level to grow to NGN15 trillion; and assets will be managed by four
red flag due diligence, although, in our experience, the more independent asset managers with an impressive record in infra-
complex/larger transactions still adopt the granular approach. structure development. Infracorp is promoted by the CBN,
The timeframe for legal due diligence may take between two Africa Finance Corporation and the Nigeria Sovereign Invest-
and six weeks, depending on the scope of the due diligence and ment Authority.
the availability of records, and accessibility to external regula- In addition to providing co-investment opportunities to PE
tory and third-party records or confirmations. investors, it is expected that the activities of Infracorp will have
a positive effect on the market and ultimately the economy.
Nigeria also ratified the African Continental Free Trade Area
11.5 Has anti-bribery or anti-corruption legislation
impacted private equity investment and/or investors’
Agreement (“AfCFTA”) with effect from January 1, 2021; whilst
approach to private equity transactions (e.g., diligence, gains remain slow to yield, and political commitment to scaling
contractual protection, etc.)? the hurdles appears to be more visible in speech than action,
where properly implemented, AfCFTA will address the restric-
tions that have made it difficult to scale regionally.
Yes. The legislation impacting PE investment includes the
In terms of economic outlook, the new administration,
Money Laundering (Prevention and Prohibition) Act 2022, the
which took over on May 29, 2023, has announced the cessa-
Terrorism (Prevention and Prohibition) Act 2022 and the CBN’s
tion of the fuel subsidy. This is expected to significantly drive
Anti-Money Laundering and Combating the Financing of
up the cost of operations of portfolio companies, as well as
Terrorism in Banks and Other Financial Institutions in Nigeria
the cost of living, thus leading to reduced spending power of
Regulations (AML/CFT Regime). Contractual provisions on
consumers/clients. Another major focus of the administration,

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 Banwo & Ighodalo 147

as announced by the President, is the unification of the exchange infrastructure, increase in oil production levels in Q4 2023, and
rate. Whilst a unified exchange rate will ultimately increase effi- the significant brain drain that is expected to increase foreign
ciency, transparency and stability in the FX market and thus remittances.
benefit FDI, these gains cannot be achieved without a supportive
fiscal and monetary context. On the upside, the external reserves Acknowledgments
that were significantly depleted in 2022 are expected to grow in
H2 2023, following the commissioning of the Dangote Refinery, The authors would like to thank Akorede Folarin and Nelson
the savings from subsidy removal being retained or invested in Iheanacho, who provided invaluable support in research, for
their contributions to this chapter.

Private Equity 2023

148 Nigeria

Ayodele Adeyemi-Faboya is a Partner in the Firm’s Corporate, Finance & Securities practice group. Her areas of specialisation include funds
advisory, corporate commercial law, corporate governance and regulatory compliance, M&A, project finance and development and, more
recently, fintech. Ayodele is particularly known for her expertise in structuring foreign and local investments and divestments in key sectors
of the economy, including finance, manufacturing, health and education; and has significant experience advising a number of private equity
firms in this regard. She also has multijurisdictional experience, having advised on a number of strategic investments in the United Kingdom,
Liberia, Guinea, Ghana, Sierra Leone and the Gambia.
In addition to M&A, Ayodele has advised in connection with the establishment of a number of PE and infrastructure funds (including Nigeria’s
first SEC-registered infrastructure fund) and fund management entities. In her spare time, Ayodele provides structuring and regulatory advice
to SMEs, through her role as facilitator in the Fate Foundation Ltd/Gte Aspiring Entrepreneurs Programme.

Banwo & Ighodalo Tel: +234 906 000 3561 2 / +234 805 087 5883 /
48 Awolowo Road, South West Ikoyi +234 809 271 4452 / +234 902 052 4921
Lagos Email: afaboya@banwo-ighodalo.com
Nigeria URL: www.banwo-ighodalo.com

Mavis Abada is a Senior Associate in the Firm’s Corporate, Finance & Securities practice group, and has experience in M&A, PE and corporate
restructuring transactions. She also has significant experience in merger control filings and has participated in some of the Firm’s banking
& finance transactions.
Mavis’ M&A and PE transactions include foreign-led, intra-African, and core Nigerian transactions that cut across several industries, including:
financial and business services; consumer and retail; education, logistics; and technology, media & telecommunications. Her clients are both
foreign and Nigerian PE firms, strategic investors, management, sellers, and targets.

Banwo & Ighodalo Tel: +234 906 000 3561 2 / +234 805 087 5883 /
48 Awolowo Road, South West Ikoyi +234 809 271 4452 / +234 902 052 4921
Lagos Email: mabada@banwo-ighodalo.com
Nigeria URL: www.banwo-ighodalo.com

Ibiyemi Ajiboye is an Associate in the Firm’s Corporate, Finance & Securities practice group, and has significant experience in M&A, PE and
corporate restructuring transactions. He also has significant experience in anti-trust matters and merger control filings involving cross-
border M&A transactions. His clients include foreign and Nigerian PE firms, strategic investors, management, sellers, and targets.

Banwo & Ighodalo Tel: +234 906 000 3561 2 / +234 805 087 5883 /
48 Awolowo Road, South West Ikoyi +234 809 271 4452 / +234 902 052 4921
Lagos Email: iajiboye@banwo-ighodalo.com
Nigeria URL: www.banwo-ighodalo.com

Banwo & Ighodalo (“B&I”) is a foremost Nigerian legal services and busi- Resources and Intellectual Property & Technology. We also have a tested
ness solution provider, delivering high-quality services. The firm was and dependable track record in Commercial Litigation & Arbitration. We
established on February 1, 1991 and is renowned for providing innova- are also Chambers and Partners’ Nigeria Law Firm of the Year (Winner,
tive, cost-effective and well-timed excellent solutions. B&I is structured Chambers Africa Awards 2022).
as a partnership and is a large Nigerian firm, presently comprising over www.banwo-ighodalo.com
80 lawyers. We undertake work for public and private companies, govern-
ments, Nigerian and foreign investors, financial institutions, foreign law
firms and international consultancy firms. Our lawyers are often called
upon to serve as resource persons at local and international seminars/
workshops and as public and private sector office holders and advisers.
We are consistently ranked Tier 1 in The Legal 500 and are ranked in
the top three in Nigeria, in areas of Capital Markets, Securities, M&A,
Corporate Finance & Restructuring, Project Finance, Foreign Investment
& Divestment, Shipping, Aviation & International Trade, Energy & Natural

Private Equity 2023

 Chapter 18 149

Norway

Norway
Aabø-Evensen & Co Ole Kristian Aabø-Evensen

12 Overview 1.2 What are the most significant factors currently

encouraging or inhibiting private equity transactions in
your jurisdiction?
1.1 What are the most common types of private equity
transactions in your jurisdiction? What is the current
state of the market for these transactions? The most significant features encouraging PE actors to transact
in Norway are access to relatively inexpensive capital as well
as a highly educated workforce, innovative technology, natural
Although the Norwegian private equity (“PE”) market ranges
resources and a well-established legal framework for M&A
from seed and growth investments by angel and venture capital
transactions. In respect of the latter (see further in section 3),
funds, to leveraged buyouts (“LBO”) and secondary transac-
those familiar with M&A transactions and methodology in most
tions by PE funds (herewith public-to-private acquisitions and
other parts of Europe will find the Norwegian landscape quite
initial public offering (“IPO”) exits), in 2022, LBO transactions
familiar, both in respect of private and public acquisitions. Most
of private targets dominated the transaction volume, repre-
EU regulations pertaining to M&A transactions have also been
senting 46.2% of the total PE transactional volume for that year.
implemented in Norwegian law through membership in the
Throughout 2022, private equity firms started to experience
European Free Trade Association (“EFTA”) and the European
increased headwinds with respect to leveraged financing, resulting
Economic Area (“EEA”).
in declining private equity deal activity despite significant dry
Historically, an important factor, viewed by many investors as
powder. In 2022, the total Norwegian M&A market continued
sheltering Norway against international financial turmoil, has
to increase in volume and was compared with 2021. Large deals
been a high oil price. For the moment, the oil- and energy prices
were slightly up in respect of the percentage of the total M&A
are once again on the rise, which is generally viewed as benefi-
value but down in numbers compared with 2022, due to a signif-
cial for the Norwegian economy. This time, however, increasing
icant drop in large deals in the second half of the year. The
energy prices have come at a high cost due to supply chain disrup-
Norwegian PE market could, however, report a 10.1% increase in
tions, and pent-up demand following the COVID-19 pandemic
reported volume compared with 2021, but with a significant drop
as well as the war in Ukraine, which have collectively intensified
in average deal sizes, as well as a drop in number of exits. For
the inflationary pressure. Increased inflation is currently also
deals involving PE Sponsors in 2022, (either on the buy- or sell-
contributing to increasing interest rates, which again may lead
side) the average reported deal sizes dropped significantly from
to a recession in many European countries. Increasing infla-
€334 in 2021, to €153 in 2022. The market continued to be driven
tion and interest rates, in combination with a somewhat aggres-
by new investments and add-ons but, in 2022, we also witnessed a
sive approach by Norwegian tax authorities against LBOs (here-
significant drop in the number of secondary investments.
with principles of PE funds domiciled in Norway) could, in the
As mentioned above, the Norwegian PE market spans the
long term, potentially frustrate international PE funds’ appetites
width of all transaction types found in any mature market, but the
in general, as well as for Norwegian targets.
typical club deals have, save for a few exceptions, for all practical
purposes been outside the realm of the Norwegian PE market.
The main reason for this is that most Norwegian transactions are 1.3 Are you seeing any types of investors other
of a size that normally does not require a major international PE than traditional private equity firms executing private
fund to spread its equity risk in order to avoid exceeding invest- equity-style transactions in your jurisdiction? If so,
ment concentration limits in its fund. The foregoing notwith- please explain which investors, and briefly identify any
significant points of difference between the deal terms
standing, sell-downs or syndication of minority equity portions offered, or approach taken, by this type of investor and
subsequent to buyouts also occur in the Norwegian market. that of traditional private equity firms.
By the number of PE transactions, TMT, the industrial/
manufacturing and the services sectors dominated the Norwe-
gian market in 2022, each with 30%, 14.3% and 13.8% of the During the last decade, we have seen a number of family offices,
buyout investment volume, respectively. They were followed by but also smaller investment-firms, and individual investors
the construction sector with 11.1% of the total deal count, the executing PE style transactions in the Norwegian market. The
consumer sector with 8.5%, and the energy sector with 5.8%. main difference between the deal terms offered in such transac-
tions is that some of these investors tend to be slightly more flex-
ible with regard to their sweet spot for investing, the approach
they take with regard to lock-up until exit, vesting structures,
accepting investments in minority stakes, and the amount of

Private Equity 2023

150 Norway

leverage applied in the deal. Some of these investors tend to Typically, the entry route used by PE funds for their invest-
seek out investment opportunities in areas that have not typi- ments depends upon which structure provides the greatest
cally been a focus for traditional PE funds, but where consoli- flexibility for efficiently repatriating funds back to the fund’s
dation opportunities still exist. Examples of such investors are, investor base in connection with either an exit or a partial exit,
inter alia, Ferd, Credo Partners, Icon and Hawk. with as little tax leakage as possible (i.e. minimising the effec-
tive tax rate for all relevant stakeholders upon exit). The choice
22 Structuring Matters of entry-jurisdiction into Europe, therefore, normally depends
on the identity and geography of the fund’s investors, the tax
treaty between the proposed European entry-jurisdiction and
2.1 What are the most common acquisition structures
adopted for private equity transactions in your the home jurisdiction for the majority of the fund’s investor
jurisdiction? base and the tax treaties between the various other jurisdictions
involved, including Norway. It is not uncommon that Sponsors
structure the investment through various forms of sub-partner-
Virtually all national and international PE funds are today organ-
ships (or feeder funds) set up in different jurisdictions to achieve
ised as some type of limited partnership, wherein the Institu-
the most optimal structure for their respective investors, all
tional Investors participate as direct or (normally) indirect limited
depending upon such investors’ geographical location.
partners, and wherein the fund manager (in the following, the
Another main driver when choosing relevant acquisition
“Manager” or the “Sponsor”) acts as the general partner,
structures (and particularly the number of holding companies
normally owned through a private limited liability company
involved), is the structuring of the financing (i.e. the bank’s
(“LLC”) specifically organised for this purpose. The domicile,
demand for control of cash flow and debt subordination); see
tax status and internal structure of the Manager sponsoring the
sections 8 and 9. Particularly in large transactions, it can be
fund will very often drive the choice of the general partner.
necessary to use various layers of financing from different stake-
PE funds typically create a special purpose shell acquisi-
holders in order to be able to carry out the acquisition. The
tion vehicle (“SPV”) to effect an investment or acquisition,
need for flexible financing structures is a commercial reason
and commit to fund a specified amount of equity to the SPV
that often drives the number of holding companies between the
at closing. The final acquisition structure adopted by these
foreign holding structure and the Norwegian BidCo.
PE funds in the Norwegian market will normally depend on
In both instances, PE funds must consider upstream issues
whether the respective fund is organised under Norwegian law
(taxation of monies extracted from the top Norwegian holding
or under foreign jurisdictions. Funds organised under Norwe-
company (“TopCo”) to the foreign holding structure) and down-
gian law will, when investing into Norwegian target companies,
stream issues (taxation of monies extracted from BidCo up to
normally adopt a one-tier structure by investing through a set of
TopCo, herewith monies flowing up from the target and its
Norwegian holding companies.
various subsidiaries).
Funds organised under a foreign jurisdiction investing into
Before deciding the final acquisition structure, Sponsors must
Norwegian target companies will usually structure the acqui-
consider numerous additional issues, typically including: tax
sition by adopting a two-tier structure, irrespective of whether
issues relating to management and employee compensation; the
the Manager is foreign or domestic. Firstly, the PE fund estab-
target’s and its group companies’ debt service capability; regu-
lishes an offshore holding structure of one or more private
latory requirements/restrictions (i.e. prohibition against finan-
LLCs incorporated and tax resident outside of Norway – typi-
cial assistance and debt-pushdowns, and the anti-asset stripping
cally in Luxembourg, the Netherlands or (occasionally) Cyprus.
rules, cf. question 11.1); rules on thin capitalisation and deduct-
Secondly, the acquisition of the shares in the Norwegian target
ibility of interests; withholding tax (“WHT”) on shareholder
company will be made by the foreign holding structure through
debt and distributions; VAT; and corporate liability and disclo-
a Norwegian-incorporated and tax-resident SPV (or “BidCo”)
sure issues, etc.
that eventually acquires the target company. Additional
Norwegian holding companies could be added into the struc-
ture between the foreign holding structure and the Norwegian 2.3 How is the equity commonly structured in private
BidCo to allow for flexibility in obtaining subordinated debt equity transactions in your jurisdiction (including
financing and other commercial reasons. institutional, management and carried interests)?
Occasionally over the last six years, we have also seen exam-
ples of Sponsors carrying out minority investments in listed The equity structure in any PE transaction usually provides an
companies, but these funds’ limited partners have often criti- opportunity and/or a requirement for the target’s management
cised such strategies. An increasing number of funds also seem to co-invest (“Investing Management”) together with the PE
to have obtained mandates to carry out minority investments fund in the acquiring group. The co-investment typically takes
in private companies subject to certain defined control criteria place at the Norwegian TopCo-level, or at the foreign holding
with respect to a possible exit. company level. The equity strip for the Investing Management
depends on the size of the transaction, but it is normally rela-
tively small with a share price at an affordable level.
2.2 What are the main drivers for these acquisition
structures? If the Investing Management mainly consists of Norwe-
gian citizens, these may prefer to structure their co-investment
into the Norwegian TopCo instead of into the foreign holding
Various deal-specific considerations dictate the type and organ- company structure. However, the PE fund may insist that the
isation of the SPV, including, among others, tax structuring Investing Management must invest in the foreign holding struc-
issues, desired governance structure, number of equity holders, ture. From a valuation perspective, it is imperative for both
equity holders’ (and the Sponsors’) exposure to liability by the PE fund and the Investing Management that the Investing
use of the applicable vehicles, general ease of administration Management’s equity participation is acquired at “full and fair
and required regulatory requirements, including the financing market value”, as participation under Norwegian law other-
bank’s demand for structural subordination (see below). wise may be subject to income tax (rather than tax on capital

Private Equity 2023

 Aabø-Evensen & Co 151

gains). In order to achieve that the Investing Management of protection when taking a minority position than taking a
invests at the same price per shares as the Institutional Inves- controlling stake. In addition, there will be particular focus on
tors, the Sponsor will typically invest in a combination of share- securing an exit route/timing of exit and securing anti-dilution
holder loans, preferred shares and ordinary shares, while the rights/pre-emption rights on any issue of new shares.
Investing Management mainly invests in ordinary shares (i.e.
shares with no preferential rights). The Investing Management’s
2.5 In relation to management equity, what is the
senior members may occasionally also be allowed to invest in typical range of equity allocated to the management, and
the same instruments (or “institutional strip”) as the Sponsor. what are the typical vesting and compulsory acquisition
The detailed structuring of the management incentive package provisions?
will depend on the tax treatment of any benefit. If the Investing
Management pays less than the market value of the shares this
Management offering to subscribe for shares in the acquiring
could, under Norwegian law, give rise to an employment tax
group will typically be required to accept compulsory transfer
charge (47.4% marginal rate for the individual and 14.1% payroll
of such shares if his/her employment terminates. The finan-
tax for the employer).
cial terms of such compulsory transfer depends on the reason
In secondary buyouts, it is commonly a condition that the
for termination (“good” or “bad” leaver). If termination is due
Investing Management must reinvest a proportion of their sale
to acceptable reasons – typically death, disability or involun-
proceeds (“rollover”). Any gains on such rollover will, in prin-
tary termination without cause – the person is a “good leaver”
ciple, trigger capital gains tax for the Investing Management,
and will receive market value for the shares. If employment is
unless the members of the management team invested through
terminated with cause, or if such person resigns without good
separate holding companies and these are those rolling over
reasons, the person is classified as a “bad leaver” and must sell
their investments. In recent years it has also become more
the shares for less than market price.
common that the Investing Management invest into a separate
Although subject to individual variations, neither time- nor
pooling vehicle to simplify administration, which otherwise
performance-based vesting has been very common for the
could be complicated by having a large number of shareholders
Investing Management’s participation in Norwegian PE trans-
(e.g. meeting attendance and exercising voting rights).
actions, at least if the buyer is a domestic or Nordic PE fund.
The carried interest arrangements (the “Carry”) for Managers
However, in transactions where international Sponsors are
domiciled in Norway will more or less be the same irrespective
involved, vesting is more common. When introduced, a three
of where the PE fund is located, although variations exist with
to five-year time-based vesting model is often used, with accel-
regard to other key factors for how the profit from the fund’s
erated vesting on exit. Such a vesting model means that only
investments is split between the Manager and the Institutional
the vested part of the equity is redeemable at “fair value” at
Investors (such as annual fee, hurdle rate, catch-up, etc.). The
each anniversary ensuing investment, whereas the part of the
Manager’s right to Carry is almost always accompanied by an
equity that has not vested may only be redeemable at a lower
obligation to risk alongside the Institutional Investors, where
value. Given the recent years’ rather aggressive approach from
the Manager as a precondition must risk its own money and
the Norwegian tax authorities on Carry, some advisors fear that
invest into the fund’s limited partnership. Today, such Carry
vesting provisions may be used as an argument for classifying
arrangements may be structured using a separate limited part-
profits from the Investing Management’s co-investments as
nership (“SLP”) or offshore company, held directly or indirectly
personal income (in whole or in part) rather than capital gains.
by the relevant investment professionals of the Manager, which
The obvious argument against such an assertion is that if the
in either case becomes a partner in the fund’s limited partner-
equity has been acquired or subscribed for at “fair market value”
ship. Each participant’s share of the Carry is delivered through
and at the same price per shares as the Institutional Investors (cf.
an interest in the SLP, or in the fund itself by way of partial
question 2.3), then revenues therefrom should, strictly speaking,
assignment of the offshore company’s interest in the fund’s
be treated and taxed in the same way as revenues derived from
limited partnership. In principle, distribution delivered this way
the institutional equity (i.e. classified as capital gains). Neverthe-
should be the same for the Institutional Investors in the fund,
less, as there is no firm legal precedent on the matter, domestic
namely a share of the income and gains derived from the under-
PE funds seem to choose the path of least resistance by fore-
lying investments of the fund’s limited partnership. As such,
going vesting. There is, of course, also a question in each trans-
Carry has traditionally, under Norwegian law, been perceived as
action of how much “leverage” the PE fund has in relation to
a regular return on investment and taxed as capital gains. Taxa-
the Investing Management, and, correspondingly, how much
tion of Carry has, however, become a much-debated topic in
push-back introducing vesting provisions will receive.
Norway in the last few years, where the Norwegian tax authori-
ties have argued that the Carry should be taxed as income rather
than capital gains. For the taxation of Carry, see question 10.4. 2.6 For what reasons is a management equity holder
usually treated as a good leaver or a bad leaver in your
jurisdiction?
2.4 If a private equity investor is taking a minority
position, are there different structuring considerations?
“Good leaver” will usually mean leaving employment on
grounds of retirement, death, disability or being discharged for
In such situations, a PE investor will focus on the exact same “cause” not related to the employee him/herself. “Bad leaver”
issues as mentioned in question 2.2 (particularly if they are will usually mean the employee him/herself terminates his/
using leverage to acquire their minority stake) to find the right her position prior to exit, leaving in circumstances justifying
balance to align the various stakeholders’ interests in creating the summary dismissal of the employee (typically misconduct),
value for its investors. The driver behind equity terms and the or the employee being discharged for “cause” related to the
equity structures is normally the desire to control and incen- employee him/herself.
tivise; however, the PE investor will likely obtain a lower level

Private Equity 2023

152 Norway

or disposal of any substantial part thereof; changes to issued

32 Governance Matters share capital; major acquisitions; adoption of annual business
plan/budget and recommendations in respect of dividend distri-
3.1 What are the typical governance arrangements butions; entering into any partnerships or creating any obliga-
for private equity portfolio companies? Are such
tions, liens or charges; major employment matters like pensions
arrangements required to be made publicly available in
your jurisdiction?
and bonus schemes; and, naturally, entering into litigation or
liquidation proceedings. Some Sponsors may divide the list
of vetoes between those requiring director consent and those
The governance arrangements commonly used by PE funds to requiring Sponsor consent at shareholders’ level.
gain management control over their portfolio companies tend A PE investor holding a minority position is likely to hold
to be relatively detailed, but there could be substantial variations less protection than on taking a controlling stake. The priority
between domestic funds compared to the governance structure areas will be ensuring that they have visibility of the day-to-day
deployed by European or global PE funds. conduct of the business (i.e. board or observer seat), and ensuring
The shareholders’ agreement will normally contain provisions that certain fundamental transactions that protect their owner-
regarding corporate governance issues. The ability to appoint ship interest cannot be taken without their consent. Examples
directors, and to control the board if necessary, is the key tool of such veto rights are: changes to the company’s constitutional
that the Sponsor will ensure is put in place in such agreements, documents; disposal of key assets; borrowing of monies; and any
including a right to appoint additional directors in order to flood form of debt restructuring transactions, etc.
the board in the event of disagreement with the executives and
any employee representatives. Although some international
funds also implement a separate management board, Norwegian 3.3 Are there any limitations on the effectiveness of
portfolio companies normally only have a single board of direc- veto arrangements: (i) at the shareholder level; and (ii) at
the director nominee level? If so, how are these typically
tors on which the Sponsors are represented. It is not uncommon
addressed?
that some PE funds want to appoint an independent chairman to
provide strategic oversight and to create an independent bridge
between the Sponsor and the Investing Management. Through As a starting point, shareholders can agree that one or more
veto rights and/or preferential voting rights afforded in the share- designated representatives shall have veto rights over certain
holders’ agreement, the Sponsor-appointed directors will usually decisions at the general meeting. Nevertheless, the tradi-
have control over important decisions like new acquisitions and tional view is that a decision from the general meeting is valid
disposals, approval of business plans and annual budgets, new regardless of whether some shareholders have voted in breach
investments outside of the business plan, etc. Besides appoint- of contractual obligations under a shareholders’ agreement.
ment/dismissal of directors (always subject to consent from the Consequently, to ensure that shareholders respect such veto
general meeting, meaning the Sponsor), the shareholders’ agree- rights, it is important that the shareholders’ agreement contains
ment may further contain rules about audit and remuneration, appropriate enforcement mechanisms (see question 3.5).
business plans and budgets, transfer/issue of shares and finan- Veto rights in a shareholders’ agreement binds neither the board
cial instruments, confidentiality and other restrictive covenants, (as a governing body) nor the CEO. This means that even if a
management of exit, and customary drag, tag and shot-out provi- shareholders’ agreement grants Sponsor-appointed directors to
sions. From a strict governance perspective, the important veto over certain important board resolutions, there is always the
requirement for the Sponsor is to ensure that the shareholders’ risk that the board disregards this and resolves the matter in ques-
agreement provides the Sponsor with appropriate access to infor- tion as the majority find appropriate. In order to cater for the “risks
mation about the company. There is no requirement for making of disobedience”, each director could be required to sign some
such shareholders’ agreements publicly available. form of adherence agreement to the shareholders’ agreements, but
Unlike in other jurisdictions (e.g. the UK or the US), it is not if such adherence agreement is considered to bind the directors in
common to include a detailed set of protective provisions in their capacity as such (and not shareholders), there is a legal risk
Norwegian portfolio companies’ articles of associations. Tradi- that the agreement, under Norwegian law, will be deemed invalid
tionally, most domestic PE funds have also preferred to keep as constituting a fettering of their discretion (other valid portions
these types of provisions only in the shareholders’ agreements of such agreements may remain in force). This risk cannot be elim-
for confidentiality and flexibility reasons. For the last few years, inated by making the relevant company a party to the shareholders’
it has nonetheless become more common to also include certain agreement. The reason being that the board owes fiduciary duties
protective provisions in the articles, especially if the portfolio to the company trumping those owed to a director’s appointing
company is controlled by an international PE fund. Such arti- shareholders. Therefore, the company cannot dictate how the
cles must be registered in the Norwegian Register of Business board in the future shall exercise duties, discretions and judgments
Enterprises and are thus publicly available. relating to individual matters put in front of them, unless other-
wise set out in the company’s articles. As a result, some funds
seek to alleviate risk by implementing provisions in the portfolio
3.2 Do private equity investors and/or their director companies’ articles, stating that the shareholders and the company
nominees typically enjoy veto rights over major
have entered into a shareholders’ agreement regulating, inter alia,
corporate actions (such as acquisitions and disposals,
business plans, related party transactions, etc.)? If a
restrictions on transfer of shares, veto rights, etc. Such clauses
private equity investor takes a minority position, what will then state that the board may, as a condition for its consent
veto rights would they typically enjoy? to transfer shares, require that new shareholders accede to such
shareholders’ agreement. There is no clear court decision on the
topic as to what extent such a reference in the articles will solve the
The shareholders’ agreement is normally drafted so that PE
problem, or if it is necessary to include the relevant text itself in the
funds and their director nominees (through board majority or
articles. In academic circles, the view is also divided.
mandatory consent requirements) have control over the port-
If the directors are also shareholders in the company, it must
folio company and any important corporate action. This
be assumed that they are free to bind their powers in their
includes, inter alia: material changes in the nature of the business

Private Equity 2023

 Aabø-Evensen & Co 153

capacity as shareholders. Consequently, Sponsors controlling share classes with different financial and voting rights, and by
sufficient votes in the general meeting can, in principle, seek introducing good leaver/bad leaver provisions, etc., a Sponsor
comfort in their right to convene an extraordinary general may to some extent at least limit the financial impact of some
meeting and remove disobedient directors from the board. Still, of these minority protection rules so that the principles of the
the right to remove board members cannot completely eliminate shareholders’ agreement in general will apply. The same can
the risk that the portfolio company, as a result of the board’s be achieved by pooling the minority investors’ investment in
resolution, has already entered into a binding arrangement with the portfolio company through a separate investment vehicle in
a third party before a new board is elected. Normally, an appro- which the Sponsor holds the controlling vote.
priate and well-tailored enforcement mechanism in the share-
holders’ agreement itself will therefore, in most situations, be
3.5 Are there any limitations or restrictions on the
considered sufficient to ensure that no party (in particular, the contents or enforceability of shareholder agreements
directors holding shares) has any incentive to breach the terms (including (i) governing law and jurisdiction, and (ii)
of the shareholders’ agreement, and therefore that it will not non-compete and non-solicit provisions)?
be necessary with any further enforcement. In practice, most
Norwegian funds seem to rely on such enforcement mecha-
Insofar as the shareholders’ agreement does not contravene stat-
nisms in the shareholders’ agreements instead of implementing
utory laws (e.g. the Companies Acts) or the relevant company’s
lengthy articles. That said, over the last few years there seems
articles, such agreements are considered valid under Norwegian
to have been a move for implementing more detailed articles, in
law, and can, in principle, be enforced among the parties thereto
particular when UK or global funds are investing in Norwegian
(but not against third parties). Even if the shareholders’ agree-
portfolio companies.
ment is binding, there are still some uncertainties as to what
extent it can be enforced by injunctions. Nevertheless, it must
3.4 Are there any duties owed by a private equity be assumed that remedies other than injunctions agreed in such
investor to minority shareholders such as management an agreement can be claimed before the courts.
shareholders (or vice versa)? If so, how are these In the event that a shareholders’ agreement contains provi-
typically addressed? sions that are conflicting with statutory minority protection
rules or provisions in the company’s articles of association, this
The general principle under Norwegian law is that a controlling could also result in the agreement not being enforceable, at least
shareholder does not have any duty towards minority share- with regard to such provision (see question 3.4).
holders and is free to act in his or her own best interest unless Further, it should be noted that if the shareholders’ agree-
otherwise is explicitly set out in law, the company’s articles or in ment attempts to bind the directors in their capacity as direc-
an agreement. Under the Norwegian Limited Liability Compa- tors, there is a risk that this part of the agreement is invalid and
nies Acts (“Companies Acts”), however, a controlling influ- cannot be enforced towards the company itself nor the director
ence cannot be exercised at board level, management level in question (see question 3.3). It should also be noted that it is
or at the general meeting in a manner likely to cause unjust not possible to extend the binding force of certain provisions of
enrichment to a shareholder or a third party at the cost of the such an agreement by making the company itself a party to it (see
company or another person. For PE investments in particular, question 3.3). Nevertheless, if the director is also a shareholder,
the Sponsor will, in addition, have undertaken a set of detailed and as such is a party to the shareholders’ agreement, it must be
(but limited) undertakings towards minority shareholders (such assumed that such shareholders are free to bind their powers in
as management shareholders), the main purpose being to align the capacity of shareholders (see question 3.3). Provided appro-
the minority shareholders’ interest not through annual compen- priate remedies and enforcement mechanisms are agreed in the
sation, but through growing the business and receiving equity agreement itself, such mechanisms will therefore, in most situa-
returns as shareholders. tions, be considered effective towards such party.
Shareholders also have certain statutory minority protections Typically, shareholder agreements cannot be enforced
through a detailed set of rules in the Companies Acts, including towards third parties, but can be enforced against the party in
the right to attend and speak at general meetings, certain disclo- breach. However, this may sometimes be of little help, unless
sure rights, rights to bring legal actions to void a corporate reso- the agreement itself contains appropriate and effective remedies
lution on the basis of it being unlawfully adopted or otherwise and enforcement mechanisms (see question 3.3).
in conflict with statute or the company’s articles, etc. Some In terms of dispute resolution, the preferred avenue of
of these rights are granted to each individual shareholder irre- approach for PE funds has, over the last decade, shifted from
spective of voting rights, and the Companies Acts also provides regular court hearings to arbitration, and it should be noted that
specific rights to minority shareholders representing a certain alternative dispute resolution in general (including both arbi-
percentage of the share capital and/or votes. tration and court-sponsored mediation) is now decidedly more
Sometimes, Sponsors, particularly foreign Sponsors, may common in Norway than in the rest of the Nordics. International
address certain of these statutory minority protection rules influence combined with the perceived upsides (i.e. non-pub-
in the shareholders’ agreement by introducing provisions that licity, efficiency, expertise and costs) may be credited for this
aim (directly or indirectly) to limit them. To what extent this is shift. Pursuant to the New York Convention, arbitral awards are
possible, and if so, how far and for how long it is possible to limit enforceable in Norway. Norway has further implemented certain
(or at least minimise) them, is subject to substantial legal uncer- statutory limitations on the enforceability of non-compete clauses
tainty under Norwegian law. Many of the rules cannot be devi- in employment contracts. Under certain special circumstances,
ated from, and an overzealous shareholders’ agreement could the new rules may also have an impact on the enforceability of
affect the validity of either the entire agreement or the particular non-compete provisions of shareholder agreements.
provision in question (see question 3.5). By implementing several

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3.6 Are there any legal restrictions or other loans between the acquiring companies and the target group,
requirements that a private equity investor should or payment of various forms of management fees, etc. between
be aware of in appointing its nominees to boards of such parties. Other forms of transactions falling within the
portfolio companies? What are the key potential risks same category may be transactions that directly or indirectly aim
and liabilities for (i) directors nominated by private at distributing funds out of a portfolio company to the Spon-
equity investors to portfolio company boards, and (ii) sors or to third parties. Also, directors should be particularly
private equity investors that nominate directors to
aware of the rule prohibiting a target company from providing
boards of portfolio companies?
upstream financial assistance in connection with the acquisition
of shares in the target company (or its parent company). This
Legal restrictions on nominating boards of portfolio prohibition against financial assistance has previously prevented
companies Norwegian target companies from participating as co-borrower
The CEO and at least half of the directors in Norwegian private or guarantor of any acquisition financing facilities. Although,
and public LLCs must either be residents of Norway or EEA/ on 1 January 2020, Norway implemented a set of rules that
UK/Northern Ireland nationals who reside in an EEA state or further eases the previous strict ban of financial assistance (by
in the UK/Northern Ireland. With respect to this, at least half amending the existing “whitewash” procedure), this is still an
of the ordinary directors must fulfil the residential requirement; area that needs careful consideration and compliance with strict
it will not suffice that solely deputy directors fulfil it, irrespective formalities if the respective directors shall stay out of peril (see
of how many of them are Norwegian residents or EEA/UK/ further in section 8). On a general note, in order to be valid,
Northern Ireland nationals. The Norwegian Ministry of Trade related-party transactions must be approved by the board, and
and Industry may grant exemptions on a case-by-case basis. It if the consideration from the company represents a real value
should also be noted that, for public LLCs (irrespective of such exceeding 2.5% of its balance sheet amount for previous fiscal
companies being listed or not), Norwegian law dictates that each year, the board must prepare a special report to be distributed to
gender shall be represented on the board by (as a main rule) at all shareholders with a known address. In addition, such report
least 40%. Consequently, on a board of five directors, there must be filed with the Norwegian Registry of Business Enter-
cannot be fewer than two members of each gender. Exceptions prises. Certain exemptions from these requirements apply; typi-
apply to directors elected by and among the employees (if any). cally agreements entered into as part of the company’s normal
PE funds must also take into consideration the requirements business at market price and other terms that are customary for
for employee representatives on Norwegian boards. According such agreements. If the relevant company’s shares are listed on a
to law, employees are entitled to board representation, both in regulated market, additional requirements apply and such agree-
private and in public LLCs, provided the number of full-time ments must also then be approved by the relevant company’s
employees in such a company exceeds 30. Under such circum- shareholders’ meeting in order to be valid.
stances, the employees are entitled to elect between one and up Directors violating any of the formal requirements described
to ⅓ of the board members from among the employees. The above may, at worst, expose him/herself to personal responsibility/
exact number of employee board representatives varies with the liability for ensuring that any funds/assets distributed in violation
number of employees in the company, but all employee repre- of such rules are returned to the company. Note that the anti-
sentatives have the same voting rights as regular board members. asset stripping rules implemented by the AIFMD Act (see ques-
Employee board representation is not mandatory under Norwe- tion 11.1) are also likely to result in personal liability for directors
gian law, but cannot be rejected if requested by the employees – in particular those appointed by the Sponsor if they contribute
and the conditions for such representation are fulfilled. to the Sponsor’s breaching of such anti-asset stripping provisions.
Further, note that, in the event that a portfolio company is
Risks and potential liabilities for the directors appointed in financial distress, its directors will at some stage come under
Like other directors, a Sponsor-appointed director of a portfolio obligation to cease trading and file for court composition
company owes fiduciary duties to the company that takes prec- proceedings or to liquidate the company. Such distress situa-
edence over duties owed to the shareholders appointing him. tions very often involve some type of prior attempts of restruc-
Directors owe their duties to all the shareholders, not only the turing or reorganising the business to salvage the various stake-
individual shareholder or group of shareholders nominating holders’ financial interests. These types of attempts could
him/her. Upon assuming office, the nominated directors will be involve selling off assets or parts of the business to a stakeholder
subject the same potential personal director liability as any other against such stakeholder being willing to contribute additional
member. Under Norwegian law, directors or executive officers cash or converting debt into equity, etc. It is not uncommon
may become liable for damages suffered by the company, share- that such transactions, in the event that these attempts later fail,
holders or third parties caused by negligence or wilful acts or may be challenged by other creditors, the receiver or trustee on
omissions. In addition, directors can be held criminally liable as behalf of the creditors, and they therefore entail substantial risks
a result of intentional or negligent contravention of the Compa- of liability for the various directors.
nies Acts and/or ancillary regulations. As a general principle,
all directors (including employee-elected directors) are subject Risks and potential liabilities for the Sponsors
to the same standard of care or fault standard and, although the In terms of liability, the general point is that a Sponsor itself
board acts collectively, a director’s liability is personal. Joint and will not assume or be exposed to any additional liability
several liability only applies to such actions or omissions attrib- simply by virtue of nominating/appointing directors to a port-
utable to more than one board member. folio company. However, a parent company or a controlling
Examples of potential risks and liabilities that Sponsor- shareholder may be held independently liable for its subsid-
appointed directors should be particularly aware of relate to the iary’s liability if it has contributed to a wrongful act through
board’s heightened scrutiny in controlling that all related-party a controlling interest in the company. Consequently, if the
transactions (if any) between a portfolio company, its share- Sponsor has reserved so many vetoes over the portfolio
holders and/or its directors are concluded at arm’s-length basis. company that the management team is no longer able to carry
In a PE investment, such transactions may typically relate to out its day-to-day business in the ordinary course without first
fixing the interest rates on shareholder loans, and/or intra-group consulting the Sponsor, this could, at least theoretically, mean

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that the Sponsor might be considered a “shadow director” or ■ In the event that it is necessary to file the transaction
manager of the business. Under these circumstances, conse- with domestic or foreign competition authorities, the
quent liability issues can arise for the Sponsor if something goes time required to prepare the necessary disclosures to be
wrong. That said, piercing the corporate veil under Norwegian submitted to such authorities. In the event of a change
law is not considered a particularly easy task. of control transaction, provided that the combined group
turnover of the acquirer and the target in Norway is
NOK 1 billion or more, and at least two of the undertak-
3.7 How do directors nominated by private equity
investors deal with actual and potential conflicts of ings concerned each have an annual turnover in Norway
interest arising from (i) their relationship with the party exceeding NOK 100 million, the transaction must be filed
nominating them, and (ii) positions as directors of other with the Norwegian Competition Authorities (“NCA”),
portfolio companies? unless filing takes place under the EU Merger Control
Regime instead.
As mentioned in question 3.6, Sponsor-appointed directors are, ■ If filing with competition authorities is necessary, the
upon assuming office, subject to the same corporate fiduciary time necessary for such authorities’ regulatory reviews,
duties as any other director on the board, and these rules (princi- including requests for additional information from such
ples) cannot be departed from through shareholder agreements authorities, and to wait for the expiry of standard waiting
or constitutional documents. periods under such regulatory approval schemes. There is
According to law, a director in a Norwegian portfolio company no deadline for filing a notification with the NCA, but a
is disqualified from participating in discussions or decisions on standstill obligation applies until the NCA has cleared the
any issues that are of such personal importance to him, or any of transaction. After receipt of the filing under the new rules,
his related parties, that the director is deemed to have a strong the NCA now has up to 25 working days to make its initial
personal or special financial interest in the matter. The same assessment of the proposed transaction.
will apply for a company’s CEO. Whether or not this provision ■ The necessity to comply with obligations to inform the
comes into play, demanding a director to step down while the employee union representatives and/or the employees of
remaining board resolves the matter, depends on an individual the transaction and its potential effects in accordance with
evaluation at any given crossroad. However, it must be assumed law and relevant collective bargaining agreements.
that most particular circumstances must be present – i.e. a ■ The time necessary for implementing relevant co-investment
director will not automatically be disqualified just because he arrangements with the Investing Management.
is also director in another portfolio company that is the compa- ■ The time necessary to establish the desired investment
ny’s contractual counterpart. In a sense, it could be viewed as vehicles and SPVs in order to execute and complete the
providing a safety valve for PE nominees that have a personal transaction.
financial interest (by virtue of being a partner of the Manager ■ If the transaction is conducted through a statutory merger,
and thereby entitled to parts of the Carry, cf. question 2.3) to where only private LLCs are involved, the merger plan
withdraw from handling board matters (and thus avoiding any with supporting documents will have to be made avail-
conflicts of interest) relating to other portfolio companies. able to the shareholders no later than two weeks prior to
To avoid potential conflicts of interest arising between nomi- the general meeting at which such merger will have to
nators and nominees, an increasing number of PE-backed be decided upon. If public LLCs are involved in such a
companies have introduced quite comprehensive instructions merger, the notice period is one month prior to the general
and procedural rules for both management (daily operations meeting, and the merger plan must also be filed with the
and administration) and the board of directors (board work and Register of Business Enterprises (“RBE”) a month before
decision-making processes). the meeting. If approved by the general meeting, the
merger must thereafter be filed with the RBE for public
announcement; this applies to private and public LLCs
42 Transaction Terms: General alike. Once the announcement has been published by the
RBE, a six-week creditor period begins, upon the expiry of
4.1 What are the major issues impacting the timetable which the merger may be effectuated.
for transactions in your jurisdiction, including antitrust, ■ It should also be noted that if the target company is oper-
foreign direct investment and other regulatory approval
ating within certain industries, there are sector-specific
requirements, disclosure obligations and financing
issues? requirements to consider (such as requirements for public
permits and approvals). These industries are banking,
insurance, petroleum, hydropower and fisheries, etc., and
As a starting point, private corporate transactions do not require the need for obtaining such public permits and approvals
consent from Norwegian authorities, which means that regular could heavily influence the transaction timetable.
share purchases can be completed in accordance with the time- ■ Finally, it should be noted that if a target company oper-
frame agreed upon by the parties – i.e. there is no set timetable. ates in sectors considered vital from a national security
Standard waiting periods pursuant to relevant competition legis- perspective, the National Security Act now grants the
lation will apply, however. The major issues impacting the time- government powers to intervene and stop acquisitions of
table for private transactions in Norway are: shares in such company.
■ The initial diligence exercise that the buyer intends to Issues influencing the timetable for take-private transactions
undertake. in Norway will in general be more or less the same. For such
■ The time necessary for financing discussions. The time target companies, however, the following additional issues must
required for such discussions will normally be heavily be accounted for:
dependent upon the size of the deal and type of preferred ■ The time necessary for the target’s board to evaluate the
financing options available. If it is necessary with bank initial proposal for the transaction and any alternatives.
financing syndications, mezzanine debt, issuing debt ■ In a voluntary tender offer, the offer period must be no less
instruments, etc. than two weeks and no more than 10 weeks.

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■ In a subsequent mandatory offer, the period must be at companies. Both the prospective buyer and the targets’ boards
least four weeks and no more than six weeks. must observe a detailed set of rules and regulations, which,
■ The time necessary to conduct the squeeze-out of the among others, comprises insider dealings rules, mandatory
minority shareholders. offer thresholds, disclosure obligations (regarding ownership of
■ The application process for delisting the target in the event shares and other financial instruments), content limitations for
that the bidder has not managed to acquire more than 90% offer documents, filing and regulatory approval of offer docu-
of the shares and some of the remaining shareholders file ments, length of offer periods, employee consultations, limita-
an objection against delisting the target company. tions on type of consideration offered, etc.
The main challenge in any acquisition, albeit more relevant to
take-private of listed companies, is for the PE fund to secure a
4.2 Have there been any discernible trends in
transaction terms over recent years? sufficient level of shareholder support (i.e. 90% or more of the
target’s shares and voting rights) in order to carry out a subse-
quent squeeze-out of any remaining minority shareholders. This
Structured sales (auction) processes continue to be the preferred 90% threshold is also important since it will be a straightforward
option for PE exits in the Norwegian market – at least for trans- process to have the target delisted from the Oslo Stock Exchange
actions exceeding €100 million. Also, in smaller transactions the (“OSE”) or Euronext Expand (formerly Oslo Axess). If not, the
seller’s financial advisors will often attempt to invite different process for delisting the target could be far more complex. In
prospective bidders to compete against each other. Conversely, principle, there are several avenues of approach for PE houses
a PE fund looking for an exit will never go for a bilateral sales desirous to taking a publicly listed company private under Norwe-
process as a preferred exit route unless: (i) the fund has a very gian law – one of which is to launch a voluntary tender offer to
clear sense of who the most logical buyer is; (ii) an auction the shareholders. The principal legislation and rules regulating
involves a high risk of damage from business disruption; and (iii) takeovers of publicly listed companies is found in chapter 6 of the
the PE fund feels it has a very strong negotiating position. Norwegian Securities Trading Act (“STA”). One of the benefi-
Throughout 2013 and at the start of 2014, confidence cial features with a voluntary offer is that, in general, there are
returned to the international equity capital markets. This again no limitations in law as to what conditions such an offer may
led to an upswing in the number of initial public offerings, both contain; this affords the PE fund a great deal of flexibility, e.g.
in the Norwegian market and the rest of Scandinavia. Due to with respect to price, type of consideration and required condi-
this market sentiment, IPOs and “dual-track” processes became tions precedents. A voluntary tender offer may be launched at the
increasingly popular among PE funds looking to exit their port- bidder’s discretion, and the bidder can also choose to make the
folio investments, in particular for some of their largest port- offer to only some of the shareholders. A voluntary offer can also
folio companies where the buyer-universe might be limited and be made subject to a financing condition, although this is rare.
the relevant company needed to raise equity in order to pursue A potential bidder will quite often find it challenging to
future growth strategies. In Norway, this trend continued successfully conclude a take-private transaction by launching
through 2020 and into 2021, but has in 2022/2023 so far come a public bid without the co-operation and favourable recom-
to a halt due to plummeting and volatile stock markets. mendation of the target’s board at some point in the process.
Stapled financing offers have again started to re-emerge in the The reason being that, as a rule, a bidder who launches a public
Norwegian market, in particular for the larger deals in which the tender offer for a listed Norwegian target does not have a right
sellers are pursuing an exit via dual-track processes. to be admitted to due diligence. This makes diligence access
We have also seen increasing examples of sellers that, in order one of the bidder’s main hurdles in a public takeover. The
to accommodate a greater bidder universe, have been willing to target is not restricted from facilitating a due diligence investi-
offer certain attractive bidders some form of cost-coverage for gation by a bidder, but the scope and structure of such reviews
money spent in an unsuccessful auction. These arrangements are in the context of a listed target will vary significantly. Provided
subject to great variations, but, on a note of caution, they regularly that the target’s board is prepared to recommend the offer, the
include provisions that stealthily alleviate much of the apparent bidder will normally be admitted to a confirmatory due dili-
seller liability by prescribing that the buyer will not be entitled to gence. It is therefore not surprising that a prospective acquirer
any coverage if it is no longer willing to uphold a purchase price (particularly PE funds) will almost always seek upfront recom-
corresponding to the adjusted enterprise value of its initial offer. mendation from the target’s board. In a control context, the
Escrow structures as the basis for making contractual claims prospective acquirer’s first contact with the target is customarily
in respect of warranties and purchase price adjustments are not a verbal, informal sounding-out (by the chairman or a senior
normally popular among sellers but, depending on the parties’ executive of the acquirer or by the acquirer’s external finan-
relative bargaining positions, it is not uncommon for buyers to cial adviser) of the target’s appetite for a take-private transac-
request escrow structures. In terms of new trends in the Norwe- tion. Depending on the outcome of that discussion, the fund
gian PE market, there has been a significant uptick in the usage will submit to the target a written, confidential, indicative and
of M&A insurance (i.e. commercial insurance of warranties and non-binding proposal and seek due diligence.
indemnities in the sale and purchase agreement (“SPA”)), which When the board of a listed company reviews a take-private
is also used to get rid of the aforementioned escrow mechanisms. proposal, it must uphold its fiduciary duties, which include two
elements: a duty of care; and a duty of loyalty. The duty of care
52 Transaction Terms: Public Acquisitions includes a duty for the board to inform itself, prior to making a
business decision, of all material information that is reasonably
5.1 What particular features and/or challenges apply available. Consequently, the directors must evaluate a proposed
to private equity investors involved in public-to-private offer or business combination in the light of risks and bene-
transactions (and their financing) and how are these fits of the proposed transaction compared to other alternatives
commonly dealt with? reasonably available to the corporation, including the alternative
of continuing as an independent entity. It is currently not clear
Takeover of a publicly listed company is subject to more regu- under Norwegian law to what extent this duty of care requires
lation under Norwegian law than are takeovers of private the board to reasonably inform itself of alternatives or actively

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seek alternative bidders in connection with a business combina- increase the chances of a successful subsequent bid for the entire
tion transaction. Each director of a listed company considering company (i.e. the remaining outstanding shares). Purchasing
a take-private transaction must also assess if, and to what extent, shares outside an offer may be prohibited if the bidder is in
they can or should assist in the transaction, or if they have a possession of insider information. In addition to the insider
conflict of interest. If a director in the target has a specific dealing rules, a bidder must pay particular attention to disclo-
interest in a potential bidder, or in a bidder in competition of a sure requirements during the stake-building process. The disclo-
first bidder, such director is incompetent and must not partici- sure requirements are triggered by any person owning shares in
pate in the handling of issues relating to the bid. a company whose securities are listed on a Norwegian regu-
Take-private transactions in Norway are subject to the same lated market (OSE or Euronext Expand), if their proportion of
disclosure issues and requirements as other takeover offers shares or rights to shares in such company reaches, exceeds or
involving a publicly listed company. The board of a listed target falls below any of the following thresholds: 5%; 10%; 15%; 20%;
is, on an ad hoc basis and on its own initiative, required to disclose 25%; ⅓; 50%; ⅔; or 90% of the share capital, or a corresponding
any information on new facts or occurrences of a precise nature proportion of the votes, as a result of acquisition, disposal or
that are likely to have a notable effect on the price of the target’s other circumstances. If so, such person must notify the company
shares or of related financial instruments (so-called insider infor- and the OSE (which is authorised to receive such notifications
mation). This is an issue of particular concern for any bidder, on behalf of the Financial Supervisory Authority of Norway
as well as for a PE fund. The decision to engage in discus- (“Norwegian FSA”)). Note that the deadline for when disclo-
sions with a PE fund relating to a potential take-private trans- sure must be made was amended in 2022 from “immediately”
action and to divulge information is thus made at the discretion to “immediately, and no later than the opening of the regulated
of the target’s board. Confidential negotiations with the target’s market on the second trading day” following the disclosure obli-
board at an initial stage are possible, with certain constraints, gation being triggered. It is envisaged that the Norwegian FSA
prior to the announcement of the bidder’s intention to launch can come up with guidance explaining key typical cases and how
a bid, provided the parties are able to maintain confidentiality. these relate to the deadline. Breaches of the disclosure rules are
However, the fact that a listed company is discussing a takeover fined, and such fines have grown larger over the years.
or a merger (and the content of such negotiations) will at some Except for the insider dealing rules, disclosure rules, and
point constitute inside information that must be disclosed to the mandatory bid rules (see below) there are generally few restric-
market. The OSE’s Appeals Committee has previously ruled tions governing stake-building. However, confidentiality agree-
that confidential negotiations between a potential bidder and ments entered into between a potential bidder and the target
the target’s board could trigger disclosure requirements, even can impose standstill obligations on a bidder, preventing acqui-
before there is a high probability of an offer being launched, sition of target shares outside the bidding process. Subject to
provided that such conversations “must be assumed not to have such limitations, the fund can also attempt to enter into agree-
an immaterial impact on the target’s share price”. Consequently, ments with key shareholders to seek support for a possible
a potential bidder (like a PE fund) and the target’s board must be upcoming bid. Such agreements can take various forms, from
prepared for a situation where the Norwegian takeover supervi- an SPA, a conditional purchase agreement, some form of letter
sory authority takes the view that the requirement for disclosure of intent, MoU, etc., or a form of pre-acceptance of a poten-
is triggered at an early stage, possibly from the time the target tial bid. Pre-acceptances are typically drafted as either a “soft”
enters into a non-disclosure agreement allowing due diligence or “hard” irrevocable (“Irrevocable”) – the former normally
access. The foregoing notwithstanding, if a target is approached only commits the shareholder who gives the Irrevocable to
regarding the potential intentions of launching a bid, this will in accept the offer if no higher competing bid is made, whereas the
itself not trigger any disclosure requirements. latter commits the shareholder to accept the offer regardless of
Under Norwegian law, a publicly listed target can take a more whether a subsequent higher competing bid is put forward. It
or less co-operative approach in a takeover situation. Confidenti- is assumed in Norwegian legal theory, that a properly drafted
ality and “wall-crossing” agreements between the bidder and the “soft” Irrevocable will not trigger the disclosure requirements.
target, allowing the bidder access to due diligence or additional It should be noted that certain amendments to the Norwegian
information about the target, will often include a “standstill” disclosure regime have been implemented and will take effect
clause preventing the bidder for a specified period from acquiring from 1 September 2022 (cf. question 12.1). When dealing with
stocks in the target without the target’s consent. If the bidder shareholders directly in take-private transactions, a PE fund will
obtains the target’s support to recommend a “negotiated” tender also experience that shareholders are reluctant to grant exten-
offer, it is normal practice for the parties to enter into a detailed sive representations and warranties besides title to shares and
transaction agreement, which (typically) sets out the terms for the the shares being unencumbered.
target’s support and the main terms for the bidder’s offer. Such Another challenge in take-private transactions is that if a PE
transaction agreements also often include a non-solicitation clause fund directly, indirectly or through consolidation of owner-
granting the bidder some type of limited exclusivity, including a ship (following a stake-building process or one or more volun-
right to amend its offer and to announce a revised offer to match tary offers) has acquired more than ⅓ of the votes in the target,
any alternative or superior competing offers that are put forward. it is (save for certain limited exceptions) obligated to make a
The foregoing notwithstanding, the Norwegian Code of Practice mandatory offer for the remaining outstanding shares. After
for Corporate Governance (“Code of Practice”) recommends passing the initial ⅓ threshold, the fund’s obligation to make
that a target’s board exercise great caution in agreeing to any form a mandatory offer for the remaining shares is repeated when it
of exclusivity. The Code of Practice further requires the board to passes (first) 40% and (then) 50% of the voting rights (consoli-
exercise particular care to comply with the requirements of equal dation rules apply). Please note that certain derivative arrange-
treatment of shareholders, thus ensuring that it achieves the best ments (e.g. total return swaps) may be considered controlling
possible bid terms for all the shareholders. votes in relation to the mandatory offer rules. Of particular
A PE fund may want to use several different tactics to ensure concern to PE funds, is that the share price offered in a manda-
a successful take-private transaction, one of which is stake- tory offer cannot be lower than the highest price paid, or agreed
building. Stake-building is the process of gradually purchasing to be paid, by the fund for shares (or rights to shares) in the
shares in a public target in order to gain leverage and thereby target during the last six months. In special circumstances, the

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relevant takeover supervisory authority (i.e. the exchange where or should not accept the bid, it is to account for the reasons
the securities are listed) may also demand that market price is why. According to the Code of Practice, it is recommended, that
paid for the shares (if this was higher at the time the manda- the board arranges a valuation for each bid by an independent
tory offer obligation was triggered). A mandatory offer must be expert, and that the board on such basis forms its recommenda-
unconditional and must encompass all shares of the target. The tion on whether or not to accept the offer. Exemptions apply
consideration may be offered in cash or by alternative means, in situations where a competing bid is made. The recommenda-
provided that complete and no less favourable payment in cash is tions of the Norwegian Code of Practice go beyond the require-
always available upon demand. The consideration offered under ments of the STA.
a mandatory offer must be unconditionally guaranteed by either
a bank or an insurance undertaking (in each case authorised to
5.2 What deal protections are available to private
conduct business in Norway). equity investors in your jurisdiction in relation to public
Getting the necessary finance arrangement in place may also acquisitions?
represent a major hurdle for a bid dependent on significant
leverage; in particular when it comes to mandatory offers, since
As a starting point, break fees are available in the sense that
any debt financing the bidder relies on in these situations must,
Norwegian takeover legislation does not contain particular
in practice, be agreed on a “certain funds” basis, so that it does
provisions prohibiting them. However, due to strict rules
not include any conditions that are not effectively within the
regarding corporate governance and fiduciary responsibilities,
bidder’s control.
the use of break fees is decisively less common in Norwegian
A PE fund desirous to take private a public target should
public-to-private transactions compared to other jurisdictions.
also seek support from the target’s management team as early
Break fees payable by the target can raise issues in relation to
as possible since these persons are often required to co-invest
compliance with the target’s corporate interests and may, in the
together with the fund (see question 2.3). In connection with
worst case, trigger liability for misuse of the target’s assets. Break
structuring of relevant management co-investment arrange-
fee agreements limiting the ability of a target’s board to fulfil its
ments, the principle that all shareholders must be treated equally
fiduciary duties, or that may put the target in financial distress
in a voluntary and mandatory offer situation imposes some
if the break fees become effective, are likely to be deemed unen-
constraints on the terms that can be agreed with employees that
forceable and, consequently, may result in personal liability for
hold (or have options to hold) shares in the target. At the outset,
the board members. Potential financial assistance aspects of a
the PE fund may, without limitations, approach an employee
break fee arrangement must also be considered carefully.
of the target and agree upon whatever terms desired, provided,
In relation to the above, it should be noted that the Code of
of course, that such terms are not contrary to good business
Practice recommends that a target’s board must exercise great
practice and conduct, or in violation of rules and regulations
caution in agreeing to any commitment that makes it more diffi-
pertaining to what considerations a member of a company may
cult for competing bids to be made from third-party bidders
or may not accept in connection with such member’s position
or may hinder any such bids. Such commitments, including
in the company. As there are no explicit legal constraints on
break fees, should be clearly and evidently based on the shared
what can be agreed regarding severance terms for directors or
interests of the target and its shareholders. According to the
senior executives in the target, entitlements provided under
recommendations, any agreement for break fees payable to the
such arrangements are likely to be permitted and upheld insofar
bidder should, in principle, be limited to compensation for costs
as the arrangements do not give such employees unreason-
incurred by the bidder in making the bid. Break fees occur,
able benefits at the expense of other shareholders in the target.
often in a range of 0.8% to 2% of the target’s market-cap. Of
The foregoing is naturally assuming that no limitations follow
the 12 public M&A offers launched in 2021, a cost cover of up
from the possible board declarations on fixing of salaries or
to NOK 10 million (around 0.1% of the offer price), reflecting
other remuneration schemes approved by the target’s general
an estimate of the cost incurred by the bidder, was introduced in
meeting. Although not specifically pertaining to the aforemen-
one of these deals. In another deal, a cost cover of up to NOK
tioned, please take particular note that Norwegian law restricts
25 million (around 3.6 % of the offer price) was agreed and, in a
the employees’ and directors’ right to accept remuneration from
third deal, a cost cover of up to EUR 1.8 million (around 1.2%
anyone outside the target in connection with their performance
of the offer price) was agreed.
of assignments on behalf of the target.
In relation to the foregoing, it should also be noted that
a bidder must disclose in the offer document what contact he 62 Transaction Terms: Private Acquisitions
has had with the management or governing bodies of the target
before the offer was made, herewith including any special bene- 6.1 What consideration structures are typically
fits conferred or agreed to be conferred upon any such individ- preferred by private equity investors (i) on the sell-side,
uals. Furthermore, when dealing with employees who are also and (ii) on the buy-side, in your jurisdiction?
shareholders in the target, a bidder should be aware that agreed
upon terms and benefits that are not exclusively related to the As a general observation, it seems that PE funds on the buy-side
employment of such shareholder may, in accordance with the often prefer transactions based on completion accounts. When
principle of equal treatment, be considered part of the offered on the sell-side, however, the same funds tend to propose a
share price, thus exposing the bidder to the risk of having the locked-box mechanism. That said, the choice of preferred
offer price in the offer document adjusted to such higher amount. completion mechanics is normally decided on the basis of what
If a Norwegian-listed company becomes the subject of a kind of business the target is engaged in, i.e. whether it is particu-
take-private proposal that materialises in a voluntary or manda- larly susceptible to seasonal variations or other cash-flow fluctu-
tory offer to the shareholders, the board is obliged to evaluate ations throughout the year, and the timing of the transaction, i.e.
the terms of the offer and issue a statement to its shareholders expected closing date. Completion accounts remain a common
describing the board’s view on the advantages and disadvantages feature if: (i) there is an expected delay between signing and
of the offer. Should the board consider itself unable to make a completion of the transaction; (ii) the business being sold is
recommendation to the shareholders on whether they should to be carved out from a larger group; (iii) substantial seasonal

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 Aabø-Evensen & Co 159

fluctuation in the target’s need for working capital is expected; unfamiliar with the Norwegian market often find such a prac-
and (iv) a large part of the target’s balance sheet refers to “work- tice strange and may therefore insist that the Investing Manage-
in-progress” items. ment provide such warranties in line with what is common in
If completion accounts are proposed by a PE fund, it is other jurisdictions.
common to base the calculation of the purchase price on the
target’s enterprise value adjusted to reflect both (i) the net cash/
6.3 What is the typical scope of other covenants,
debt position of the target group at completion, and (ii) any devi- undertakings and indemnities provided by a private
ation from the normalised working capital level at completion. equity seller and its management team to a buyer?
A seller may also propose different variations of this method-
ology, e.g. by fixing the purchase price in the SPA but at the
As in most other jurisdictions, a PE fund’s starting point will
same time assuming a “target level ” of debt and working capital.
often be that they do not provide any restrictive covenants. The
On rare occasions, other adjustment mechanisms are proposed
same applies for wide confidentiality provisions; the reason
depending on the target’s industry, e.g. adjustments based on the
being that such clauses may restrict the ability to use knowl-
target group’s net financial assets, etc.
edge acquired during the lifetime of the investment for future
investments. However, depending on market conditions, and the
6.2 What is the typical package of warranties / respective party’s bargaining position, most funds are willing to
indemnities offered by (i) a private equity seller, and (ii) adapt their “policy” in order to secure the exit, and non-compete
the management team to a buyer? and non-solicitation clauses between 12 and 24 months are seen.
In a Norwegian transaction, it is not customary for a buyer to
The catalogue of vendor representations, warranties and indem- require warranties on “an indemnity basis” like in the US, and a
nities offered to prospective buyers varies significantly from seller will normally resist such an approach and instead provide
transaction to transaction, where it more or less comes down to indemnities for specific identified risks. However, indemnities
bargaining power and leverage; if there is great competition for are common in share purchase agreements and asset purchase
a target, only limited warranties will be given, and if the target is agreements. Indemnities mainly cover potential claims, losses
less sought after, then a more extensive warranty catalogue may or liabilities that the buyer has revealed during due diligence
be obtained. and that have not been addressed as a “to be fixed” issue or
The typical packages of warranties and indemnities offered by by a price reduction. In general, all PE funds are looking for
a PE seller in the Norwegian market can, to some extent, also a complete exit with cash on completion and, depending on at
be influenced from market practices in the fund’s home juris- what stage of the fund’s lifetime the exit takes place, such funds
diction. It is, for example, a well-known fact that many UK will normally seek to resist or limit any form of indemnification
Sponsors rarely want to provide business representations and clauses in the SPA.
warranties, which means that the PE fund will try to limit the Nevertheless, provided that the PE fund selling is Norwe-
warranty package to so-called fundamental warranties (i.e. owner- gian or Nordic, it has not been common to insist that a buyer
ship to shares, valid execution of documentation, etc.). Instead, relies solely on indemnities provided by the management team.
these sellers will attempt to make the buyer rely on its own due Instead, the PE funds have tried to accommodate buyer’s
diligence and, if possible, by warranties provided by the target’s requests for indemnities, but at the same time introduce special
management team. This means that when such Sponsors are caps and deadlines for such potential liability. To the extent
attempting an exit of a Norwegian portfolio company, they possible, the PE vendor might also attempt to insure all poten-
may attempt to apply the same practice depending on what they tial liability claims, but some diligence findings may often be of
expect is the most likely “buyer-universe” for the relevant assets. such nature that insuring it is rather difficult. In some cases, the
This being so, such an approach is rarely seen in the Norwegian insurance premium is also so high that it is better to negotiate an
market, at least if the seller is a Norwegian or Nordic PE fund. appropriate price reduction. W&I insurances, including special
Throughout 2016 and 2017, sellers in general had to accept a claims insurances, have, however, started to become increas-
fairly broad set of representations and warranties if they wanted a ingly popular in the Norwegian market (see question 6.4).
deal to succeed in the Norwegian market, and the warranty cata-
logue remained at least as extensive in 2018 and throughout 2022.
6.4 To what extent is representation & warranty
During this period, buyers often succeeded in broadening the insurance used in your jurisdiction? If so, what are the
scope of the warranty coverage; for example, by including some typical (i) excesses / policy limits, and (ii) carve-outs /
type of information warranties in the contracts. However, excep- exclusions from such insurance policies, and what is the
tions did apply, especially in particular sectors, depending on the typical cost of such insurance?
parties’ bargaining position. For some extremely attractive assets
sold through dual-tracks, we also witnessed that PE vendors in W&I insurance has historically not been a common feature
some situations managed to get away with a very limited set of in the Norwegian deal landscape. However, during 2013 and
fundamental warranties (only), and where the buyer had to rely throughout 2022, the Norwegian market witnessed a substantial
completely on warranty and indemnity (“W&I”) insurance. growth in the number of transactions in which the seller or the
In general, the representations and warranties packages buyer attempted to use W&I insurance as a way to reach agree-
offered by a typical PE vendor in the Norwegian market will be ment on liability under the SPA (or, alternatively, introduced by
fairly limited, but may, at first glance, not look too different from a buyer in order to achieve a competitive advantage in a bidding
what a strategic seller may propose in its first draft. process). For 2022, we estimate that close to 12% of all M&A
Foreign Sponsors should note that, historically, it has not been deals in Norway used this type of insurance, which in fact was
very common that Norwegian or Nordic Sponsors insist on the a significant drop in the number of deals with W&I Insurance
Investing Management providing separate management warran- from 2021. The main reason for this reduction was the signif-
ties in connection with their co-investments or rollovers. If the icant drop in average deal sizes for 2022 compared with 2021.
management team provides such management warranties, the The W&I insurance product has become particularly popular
warranties are often limited in scope. International Sponsors among PE funds seeking a clean exit. Such funds have now

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160 Norway

started to arrange “stapled” buy-side W&I insurance to be made international PE funds exit investments, to propose a different
available to selected bidders in structured sales processes. Such set of warranties and indemnities for the PE fund and the target’s
insurances have also been used as a tool for the PE fund in order management team (see question 6.3) and thereby also a different
to get rid of the escrow clause in the SPA. Typical carve-outs/ set of limitation rules for the management. However, in the
exclusions under such policies will comprise: pension under- event that the buyer is an international PE fund and the manage-
funding; projections; transfer pricing issues; anti-bribery; ment team has to rollover parts of its investments, such inter-
secondary tax obligations; and uninsurable civil fines or penal- national funds may want to request that the Investing Manage-
ties. For more on excess/policy limits, see question 6.5. The ment in the co-investment agreement/shareholders’ agreement
cost of such insurance depends on the industry in which the provides the fund with separate representations and warranties
target operates, the type of insurance coverage requested, the (see question 6.3).
target itself and the parties involved, but will typically be in the
range from around 0.7% to 1.8% of the insured amount.
6.6 Do (i) private equity sellers provide security (e.g.,
escrow accounts) for any warranties / liabilities, and
6.5 What limitations will typically apply to the liability (ii) private equity buyers insist on any security for
of a private equity seller and management team under warranties / liabilities (including any obtained from the
warranties, covenants, indemnities and undertakings? management team)?

Save in respect of vendor liability for locked-box leakage or As mentioned in questions 4.2 and 6.4, PE vendors will, by
breach of specific restrictive covenants, which are normally virtue of seeking a clean exit without any clawback or similar
subject to special liability regulations (please see question 6.3), a post-closing issues, rarely accept security arrangements like
PE vendor will normally attempt to include several limitations escrow accounts unless absolutely necessary. Depending on the
on its potential liability for breach of the SPA and its obligations, circumstances, PE buyers may insist to include escrow provi-
covenants, warranties and indemnities thereunder. Significant sions into the SPA as security for sellers’ warranties/liabilities.
variations will apply depending on the market conditions, the As with most other elements in a given transaction, however,
parties’ bargaining position, the target’s industry sector and this comes down to prevailing market conditions and the
individual circumstances. parties’ relative bargaining positions. It has not been common
Historically, if a PE fund was on the sell-side, it would very practice among Norwegian PE funds to request that the target’s
often start with proposing a six to 12-month limitation period Investing Management in the co-investment agreement/share-
for the general warranties, and a period of between 12 and 24 holders’ agreement provides the fund with separate representa-
months for the tax warranties. However, the introduction of the tions and warranties (see question 6.3). As alluded to in ques-
W&I insurance product has led some of the Norwegian funds tion 6.5, such arrangements are, however, seen if the buyer is an
to become slightly more generous with the length of the limi- international PE fund and the management team has to rollover
tation periods offered in their first draft of the SPA. The main parts of its investments.
reason is that the insurance market is able to offer a 24-month
limitation period for the general warranties, and between five 6.7 How do private equity buyers typically provide
and seven years on tax warranties at a very little price difference comfort as to the availability of (i) debt finance, and (ii)
compared to shorter limitation periods. equity finance? What rights of enforcement do sellers
A PE vendor will typically (but depending on the market typically obtain in the absence of compliance by the
conditions) also start off with proposing a relatively high “de buyer (e.g., equity underwrite of debt funding, right to
minimis” (single loss) threshold combined with a basket amount specific performance of obligations under an equity
commitment letter, damages, etc.)?
in the upper range of what traditionally has been considered
“market” in Norway for such limitation provisions. PE funds
exiting their investments today may also attempt to align the The sellers’ process letters to PE buyers will normally instruct
basket amount with the policy “excess amount” under W&I that a buyer’s final bid must be fully financed (i.e. expressly state
insurance. This typically means an amount from 0.5% to 1% that it is not subject to financing), and that the sources thereof
of the target’s enterprise value, depending on the insurance must be reasonably identified. If financing is to be provided by
market and which insurance provider is underwriting the policy. external sources, the final bid must also provide the terms and
The standard policy excess amounts offered by the insurance status of all such financing arrangements (including any commit-
industry is normally 1% of enterprise value, which is above ment letters), as well as the contact details of the relevant institu-
the historical level of what has been considered market value tions providing financing (the buyer is often requested to inform
for the basket amounts in Norway, but currently an increasing the institutions that a seller’s representative may contact them).
number of insurers are willing to offer 0.5% of the enterprise It has become common that sellers insist that the SPA contains
value as the policy excess amount. While the majority of the buyer warranties regarding the equity financing commitment
deals in the Norwegian market are traditionally done with a (if applicable to the transaction). A PE fund is often required
“tipping basket” (whereby the seller is responsible for all losses to provide an equity commitment letter to backstop its obliga-
and not just those exceeding the basket amount), an exiting PE tion to fund the purchasing vehicle (BidCo) immediately prior
fund may propose a “deductible basket” (whereby the seller is to completion. However, such equity commitment letters will
only responsible for losses in excess of the basket amount). The often be addressed to the TopCo in the string of holding compa-
result in the final SPA depends on market conditions and the nies that owns the BidCo (or to a subordinated HoldCo further
bargaining position of the parties involved. A PE vendor will down in the string of holding companies). The enforceability of
also normally propose to cap its total liability at the lower end of such equity commitment letters is most often qualified upon a
what is market, for example by proposing an overall liability cap set of conditions, and the PE fund’s liability under the letter is,
of 10% of the purchase price. in all events, capped at a designated committed amount.
Finally, it should be noted that it has thus far not been tradi- In respect of the above, a seller should note that Norwegian
tion among Norwegian PE funds, as sometimes seen when corporate law adheres to the concept of corporate personhood,

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 Aabø-Evensen & Co 161

whereby a company is treated as a separate legal person, solely portfolio companies. Timing is also of the essence, and some-
responsible for its own debts and promises, and the sole bene- times the window of opportunity is simply closed due to prevailing
ficiary of credits it is owed. Related parties will thus not incur market conditions. If that is the case, an alternative approach can
liability for a company’s promises/guarantees, and a Norwegian be to carry out a private placement in advance – either in order
court of competent jurisdiction will only in exceptional circum- to raise both new equity and new shareholders, or just for raising
stances (e.g. in connection with legal charges of fraud or tax new equity and to take the spread upon the listing itself.
evasion) pierce the corporate veil through application of the alter The second main deliberation a PE fund contemplating an
ego doctrine. As such, guarantees that furnished a seller exclu- IPO exit must make is of whether the target is ready, willing and
sively by the BidCo (by way of copies of a commitment letter or able to go public. Irrespective of excellence, the public investor
other form of promissory notes issued to the BidCo) will only market for the relevant industry sector may simply be saturated,
be enforceable against the BidCo, which normally does not have and, in such a situation, a newcomer will most likely struggle
any funds besides its share capital (in Norway, the minimum severely to get both traction and attention. From an internal
share capital for an LLC is NOK 30,000). Consequently, a point of view, there are also the household tasks of getting
careful seller will often require a limited right to enforce the procedures and regulations up to STA standards and listing
equity commitment letter directly against the PE fund itself. requirements, preparing financial and other pertinent investor
documentation, and training management and key personnel,
whom frequently have very limited insight into the dynamics
6.8 Are reverse break fees prevalent in private equity
transactions to limit private equity buyers’ exposure? If and requirements of a public company in terms of governance,
so, what terms are typical? reporting, policy implementation, etc.
Thirdly, and assuming the target is deemed suitable for listing
and that all elements above have undergone careful scrutiny,
Reverse break/termination fees have historically not been prev-
the PE fund must consider whether it is prudent to place all
alent in Norwegian PE transactions, and PE funds have rather
its eggs in the IPO basket, or whether it is smarter to initiate a
sought to make their obligation to consummate the transaction
dual-track process – combining the IPO exit with either a struc-
conditional upon receiving required financing, without having
tured or a private (bilateral) sales process. Such a process may
to pay any form of fees to the sellers. To what extent sellers
either be a “true parallel” (where both routes run parallel and
are willing to accept such conditions normally depends on the
the ultimate decision is deferred to final stages), “staggered”
market situation and the respective parties’ bargaining positions.
(where the M&A process front-runs the IPO process and the
Such financing out conditions/clauses have not disappeared in
ultimate decision is made after receipt of second round bids),
today’s market, but sellers tend to resist these types of conditions.
or an “IPO-led hybrid” (where both routes’ preparation and
Over the last few years, we have observed that the use of
progress is dictated by the IPO timeline). The process of pref-
reverse break fees is on the rise (albeit very slowly), and whereas
erence notwithstanding, the obvious advantages of initiating a
virtually no M&A transactions in the Norwegian market
dual-track process is a better understanding of market value and
included reverse break fees a few years ago, our PE clients have
investor/buyer universe, increased flexibility, and reduction of
regularly, during the last few years, enquired about its feasibility.
transactional risk – each track is effectively the fail-safe of the
The amount of a reverse break fees is largely a matter for
other. On the reverse comes added and often concurrent work
negotiation and will therefore vary in each individual transac-
streams, prolonged timelines, the inherent risk of prematurely
tion. Typically, however, the fees are agreed at a fixed amount
deviating from the dual-track (which may cause internal fric-
in the range of 1% to 2.5% of the transaction value.
tion and stoppages) and, of course, the additional advisor costs.

72 Transaction Terms: IPOs

7.2 What customary lock-ups would be imposed on
private equity sellers on an IPO exit?
7.1 What particular features and/or challenges should
a private equity seller be aware of in considering an IPO
exit? Although significant variations may apply, Managers are
normally subject to a 180-day lock-up period from listing (the
From a PE perspective, three main considerations guide the last couple of years we have seen examples as high as 360 days).
determination of whether an IPO exit is the right choice. The Lock-up periods for co-investing management are somewhat less
first, which goes to the very nature of the PE model, is whether common, but, if imposed, tend to range in the region of 360 days.
the PE fund through an IPO exit achieves the best possible price
for its shares, while at the same time reducing its exposure (share- 7.3 Do private equity sellers generally pursue a dual-
holding) to an acceptable level. A successful IPO often requires track exit process? If so, (i) how late in the process are
that investing shareholders receive a discount of between 10% private equity sellers continuing to run the dual-track,
and 15% on the regular trading price, and the PE fund seldom and (ii) were more dual-track deals ultimately realised
through a sale or IPO?
manages to offload 100% of its shareholding. A clear strategy
for continued ownership is thus imperative, especially consid-
ering that a larger shareholder’s planned/impending sale (typi- PE sellers’ preferences for dual-track processes are generally
cally upon expiry of relevant lock-up periods) will put substan- subject to equity market momentum (i.e. that the capital market
tial negative pressure on the share price. Another key element may offer superior valuation to M&A alternatives) but where
in terms of achieving the best sales price will be the formulation an IPO valuation could be close to LBO valuations, and where
of a powerful equity story, which, in essence, is the sales pitch the lead buyer(s) is less clear. Under such circumstances, dual-
and reasoning why investors should pick up the share. For PE track exit processes are used to maintain flexibility, to help
funds, the equity story highlights the strong sides of the target in maximise valuation and for de-risking a potential IPO. Dual-
a growth perspective, with focus on a high appreciation potential track exit processes allow the sellers maximum visibility, and
– the value perspective, accentuating expectations of low appreci- the decision on the M&A track should be resolved a short time
ation and high dividends is normally not relevant for PE-backed ahead of launching the company’s intention to float (“ITF”)

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162 Norway

since investors do not focus during pre-deal investor educa- from NOK 127 billion new issued bonds for 2021 to NOK 52
tion sessions until clarity on the winning track is announced. billion new issued bonds for 2022.
Consequently, a second round M&A process will normally run
parallel to research drafting under the IPO track. The deci-
8.2 Are there any relevant legal requirements or
sion on the winning track is often taken shortly before road- restrictions impacting the nature or structure of the debt
show launch under the IPO track. Whether dual-track deals financing (or any particular type of debt financing) of
are ultimately realised through a sale or IPO depends on the private equity transactions?
momentum in the equity markets; however, during the last
few years, these deals have often materialised in a sale, while
As of 1 January 2020, certain further easing of the Norwegian
throughout 2020 and 2021 this trend shifted. During 2020 and
financial assistance prohibition rule has been adopted (see below).
2021, we observed a significant increase in dual-track processes As a general rule, the Norwegian public and private LLCs have
being materialised in an IPO, in particular on Euronext Growth been prohibited from providing upstream financial assistance in
Oslo (formerly Merkur Market). However, at the end of 2021 connection with the acquisition of shares in a target company
and throughout 2022, this trend came to a halt, with declining (or its parent company). This prohibition prevented Norwegian
stock market prices. Nevertheless, entering 2023, we have seen target companies from participating as co-borrowers or guar-
a few attempts of dual-track processes being launched. antors of any acquisition-financing facilities. However, in prac-
tice, there have always been a number of ways to achieve at least
82 Financing a partial debt pushdown through refinancing the target compa-
ny’s existing debt, which should not be regarded as a breach of the
8.1 Please outline the most common sources of debt prohibition against financial assistance.
finance used to fund private equity transactions in your Effective from 2013, the Norwegian Parliament introduced a
jurisdiction and provide an overview of the current state type of “whitewash” procedure, allowing both public and private
of the finance market in your jurisdiction for such debt target companies to provide financial assistance to a potential
(including the syndicated loan market, private credit buyer of shares in such target (or its parent company), provided,
market and the high-yield bond market).
inter alia, such financial assistance did not exceed the funds avail-
able for distribution of dividend. Such financial assistance had
Norwegian LBOs generally involve bank debts as the main to be granted on normal commercial terms and policies, and the
source for financing in the form of term loans and a revolving buyer also had to deposit adequate security for his obligation to
credit facility. In large transactions, the senior loan will be repay any financial assistance received from the target.
governed either by Norwegian or English law, with one bank The rule’s requirement for depositing “adequate security” for
acting as an agent for a lending syndicate. In such syndicated the borrower’s obligation to repay any upstream financial assis-
transactions, the senior loan agreements used are normally tance provided by a target in connection with M&A transactions
influenced by the forms used internationally, in particular the would, however, mean that it was quite impractical to obtain
standard forms developed by the Loan Market Association. A direct financial assistance from the target company in most
typical leveraged PE structure may, depending on the size of LBO transactions, due to the senior financing banks’ collateral
the target, contain several layers of debt. Historically, it was requirements in connection with such deals. The reason for this
quite common to use a combination of senior facilities and was that the banks normally request extensive collateral pack-
mezzanine facilities, whereby security is granted to a security ages, so that, in practice, there would be no “adequate security”
agent. In certain circumstances, the mezzanine debt was also left or available from the buying company (or its parent company)
issued in combination with warrants to purchase equity in the for securing any financial assistance from the target group, at
target. However, due to the severe hit mezzanine investors least for the purchase of the shares. With effect from 1 January
faced during and after the credit crunch, it became difficult to 2020, this situation has changed.
obtain such financing at reasonable prices, and many Sponsors First, provided the target company is a Norwegian ASA-
started to consider mezzanine financing too expensive. Over Company, an exemption from the dividend limitation rule is
the last eight years, mezzanine financing has rarely been seen in implemented. This exemption rule will, however, only apply if the
the Norwegian market for new transactions. One of the more bidder (as borrower) is domiciled within the EEA area and is part
important reasons for this change has been the development of a of or, after an acquisition of shares, will form part of a group with
very buoyant Norwegian high-yield bond market, which largely the target company. In such latter situations, the financial assis-
substituted the traditional mezzanine facilities. Such transac- tance may now also exceed the target company’s funds available
tions would typically involve “bridge-financing commitments” for distribution of dividend. This group exemption will, however,
pursuant to which either a bank or a mezzanine provider agrees not apply if the target company is a Norwegian ASA-Company.
to provide “bridge” loans in the event that the bond debt cannot Second, the requirement for the buyer (as borrower) to provide
be sold prior to completion. Due to a rapid decline in oil prices “adequate security” for its repayment obligation is no longer an
during 2014 and 2015, the Norwegian high-yield bond market absolute condition for obtaining such financial assistance from
took a severe hit from October 2014 and onwards throughout the target company. That said, due to the requirement that such
most of 2016. Since the start of 2017 and throughout 2019, the financial assistance has to be granted on normal commercial
Norwegian high-yield bond market improved significantly, at terms and policies, it cannot be completely ruled out that a bidder,
least within certain selected industries. At the start of 2020, in the future, may still have to provide some sort of “security” for
Norway was hit by COVID-19 and the high-yield bond market being allowed to obtain financial assistance from a Norwegian
closed down for a period. However, during the summer of target company. Nevertheless, provided that it can be argued the
2020, the high-yield bond market started to improve and has acquisition being in the target company’s best interest and such
returned more or less to its pre-pandemic status. Since 2022, financial assistance can be justified in absence of any security,
the Norwegian bond market remains turbulent, with interest after 1 January 2020, it is now possible for a target company to
rates and credit spreads rising sharply. The Norwegian high- grant financial assistance to a bidder without such security.
yield market continued to decrease throughout 2022, dropping Any financial assistance must still be approved by the general
meeting, resolved by at least two-thirds of the aggregate vote cast

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 Aabø-Evensen & Co 163

and the share capital being represented at the meeting (unless bridge financing for investments, ultimately financed from
otherwise required by the target company’s articles of association). capital contributions from the limited partners of the PE funds.
In addition, the board must ensure that a credit rating report of the
party receiving the financial assistance is obtained and, also, that 92 Alternative Liquidity Solutions
the general meeting’s approval is obtained prior to any financial
assistance actually being granted by the board. The board shall
9.1 How prevalent is the use of continuation fund
also prepare and execute a statement, which must include: (i) infor- vehicles or GP-led secondary transactions as a deal type
mation on the background for the proposal of financial assistance; in your jurisdiction?
(ii) conditions for completing the transaction; (iii) the price payable
by the buyer for the shares (or any rights to the shares) in the target;
For the last couple of years, there has been an increase in the use
(iv) an evaluation about to what extent it will be in the target’s best
of so-called continuation funds also in the Norwegian market
interest to complete such transaction; and (v) an assessment of the
and, today, these funds are increasingly used by GPs to buy port-
effect on the target’s liquidity and solvency.
folio companies out of existing funds as they reach the end of
From 1 July 2014, Sponsors must also ensure that they observe
their lives, in order to hopefully extract additional value from
the anti-asset stripping regime that is set out in the Act on Alter-
those assets. These funds have been around for several years, and
native Investment Fund Managers (see question 10.2). These
used to be thought of as vehicles formed to restructure underper-
rules may limit the Sponsor’s ability to conduct debt pushdowns,
forming assets. The continuation vehicle is typically controlled
depending on the status of the target (listed or non-listed), the
by the same sponsor, while the pricing and terms of the transac-
number of employees in the target and the size of the target’s
tion are generally among and negotiated by the lead secondary
revenues or balance sheet.
buyers and the fund sponsor on behalf of the existing fund.
Further, it should be noted that the power of a Norwegian entity
Today, such funds now seem to have gained acceptance as a bona
to grant security or guarantees may, in some situations, also be
fide exit alternative alongside sales to strategic or financial buyers,
limited by the doctrine of corporate benefit. Under Norwegian
sales to special purpose acquisition companies (“SPACs”) or as
law, it is uncertain if a group benefit is sufficient when there is no
an alternative to an IPO. Recent examples of such trends include
benefit to the individual group company; for example, in connec-
Summa’s attempt to move Norwegian biowaste company Norsk
tion with such individual group company granting a guarantee or
Gjenvinning from its debut fund to a separate vehicle, as well
providing a security. Previously, it has been assumed that Norwe-
as Norvestor SPV II’s acquisition of NetNordic Holding AS,
gian companies are able to provide upstream and cross-stream
the Norway-based provider of broadband and telecommunica-
guarantees, provided that: (i) this will not jeopardise its contin-
tion solutions for businesses from Norvestor VII LP, the private
uing existence; (ii) its corporate objects are not transgressed by
equity fund of Norvestor Equity AS.
such transactions; (iii) it can be argued that such cross guaran-
tees benefitting the Norwegian company exist or that the relevant
group company receives any type of guarantee fees; and (iv) such 9.2 Are there any particular legal requirements or
guarantees and securities are not in breach of the financial assis- restrictions impacting their use?
tance propitiation. However, an amendment to the Companies
Acts from 2013 now indicates that a group benefit may be sufficient Continuation vehicle transactions raise an issue about the inherent
when issuing an intra-group guarantee, even if there is no direct conflict of interest, as both the selling fund and buying fund are
benefit to the individual group company issuing the guarantee. often entities controlled by the same GP. This creates govern-
Finally, PE funds’ use of various forms of shareholder loans ance and process questions that will need to be addressed. Typi-
and inter-company debt, supported by various intra-group guar- cally, the GP needs approval from its LP Advisory Committee of
antees in LBO transactions, could also trigger a need for the the existing fund before launching a continuation fund. Since
board to prepare special reports for the various group companies, the GP will be on both sides of the transaction, there will be a
and require such reports to be filed with the RBE in order to be requirement that the pricing agreed in the transaction is both
valid. This could turn out to be necessary unless such loans are fair and transparent. Typically, this is carried out by running an
entered into as part of the relevant subsidiaries’ ordinary course auction process or, alternatively, having an independent panel of
of business activity and contain prices and other terms that are experts provide a fair market valuation assessment in the form
normal for such agreements. In legal theory, it has, however, been of, inter alia, fairness opinions. It should be noted that Norway
argued that intra-group loan agreements entered into in connec- has implemented the EU Alternative Investment Fund Managers
tion with M&A transactions very often, must be considered to fall Directive (“AIFMD”), and that the Norwegian Act on the
outside the normal business activity of the respective company Management of Alternative Investment Funds contains, detailed
receiving such financing and, therefore, under all circumstances, conduct of business rules, including requirements on how the
falls within the scope of such reporting requirements. AIFM shall seek to prevent conflicts of interest from arising in
connection with the business, as well having in place procedures
8.3 What recent trends have there been in the debt- for the correct and independent valuation of assets of funds.
financing market in your jurisdiction? The GP should expect that any GP-led transaction could lead to
increased scrutiny from the Norwegian FSA.
For the last few years, we have started to see increased activity
from non-bank (alternative) lenders and funds that are offering 102 Tax Matters
to replace or supplement traditional senior secured bank loans.
The products these lenders are offering typically include term 10.1 What are the key tax considerations for private
loan B facilities, unitranche loans, etc. equity investors and transactions in your jurisdiction?
In addition, an increasing number of banks also seems willing Are off-shore structures common?
to offer PE funds so-called “capital call facilities”, “subscrip-
tion facilities” or “equity bridge facilities” to provide short-term Key tax considerations relating to Norwegian PE acquisitions
typically include: (i) quantification of the tax costs associated

Private Equity 2023

164 Norway

with the acquisition; (ii) management of tax charges of the target has profitable activities without the imposition of additional tax
group; (iii) exit planning (including a partial exit); and (iv) tax- costs such as WHT. Additional tax minimisation techniques
efficient compensation to the management of the target group. may also be used to manage the target group’s tax charge. Parts
Sponsors operating in the Norwegian market quite commonly of the PE fund’s investment may also be made in the form of
use offshore structures for achieving a tax-efficient acquisition shareholder loans, which may generate additional tax deductions,
structure. provided this can be structured in a way that current tax liabili-
ties are not imposed on the fund’s investors and Sponsors in some
Costs of acquisition form of phantom income.
No stamp duties, share transfer taxes or other governmental fees Historically, under Norwegian law, interest arising on related-
apply in connection with a share sale under Norwegian law. The party debt was considered deductible for tax purposes to the extent
tax treatment of transaction costs depends on whether these are that the quantum and terms of the debt was arm’s length in nature.
classified as costs for acquisitions/disposals, operating costs, or Over recent years, the Norwegian tax authorities have taken an
debt-financing costs. increasingly aggressive approach in challenging leveraged struc-
As a general principle, all transaction costs incurred directly tures; in particular by challenging the substance of non-Norwe-
in connection with an acquisition of shares should be capital- gian holding company structures, distributions out of liquidation
ised for both accounting and tax purposes with the acquired and the tax deductibility of interest on shareholder debt.
shares. The costs will be added to the tax base of the shares and From the income year 2014, rules limiting the deduction of
may therefore reduce any capital gain arising upon a subsequent net interest paid to related parties entered into force. The rules
disposal to the extent the disposal is not covered by the Norwe- aim to eliminate, or reduce the risk of, the Norwegian tax base
gian participation exemption rules. Note that, according to the being excavated as a result of tax planning within international
Norwegian participation exemption rule, Norwegian share- groups where the debt has been allocated to the Norwegian
holders that are limited companies, as well as certain similar group companies. Additional restrictions on interest deduc-
entities (corporate shareholders), are generally exempt from tax tions have been implemented later. The original limitation of
on dividends received from, and capital gains on the realisation related-party interest will exist in parallel with the new “group
of, shares in domestic or foreign companies domiciled in EEA rule” as a “separate entity rule”. Note that the “separate entity
Member States including the EU, Norway, Iceland and Liech- rule” also applies to a company within a group not subject to
tenstein. Losses related to such realisations are not tax-deduct- interest limitation due to the escape rules when interest is paid to
ible. Since normally both the target and BidCo used by the PE a related party outside of the group (typically where the related
fund will be LLCs domiciled in Norway, the acquisition costs in lender is an individual or a company not belonging to the consol-
connection with a share deal will not effectively be deductible idated group for accounting purposes).
under the current Norwegian tax regime. With effect from 1 January 2019, interest payable on bank
Notwithstanding the above, certain expenses incurred by a facilities and other external debt have also become subject to
company in connection with the ownership of shares/subsidi- a similar interest-deduction limitation regime, as interest paid
aries (i.e. costs for corporate management and administration, to “related parties” for companies within a “group”. The
strategy work and planning, marketing costs, financing costs, group definition includes all companies that could have been
restructuring costs, etc.) should be deductible on a current basis consolidated if the International Financial Reporting Stand-
for corporate tax purposes under Norwegian law. Broken-deal ards (“IFRS”) had been applied in the year prior to the fiscal
expenses that are incurred in connection with failed acquisi- year in question. In situations where a BidCo is used for an
tions of shares (typical expenses relating to due diligence) are acquisition, one should assume that the group rule will apply
not deductible for tax purposes. for limitation of the BidCo’s and its subsidiaries’ interest deduc-
In principle, costs of arranging the financing (i.e. fees in tion going forward, but possibly avoided in the year of acquisi-
connection with obtaining and maintaining debt, bank charges tion. Provided the BidCo was exempted from interest limita-
and associated advisory/legal fees) should be deductible on a tion, being part of a pure Norwegian group in the prior year or
current basis. It is important to distinguish between financing at the time of establishment in the current year, interest limita-
costs, which are considered interest for tax purposes, and other tion according to the group rule should not apply in the year it
financing costs, as interest costs are subject to the Norwegian becomes part of the acquiring fund group and the target group.
interest-deduction limitation regime (see below). However, However, interest limitation according to the separate entity
one may be able to avoid interest deduction limitation for an rule may still apply. Interest cost disallowed under the limita-
acquisition vehicle in the year of acquisition for external interest tion rules can be carried forward for 10 years, but subsequent
cost, provided the acquisition vehicle is purchased from a pure deduction is also dependent on capacity for interest deduction,
Norwegian group. inter alia, within 25% of taxable EBITDA.
The acquisition vehicle will, in addition, seek to maximise its The group rule applies if the deducted net interest expenses
recovery of VAT incurred in acquiring the target (particularly in exceed NOK 25 million in total for all companies domiciled in
relation to advisory fees). Generally, input VAT on advisory fees Norway within the same group. Where the threshold amount is
in relation to acquisition of shares is not recoverable/deductible exceeded, deductions are limited to 25% of taxable EBITDA on
for VAT purposes. a separate company basis. In order to calculate the effect of the
interest limitation rules, one can thus not base this on consoli-
Deductibility of interest dated accounts. It may thus be beneficial for a group to partly
In order to reduce the buyer’s effective tax rate, PE funds are refrain from deduction of interest expenses to avoid exceeding
desirous to offset the interest costs on the acquisition debt the threshold.
against the operating target group’s taxable profit. Conse- The interest limitation rules applicable to group of companies
quently, the acquisition structure is normally established to have two escape rules allowing deduction of interest payments
maximise the amount of financing costs that can be offset despite the group rule. Under the first rule, which applies to each
against the operating profit of the target group. Where the Norwegian company in a group separately, the equity ratio in
target group is multinational, the fund will also desire that the balance sheet of the Norwegian company is compared with
interest costs can be “pushed down” into the jurisdiction that the equity ratio in the consolidated balance sheet of the group.

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 Aabø-Evensen & Co 165

A group company established in the fiscal year or a surviving the contributing and receiving entities must be corporate entities
company in a merger during the fiscal year cannot apply this taxable in Norway, an ultimate parent company must hold more
rule to obtain interest deduction. Under the second escape rule, than 90% of the shares and voting rights of the subsidiaries (either
which applies to the Norwegian part of the consolidated group directly or indirectly) at the end of the parent’s and the subsidi-
as a whole, the equity ratio for a consolidated balance sheet of aries’ fiscal year, and the companies must make full disclosure of
the Norwegian part of the group is compared with the balance the contribution in their tax returns for the same fiscal year.
sheet of the group. In both cases, the Norwegian equity ratio Norway has introduced WHT on interest payments to related
must be no more than two percentage points lower than the parties in low tax jurisdictions. Withholding tax applies to
equity ratio of the group as a whole. An effect of the second rule payments of interest from 1 July 2021 at a rate of 15%. Compa-
is that a group with Norwegian companies only would not be nies are considered related if there is a direct or indirect owner-
subject to interest limitation under the group rule. Companies ship interest between them of at least 50% or if a company has
qualifying for the equity escape clauses may deduct net interest a direct or indirect ownership interest in both the payer and
expenses in full, except for interest expenses to related parties the creditor of at least 50%, at any time during the fiscal year.
outside of the group. Several adjustments have to be made to In short, a country where the effective income taxation of the
the balance sheet of the Norwegian company or the Norwegian company’s profits is less than two-thirds of the effective taxa-
part of the group when calculating the equity ratio. If different tion that would have been due had the company been resident in
accounting principles have been applied in the local Norwegian Norway, would be considered a low-tax jurisdiction. However,
accounts and group accounts, the local accounts must be aligned a review of general tax level in the potential low-tax jurisdiction
with the principles applied in the group accounts. Further, is also required to conclude on the country’s status.
goodwill and badwill, as well as other positive or negative excess Exemptions from withholding tax on interest apply if a
values in the group accounts relating to the Norwegian company reduced rate follows from a tax treaty. Further, there are also
or the Norwegian part of the company group, must be allocated several general exemptions, inter alia, for payments to compa-
to these entities. The local balance sheets must also be adjusted nies that are genuinely established and conduct real economic
for intra-group shares and claims that are consolidated line by activity in the EEA, to a Norwegian branch of a foreign
line in the group accounts. Shares in and claims against such company taxable in Norway and for interest taxable under the
group companies shall be set off against debt and total assets Norwegian petroleum tax act.
when calculating the group’s equity ratio. The adjusted group
accounts and the adjusted local accounts for the Norwegian Distributions of dividends
company or the Norwegian part of the group, must be approved Normally, in a typical LBO, it will not be envisaged that any divi-
by the companies’ auditor. dends will be made by the Norwegian holding company struc-
The “separate entity rule” only applies if the net interest expenses ture during a PE fund’s investment period, except in respect of
(both internal and external) exceed NOK 5 million. This rule potential partial exits. However, in the event that distributions
caps the interest deductions on loans from related parties only from the Norwegian holding company structure are required
(which do not constitute a group under the above rule) to 25% of prior to exit, Norwegian WHT on dividends will need to be
the borrower’s “taxable earnings before interest, tax, depreciation, considered. The applicable WHT rate depends on the respective
and amortisations”. The term “related party” covers both direct tax treaties and (typically) on the foreign shareholder’s ownership
and indirect ownership or control, and the minimum ownership percentage in the Norwegian holding companies. Norway has
or control required is 50% (at any time during the fiscal year) of a broad network of tax treaties that reduce the ordinary WHT
the debtor or creditor. Also, a loan from an unrelated party (typi- rate of 25%. It should be noted that Norway has implemented
cally a bank) that is secured by a guarantee from a related party the OECD multilateral instrument for avoidance of base erosion
that is not a group company (inter alia, a parent company guar- and profit shifting, introducing a principal purpose test in many
antee) will also be considered a related-party loan under this rule. treaties. All existing treaties should be considered carefully, to
Negative pledges provided by a related party in favour of a third- analyse their current status when relying on treaty protection.
party lender are not deemed as security within the scope of the Under domestic legislation, no WHT is imposed on divi-
interest limitation rule. Also, where a related party has a claim dends or liquidation dividends paid by a Norwegian LLC to an
against a non-related lender and the interest-bearing loan from the EEA resident corporate shareholder, provided the shareholder
non-related lender is connected with such a claim, the loan can be is genuinely established and conducts real business activity in
deemed a related-party loan. the relevant jurisdiction. Furthermore, the EEA resident corpo-
It should also be noted that the acquisition vehicle itself rate shareholder must be comparable to a Norwegian LLC. In
would normally have no taxable profits against which to offset this context, an assessment must be performed to determine
its interest deductions. Therefore, it is critical for the Norwe- whether the company is genuinely established pursuant to a busi-
gian holding companies in the acquisition structure to be able ness motive and that the establishment is not purely tax moti-
to offset its interest expenses against the possible profits gener- vated. The assessment will differ according to the nature of the
ated by the target’s operations. Norwegian companies cannot company in question, and it is assumed that the assessment of a
file consolidated tax returns or form fiscal unities, but a transfer trading company and a holding company will not be the same.
of taxable income within an affiliated group of Norwegian enti- If such criteria are not met, then the WHT rate in the applicable
ties is possible through group contributions. Group contribu- double-taxation treaty for the relevant jurisdictions involved will
tions allow a company to offset taxable profits against tax losses apply. Also note, if such a foreign holding company is considered
in another Norwegian entity in the same fiscal year by transfer- an agent or nominee for another real shareholder (not a legal and
ring funds or establishing an account receivable. It is possible economic owner of the dividends) or a pure conduit company
to grant more group contribution than taxable income, but the without any autonomy to decide what to do with its income, the
grantor company will not be able to deduct the excess amount. Norwegian tax authorities may apply the default 25% WHT rate
This excess amount, which is not deductible for the grantor, (i.e. not accept treaty protection). Foreign buyers of Norwegian
would equally not be taxable for the recipient. The distribut- assets should thus be cautious when setting up acquisition struc-
able reserves form the limit for total group contribution and tures and also include tax reviews of any prior holding structures
dividend distribution. In order to enable group contributions, when conducting due diligence.

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166 Norway

Paid-in capital is an individual tax position for the share- that, in particular, foreign PE funds require that members of
holders. A foreign holding company that has paid in a premium the Investing Management accept an appropriate indemnity in
to an acquisition vehicle can repay such paid-in capital with no the shareholders’ agreement to cover any potential employment
risk of dividend WHT. In case of a dividend distribution where tax obligations arising as a result of the Investing Management’s
there is a risk for WHT, a shareholder with paid-in capital as equity investment.
a tax position can opt to allocate the distribution to its indi- Any employment taxes arising because of the Investing
vidual paid-in capital account, thereby avoiding dividend WHT. Management obtaining shares at a discount must be reported to
When setting up a Norwegian BidCo, one should thus register the Norwegian tax authorities immediately after the transaction
a limited amount as nominal share capital and the remaining in the relevant tax period and the employer would be obliged to
equity as paid-in premium, to allow for tax-exempt distributions withhold salary taxes from the employee’s cash salary.
during the holding period, inter alia, in a partial exit.
It should also be noted that dividends received by a Norwe-
10.2 What are the key tax-efficient arrangements that
gian company on business-related shares in group subsidiaries are typically considered by management teams in private
within the EEA held directly or indirectly with more than 90% equity acquisitions (such as growth shares, incentive
inside the EEA are exempt from Norwegian corporate tax on the shares, deferred / vesting arrangements)?
part of the receiving corporate shareholders. However, 3% of
the received dividends are subject to taxation for corporate share-
The most common tax-efficient arrangement considered by
holders holding not more than 90% of the shares. This entails
management teams in PE portfolio companies is to struc-
an effective tax of 0.66%. This rule should level the benefit
ture the managements’ equity participation via private holding
that shareholders are allowed tax deduction for ownership costs
companies to benefit from the Norwegian participation exemp-
incurred on shares subject to participation exemption. Under the
tion rule. This would allow for a tax-exempted rollover at a
Norwegian generally accepted accounting principles (“GAAP”),
later sale or deferred taxation of the capital gain until manage-
dividends received from wholly owned subsidiaries can be recog-
ment distribute the capital gains from their holding companies.
nised in the accounting year the dividend is based on, hence
Under Norwegian law, arrangements such as growth shares and
making the basis for a distribution from the parent company in
deferred/vesting arrangements may entail a risk that parts of
the same accounting year. This may allow for a tax-effective and
any capital gains will be subject to employment income tax and
quick cash flow to handle bridge financing in an acquisition.
social security unless it can be documented that the shares were
acquired or subscribed for at fair market value. If, however,
Exit planning
such securities are considered discounted, such discount will be
In general, it is of vital importance to PE funds that all poten-
chargeable to income tax at the relevant employee’s marginal
tial exit scenarios are anticipated and planned for when formu-
tax rate and will be subject to social security tax. Generally,
lating the final acquisition structure. Norway does not impose
arrangements initiated by the principal or the employer, which
dividend WHT on liquidation dividends. However, the advisors
reduce the risks for the Investing Management, increase the risk
need to consider a full exit, partial exit, IPO, etc.
of reclassifying capital gains to salary for the management. As
As described above, the ultimate parent company in the acqui-
this would both increase the tax burden and social security obli-
sition structure will quite often be a foreign entity. Foreign-dom-
gations for the management and the employer, diligent planning
iciled carried interest holders are thus able to benefit from the
should be in place for any management incentive plans.
remittance basis of taxation in respect of carried interest distribu-
No similar rules to the UK “entrepreneurs’ relief” exist under
tions arising from an exit. That being said, it is nevertheless critical
Norwegian law. International PE funds may still want to struc-
that any exit can be structured in such way that it does not trigger
ture their management investment programmes in Norwegian
any WHT or other tax leakages and, where possible, that any exit
portfolio companies to meet the conditions for such relief in
proceeds can be taxed as capital gains for investors, carry holders
case existing or future members of the Investing Management
and management. As described earlier, Luxembourg holding
team would qualify for such relief due to their current tax domi-
companies (“LuxCo”) are often used to achieve such objectives.
cile. Some limited tax incentive schemes are available for the
discounted acquisition of shares, with options for employees
Executive compensation
to acquire shares in the employing company. For Norwegian
In addition to receiving salaries, which under Norwegian law is
employees, a capital gain made at sale or excise of options granted
subject to income tax and national insurance contributions in
by the employer would be treated as salary for tax purposes.
the normal way, members of the target’s management team (the
However, as of 2022, a new rule for taxation of options granted
Investing Management) will normally also be offered an oppor-
to employees in start-up or growth phase companies has been
tunity to subscribe for shares in a BidCo. To the extent that the
enforced by the Norwegian Parliament. Subject to various limi-
Investing Management pays less than the market value of such
tations, there shall be no taxation at grant of such options or at
shares, this could give rise to an employment tax charge (see
exercise, and there will be ordinary capital gain taxation when
question 2.3). As employers’ contributions to the social secu-
the shares are sold. This means that any capital gain is taxed at
rity tax are deductible, the effective rate for the employer should
a rate of 37.84% and a loss is deductible, rather than taxable as
be lower than the standard 14.1%. Normally, the PE fund
salary at a marginal rate of 47.4%. Hence, the new rule provides
will split its investment between ordinary equity and preferred
a more beneficial tax treatment than the former tax rules, which
equity or debt, while the Investing Management invests in
simply provided a beneficial timing of income and taxation only.
ordinary shares. As a result of this, the ordinary shares will
There are also transitional rules that allow options granted
normally have a low initial market value, but with the potential
under the former regime to be transferred into the new regime.
to appreciate significantly if the acquired business generates the
For an employer to grant options under this tax rule, it must be a
PE fund’s desired IRR. In order to avoid accusations that the
limited liability company with an average of 50 (or fewer) of full-
Investing Management were allowed to subscribe their shares at
time employees, and a total account balance of NOK 80 million
a price lower than market price, it is fairly normal that the value
or less in the income prior to the grant (employees and balances
of the Investing Management’s shares is confirmed by a valua-
in other group companies inclusive). The company cannot be
tion carried out post-acquisition. Further, it is not uncommon

Private Equity 2023

 Aabø-Evensen & Co 167

older than 10 years, including the year of grant, and detailed financial instruments will be acquired may affect the income tax
rules apply to companies that have been subject to restructur- treatment of such instruments. Links that are too close to the
ings. Governmental bodies cannot own or vote for 25% or employment can lead to the re-characterisation of the income/
more of the total capital and votes in the company. There are gains from such instruments. For more issues, please see ques-
also a number of limitations on which industries the company tions 2.3 and 10.1.
may be involved in, and the company could not be in financial
stress, etc. at the time of granting the options. Further, there
10.4 Have there been any significant changes in tax
are detailed rules on which employees are eligible, e.g. employees legislation or the practices of tax authorities (including
must have at least a 25-hour work week and cannot have owned in relation to tax rulings or clearances) impacting private
or controlled 5% or more of the capital or votes in the company equity investors, management teams or private equity
the last two years. The latter limitation also applies for the transactions and are any anticipated?
group of companies if the employer is part of a group. Finally,
there are several limitations on the options to qualify: only There are no explicit Norwegian tax regulations regarding
shares in the employing company can be acquired; the options distribution of carried interest to Managers in exchange for
cannot be transferred as a gift, by heritage or any other way; the their services. Only when there is a strong connection between
strike price cannot be lower than fair market value of the shares Norwegian resident active owners’ personal labour contribution
at grant; and vesting time cannot be shorter than three years or and the Carry, can the Carry be taxed as salary. Provided that the
longer than 10 years. Finally, there is a limitation on the total profit in its nature is a result of the ownership and the increased
value of underlying shares of NOK 60 million at grant and a value is not solely a result of the Managers’ personal work, there
single employee cannot receive options with an underlying value is not sufficient connection to reclassify capital gains to salary.
of NOK 3 million at grant. This was broadly laid down in the Supreme Court ruling in
2015. The tax authorities continue challenging Managers and
10.3 What are the key tax considerations for general partners and claim that carried interest to management’s
management teams that are selling and/or rolling-over holding companies can be taxed as operating income subject
part of their investment into a new acquisition structure? to corporate tax at 22% rather than tax-exempted capital gains
on shares. Such a view was recently also supported by a deci-
The key tax considerations for the Investing Management sion from the court of appeals and now appears to be generally
selling and/or rolling over part of their investment into a new accepted in the market. Further, reallocation of carried interest
acquisition structure, include: between the general partners and the Manager based on general
■ Rollover relief: transfer pricing principles is also an issue that the tax authorities
■ For individual shareholders, as a starting point no follow up where there are different tax consequences.
statutory rollover relief exists that allow shares to Introduction of the principal purpose test (“PPT”) and simpli-
be exchanged for shares without crystallisation of a fied limitation of benefits (“LOB”) in the tax treaties with respect
capital tax charge. to dividend WHT may have impact on some structures; however,
■ If the Investing Management has invested through under the prevailing structure in Norway (which is the Luxem-
a separate holding company or pooling vehicle, the bourg holding structure with certain substance in Luxembourg),
Norwegian participation exemption rule will allow the WHT exemption should still generally rely on the EEA
rolling over the whole or part of such investment into exemption for corporate shareholders that are not established as
a new acquisition structure without triggering capital wholly artificial arrangements for the purpose of avoiding tax. A
tax charges. review of the current tax status should nevertheless be carried out
■ Subject to certain conditions being fulfilled, a rollover prior to a distribution of dividends from Norwegian companies.
relief could be achieved in cross-border transactions In addition to introducing interest WHT as described above,
also for individual shareholders. WHT on interest and certain rental payments was also intro-
■ Exchanging shares for loan notes: duced and has been effective from 1 October 2021. Such WHT
■ For individual shareholders, this will not qualify for can be imposed on payments to related parties, i.e. if there is a
rollover relief, and will attach a tax charge. direct or indirect ownership interest between them of at least
■ If the selling management team’s investment is struc- 50%, or if a company has a direct or indirect ownership interest
tured through separate holding companies or a in both the payer and the creditor of at least 50%, at any time of
pooling vehicle, exchanging shares for loan notes will, the fiscal year. Only payments to related parties in in low tax
under the Norwegian participation exemption rule as jurisdictions will be subject to such taxation. Taxable payments
a starting point, not trigger any tax charges. are to be taxed at 15% (gross). Exemptions apply, inter alia, if a
Other key issues that need to be considered are: to what extent reduced rate follows from a tax treaty or the recipient is genu-
will any members of the team be subject to tax if the target or the inely established in the EEA and carries out real economic activ-
PE fund makes a loan to members of the team to facilitate the ities in an EEA country.
purchase of equity? Will tax and social security contributions be Effective from 2020, Norway introduced a statutory general
due if such loans are written off or waived by the lender? Loans anti-avoidance rule (“GAR”). This was, in many respects, legis-
from a Norwegian company to any of its direct or indirect share- lation on the previous non-statutory anti-avoidance doctrine. It
holders being private individuals holding more than 5% of the is thus important to consider the risk for disallowance of losses
shares in the company (or to such shareholders’ related parties) or reclassification of transactions where intermediary transac-
will be taxed as dividends on the part of such individual share- tions are carried out for the purpose of saving taxes. However,
holder (see question 9.4). Nevertheless, the taxed amount will carrying out a tax-exempted demerger followed by a tax-exempted
increase the shareholder’s individual paid-in capital position and sale of shares of the demerged company is still generally consid-
can be distributed as a dividend subsequently without taxation. ered possible.
The Investing Management must also consider if any restric- Due to the COVID-19 pandemic, the Norwegian Parliament
tions to the transferability and other terms at which new shares/ passed a number of temporary adjustments to the tax legislation,

Private Equity 2023

168 Norway

in order to ease the consequences of locking down many busi- days if and when the fund’s shareholdings in a target either reach,
ness areas. These adjustments mainly involve the postponement exceed or fall below 10%, 20%, 30%, 50% or 75%. The third
of reporting and payments of taxes. point of interest, legislated through the Act, is that a Manager,
The most important changes in tax regulations proposed in during the 24-month period following acquisition, more or less
2023 include increasing the taxation of income from natural is prohibited from facilitating, supporting or instructing any
resources, introducing, i.a., ground rate tax for land-based wind distribution, capital reduction, share redemption or acquisition
power and for the aquaculture industry. The final ground rate tax of own shares of the target (portfolio company) (the so-called
rate for the aquaculture companies ended at 25% (in addition to “anti-asset stripping” rules). The foregoing applies if either:
ordinary income tax of 22%), effective from 2023. The ground (a) the target’s net assets, pursuant to the last annual accounts
rate tax for land-based wind power has been postponed to 2024. are, or following such distribution would become, lower than
the amount of subscribed capital plus reserves that cannot be
112 Legal and Regulatory Matters distributed subject to statutory regulation; or (b) such distribu-
tion exceeds the target’s profit for the previous fiscal year plus
any subsequent earnings/amounts allocated to the fund, less any
11.1 Have there been any significant legal and/or
regulatory developments over recent years impacting losses/amounts that must be allocated to restricted funds subject
private equity investors or transactions and are any to statutory regulation. It should also be noted that the above
anticipated? anti-asset stripping provisions will apply to such fund’s acqui-
sitions of listed target companies irrespective of the number
The AIFMD was implemented in Norwegian law on 1 July 2014 of employees, size of revenue or balance sheet for such listed
(the “Act”), and applies to Managers of all collective investment targets. Anti-asset stripping provisions could, to an extent,
vehicles (irrespective of legal structure, albeit not UCITS funds) affect a PE fund’s ability to conduct debt-pushdowns in connec-
that call capital from a number of investors pursuant to a defined tion with LBOs going forward.
investment strategy (alternative investment funds (“AIF”)).
There are two levels of adherence under the Act. The first is a 11.2 Are private equity investors or particular
general obligation to register the AIF Manager with the Norwe- transactions subject to enhanced regulatory scrutiny in
gian FSA and provide the agency with information, on a regular your jurisdiction (e.g., on national security grounds)?
basis, regarding: the fund’s investment strategy; the main cate-
gory of instruments it invests in; and the largest engagements and Norway has, as in many other countries, tightened its grip on
concentrations under its management. Failure to comply with national security reviews of foreign direct investments, by
these reporting requirements may induce the Norwegian FSA to implementing a new National Security Act, granting the govern-
demand immediate rectification or impose a temporary ban on ment powers to intervene and stop acquisitions of shares in a
the Manager’s and the fund’s activities. The foregoing applies company holding investments in sectors considered vital from
to all AIFs, whereas the second level of adherence (see below) a Norwegian national security perspective. It is therefore
only applies to funds that have either (a) a leveraged investment expected that PE investors’ investments within such sectors or
capacity exceeding €100 million, or (b) an unleveraged invest- particular transactions within such sectors in the near future
ment capacity exceeding €500 million, and where its investors do could become subject to enhanced scrutiny by the Norwegian
not have redemption rights for the first five years of investment. government, even if this so far has not been very prevalent in
Where an AIF exceeds these thresholds, the Manager must, in the Norwegian market.
addition to the reporting requirements above, obtain authorisa-
tion from the Norwegian FSA to manage and market the fund’s
11.3 Are impact investments subject to any additional
portfolio, herewith conducting its own risk assessments, etc.
legal or regulatory requirements?
From a transactional point of view, and particularly with
respect to obligations for PE actors operating in the Norwe-
gian market, the Act stipulates the following points of particular From 1 January 2023, the mandatory disclosure and reporting
interest: the first is disclosure of control in non-listed compa- obligations under the Sustainable Finance Disclosure Regula-
nies, and stipulates that if a fund, alone or together with another tion (“SFDR”) and the Taxonomy Regulation have been imple-
AIF, acquires control (more than 50% of votes) in a non-listed mented into Norwegian law. These new rules will contribute
company with 250 or more employees and either revenues to standardising ESG disclosures. The SFDR introduces statu-
exceeding €50 million or a balance sheet exceeding €43 million, tory disclosure requirements also for registered alternative fund
the Manager must, within 10 business days, inform the Norwe- managers. These rules also introduce certain statutory invest-
gian SFA. Exempt from the foregoing are acquisitions of compa- ment restrictions on alternative investment fund managers,
nies whose sole purpose is ownership or administration or real provided they elect to manage or market funds that are so-called
property. The notification must include information about Article 8 or 9 funds, meaning funds that promote environ-
when and how control was acquired, shareholdings and voting mental or social characteristics (light green) and/or funds that
rights of the target, any planned undertakings to avoid poten- have sustainable investment as their objective (dark green).
tial conflicts of interest and planned communication strategy
vis-à-vis investors and employees. The target and its residual 11.4 How detailed is the legal due diligence (including
shareholders shall also be informed about the fund’s strategic compliance) conducted by private equity investors prior
plans and how the acquisition may potentially affect employees. to any acquisitions (e.g., typical timeframes, materiality,
Please note that the same disclosure requirements, according scope, etc.)?
to the rules, also apply if an AIF acquires control of a listed
target company, irrespective of, inter alia, such target company’s In a structured process, PE investors tend to limit diligence
number of employees, revenues and balance sheet. Secondly, scope and timeframe (i.e. only key issues/areas of interest) and
and ensuing an acquisition described above, the Manager is only request a very limited and preliminary “red-flag” legal
under duty to inform the Norwegian SFA within 10 business due diligence report on the target. This is simply an economic

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 Aabø-Evensen & Co 169

(cash-saving) approach, allowing the fund to show interest and liable for its own acts and omissions – i.e. a Norwegian court
get to know the target more intimately without “burning cash” of competent jurisdiction will only pierce the corporate veil in
on what may turn out to be an uninteresting or too costly object. exceptional circumstances.
If the fund is invited into the final bid round of an “auction” From this general point of basis flows certain limited, but
process, and provided only few bidders remain in contest, the dili- important exceptions, namely that a parent company or a
gence field is opened up, and PE funds normally ask its advisors controlling shareholder may be held independently liable for
to prepare a more complete diligence report on legal, financial, its subsidiary’s liability if it has contributed to a wrongful act
commercial and compliance matters. Further, on compliance through a controlling interest in the company (see question 3.6).
diligence, see question 11.5. The level of scope, materiality, etc. For practical purposes, such liability can be divided into “crim-
will depend on certain associated factors, like whether the fund inal liabilities” and “civil liabilities”.
has obtained exclusivity, whether the target is reputable or other- The criminal liabilities category includes anything that a port-
wise familiar to the investors, the equity, debt and liability history folio company may do or refrain from doing, which carries the
of the target, the prevailing M&A market (to some extent, the potential risk of criminal prosecution. In respect of publicly
warranty catalogue reflects the diligence process), and so forth. listed companies, and thus relevant in relation to IPO exits or
PE funds normally always engage outside expertise to conduct public-to-private transactions, such “criminal liability” may arise in
diligence in connection with LBO transactions. This will connection with market manipulation (undertaken in order to arti-
normally also be a requirement from the senior banks in order ficially inflate or deflate the trading price of listed shares), insider
to finance such transactions. Even if the fund has in-house dealing or violation of relevant security trading regulations (e.g. wilful
counsel, outside expertise is engaged so that the fund’s invest- misrepresentation or omission of certain information in offer
ment committee can make informed decisions on the basis of documents). If a portfolio company violates such regulations,
impartial, qualified and independent advice. and its PE investor (either on its own, through the violating port-
folio company or through another portfolio company) transacts
in securities affected thereby, there is a tangible risk that the PE
11.5 Has anti-bribery or anti-corruption legislation
impacted private equity investment and/or investors’ investor will be identified with its portfolio company (i.e. the
approach to private equity transactions (e.g., diligence, shareholder should have known), and thus held liable for the same
contractual protection, etc.)? transgression(s).
In the category of “civil liability” (meaning that liability
usually is limited to fines or private lawsuits), the same consol-
In our experience, particular Pan-European and global funds
idation (identification) rules may come to play if a portfolio
have, in the last few years, increased their focus on and concerns
company violates, e.g. applicable antitrust or environmental
about regulatory and compliance risk in their diligence exercises.
legislation. Over recent years, we have seen very few, but
For some of these funds, it has become standard to request legal
disturbing, examples of decisions by Norwegian courts in which
advisors to prepare separate anti-bribery reports to supplement
it was ruled that environmental liability of a subsidiary (unable
the regular diligence report, often also accompanied by a sepa-
to remedy the situation on its own) was moved upwards in the
rate environmental, social and governance (“ESG”) report.
holding structure until rectification was satisfied.
Some of the funds also require that the sellers provide separate
The foregoing notwithstanding, the general concept of corpo-
anti-corruption and anti-bribery warranties in the SPA.
rate personhood and individual (contained) liability is still the
Previously, Norwegian funds were more relaxed and it was not
all-encompassing rule of practice, and we have yet to see any case
market practice to request such special reports. Now, this seems
where a PE investor or another portfolio company has been held
to slowly change, and on the diligence side we see a continuing
liable for its portfolio company acts or omissions in Norway.
focus on legal compliance due to regulators generally becoming
more aggressive in pursuing the enforcement of bribery, corrup-
tion and money laundering laws. 122 Other Useful Facts
From a contractual (SPA) point of view, it should also be
noted that providers of W&I insurance normally, probably by 12.1 What other factors commonly give rise to concerns
virtue of great damage potential and the inherent difficulty for private equity investors in your jurisdiction or should
(impossibility) of examining facts through its own under- such investors otherwise be aware of in considering an
writing process, will, with some exemptions, refuse coverage for investment in your jurisdiction?
any seller warranties assuring compliance with and absence of
anti-corruptive behaviours. As can be expected, this creates a Tax treatment of capital gains from foreign funds to
disharmony in PE due diligence (cf. above) and the concurrent Norwegian investors
or ensuing SPA negotiations, where both parties (in principle) PE funds would normally be AIFs not subject to the beneficial
are open for relevant representations and warranties in relation tax rules applicable for Securities Funds. However, in a 2019
to anti-bribery/anti-corruption being included, but where the ruling by the Supreme Court, a fund was considered a Securities
vendor cannot abide for the sake of a clean exit (which the buyer Fund, whereby also capital gains on investments in shares outside
reluctantly can appreciate). the EEA are tax exempted. Whether or not capital gains from
investments in AIFs are subject to participation exemption for
Norwegian corporate investors, depends on whether the fund
11.6 Are there any circumstances in which: (i) a private
equity investor may be held liable for the liabilities of
is considered transparent or non-transparent for tax purposes
the underlying portfolio companies (including due to and the location of transparent fund’s portfolio companies.
breach of applicable laws by the portfolio companies); The classification of a fund in its country of residence does not
and (ii) one portfolio company may be held liable for the mean that the fund must be classified equally for Norwegian tax
liabilities of another portfolio company? purposes. For instance, a foreign non-transparent fund could
be deemed transparent for Norwegian purposes if one or more
The general rule under Norwegian law is corporate person- investors have unlimited liability for the fund’s obligations and
hood, whereby a portfolio company alone is held accountable/ a foreign transparent fund could be deemed non-transparent if

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170 Norway

the general partner does not have a real economic interest in sufficiently considered and justified, thus resolving to set aside the
the fund, e.g. by right to a carry or a minimum ownership of tax assessment. This ruling have an impact on investors domi-
the fund. ciled in Norway investing into PE funds organised as limited
A transparent fund would, as a starting point, be comprised partnerships, since the profit and losses from such limited part-
by a participation exemption independent of its country of resi- nerships under Norwegian law must be allocated among its part-
dence. If the fund only invests in portfolio companies resident ners and will be taxed at the hand of such partners.
within the EEA only, there are generally no tax issues for Norwe-
gian corporate investors, except for 0.66% taxation on distribu- VAT
tions from the fund. However, negative tax consequences for On 16 May 2013, the Norwegian tax authorities issued a much
Norwegian investors would occur if the fund invests in port- criticised memo in which the authorities argued that in the event
folio companies in low tax jurisdictions in the EEA or generally a Sponsor provides advisory and consultancy services to its port-
outside the EEA. If over 10% of the funds’ equity investments folio companies, such services should be subject to 25% VAT.
are not comprised by the Norwegian participation exemption This raises difficult classification issues between the Sponsor’s
method at any time in the past two-year period prior to the real- ordinary management of its portfolio companies, which, in
isation, a capital gain on interest in the fund itself would not be general, is VAT-exempt, and other consultancy/advisory services
comprised by tax exemption, hence being subject to Norwegian that may be subject to VAT. The authorities have indicated that
taxation. However, this 10% rule does not impact the taxation of individual circumstances in a tax inspection may determine that
capital gains that the fund receives and distributes, which would parts of the management services provided by a Sponsor must
be embraced by a participation exemption, provided the under- be reclassified as consultancy services and therefore will become
lying investment is covered by the participation exemption. The subject to VAT under Norwegian law. There has also been an
participation exemption would also apply for an investment by increased aggressiveness from the authorities on this area and we
the fund in a company in a non-low tax jurisdiction outside the expect that this will continue in the coming year.
EEA, provided the fund has held at least 10% of the shares and The possibility of a Norwegian holding company that is not
voting power for more than two years at the time of distribution carrying out business activities avoiding reverse charge VAT on
or sale of the shares. However, if the investment is made through services rendered remotely from a foreign service provider, is due
a holding structure, e.g. a US portfolio company owned via CI, to be abolished by amendment of the Act on VAT as from 2023.
the structure could have negative tax consequences as capital
gains from the portfolio investment would be taxable even if the EU initiatives
fund qualifies for participation exemption. Over the last few years, the EU has issued several new Directives,
In a non-transparent fund, the residency of the portfolio regulations and/or clarification statements regarding the capital
company would be of less importance for the taxation of the markets. These initiatives from the EU will most likely, directly
investors. Returns from such a fund established within the or indirectly, have an impact on the regulatory framework for
EEA would normally be subject to participation exemption for public M&A transactions in Norway in the years to come. As a
Norwegian corporate investors, unless the fund is a resident in result of these initiatives, the Norwegian government appointed
a low tax jurisdiction not genuinely established and carrying out an expert committee to evaluate and propose relevant amend-
activities within the EEA. Luxembourg and the Netherlands ments to the existing Norwegian legislation resulting from EU
could be considered low tax jurisdictions under Norwegian rules. amendments to the Markets in Financial Instruments Directive
In addition to determining the general classification of a (“MiFID II”), the Transparency Directive and the implementa-
foreign fund and its portfolio investments for Norwegian tax tion of the Market Abuse Regulation (“MAR”). This committee
purposes, one should also consider whether CFC regulations or has now published seven reports proposing several amendments
specific hybrid consideration could apply, changing the taxation to the STA. Some of the proposals so far have also resulted in
for Norwegian investors. A sale of shares in a transparent fund a number of amendments to Norwegian legislation regulating
to a foreign investor could trigger exit taxation for the Norwe- public takeovers in Norway. On 12 June 2019, the Norwegian
gian seller on latent capital gains on portfolio companies not Parliament adopted a bill implementing the Prospectus Regu-
qualifying for participation exemption in the fund. The Norwe- lation into Norwegian law by amending chapter 7 of the STA.
gian tax classification of a fund and its investment as well as In June 2019, the Norwegian Parliament adopted a bill imple-
the fund’s investment structure in addition to the complexity of menting the MAR into Norwegian law; however, this bill did
different sets of rules are thus important for Norwegian corpo- not enter into force until 1 March 2021. From the latter date,
rate investors to consider and understand whether capital gains chapter 3 of the STA was amended accordingly. As a conse-
would be tax exempted or not in Norway. quence, a target’s decision to delay disclosure of inside informa-
tion has now been amended, so that the target (issuer) need only
Tax treatment of a management fee paid by a PE fund to notify the takeover supervisory authority about such delay after
its Managers the relevant information has been disclosed to the market.
In a ruling by the Norwegian Supreme Court from February A seventh report was published in January 2021. The report
2018, the court concluded that management fees paid by a PE contains proposals for certain amendments to the rules on super-
fund to its Manager/advisor must, for tax purposes, be allocated visory authority, sanction competence and appeal schemes. The
between the different tasks carried out by such Managers on report proposes, inter alia, that the task, as offering authority,
behalf of the fund. In this regard, the Supreme Court concluded be transferred from the OSE to the Norwegian FSA, and that
that any part of such management fees that could be considered the delegation of the supervision with the ongoing duty to
related to transaction services (i.e. services related to acquisi- provide information and the deferred publication cease. The
tions and exits of the funds’ portfolio companies) carried out by committee proposes that the Stock Exchange Appeals Board be
a fund’s Managers, under Norwegian law, must be capitalised closed down and that an appeals board be established under the
and consequently will not be tax-deductible for such funds. In Ministry of Finance for cases in the securities market area. We
this particular case, the Norwegian tax authorities had argued expect that the proposed amendments will be implemented into
that 40% of the management fee was related to such transac- Norwegian law in 2023 at the earliest.
tion services. However, the court concluded that this was not

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 Aabø-Evensen & Co 171

Amendments to the disclosure requirements under the STA marketing passport of the AIFMD and UCITS Directive. In
As from 1 September 2022, the previous Norwegian rule addition, an ongoing annual fee will be levied for maintenance
on mandatory disclosure obligations when the acquisition of the national register of funds registered for marketing.
of warrants and convertible bonds is not linked to any issued
(existing) shares issued by a company whose securities are listed New takeover rules expected
on a regulated market has lapsed. In addition, a committee is currently also working on a report
At the same time, the materiality thresholds and disclo- concerning the Norwegian rules governing voluntary and
sure requirements that apply for acquisition of shares in listed mandatory offers, with a particular focus on the STA current
companies now also apply for derivatives with shares as an limited regulation of the pre-offer phase. This committee report
underlying instrument, irrespective of such equity derivatives does not arise out of changes to EU rules but rather the need to
being cash-settled or settled by physical delivery of the under- review and update Norwegian takeover rules on the basis of past
lying securities (i.e. financially settled options, futures, etc.). It experience and market developments. On 23 January 2019, the
should be noted that for such derivative agreements, the holder committee submitted a report concerning the Norwegian rules
must first disclose the conclusion of the derivative agreement on voluntary and mandatory offers, with a particular focus on
itself and then also the acquisition of the underlying shares, if the current limited regulation of the pre-offer phase.
a disclosure limit is still reached or crossed upon such acquisi- It is unclear when the Norwegian Parliament will adopt these
tion. The rationale for this is that such financial instruments amendments into Norwegian legislation, although we do not
can be used to make shares unavailable to other players without expect the proposed changes to be implemented into Norwegian
this becoming known to the market, since the counterparty will law until 1 January 2023 at the earliest. However, in April 2020,
often acquire the underlying shares. the Norwegian Parliament adopted a rule under which a regula-
The new rules now require the aggregation of holdings of tion can be issued setting out rules for calculating the offer price
financial instruments linked to the same issuer, so that deriva- in cases where there is a need for an exception to the above main
tives must also be aggregated with other holdings. In the case of rule or where it is not possible or reasonable to use the main rule
derivatives with financial settlement, however, only long posi- for calculating the offer price. At the same time, it resolved to
tions shall be taken into account in the calculation. Long posi- replace the “market pricing” alternative with a more balanced
tions (positions that increase in value if the underlying value rule set out in a separate regulation. However, the repeal of the
increases) must therefore not be settled against short positions “market pricing” alternative has not yet entered into force. Due
(positions that decrease in value if the underlying value increases) to the COVID-19 pandemic, a temporary regulation for calcu-
linked to the same underlying issuer. For instruments that exclu- lating the offer price was implemented with effect from 20 May
sively give the right to financial settlement, the nominal number 2020. This temporary regulation has now been prolonged until
of the underlying shares must be multiplied by the delta value 1 January 2024.
of the instrument for the purpose of calculating the disclosure
obligation. The disclosure obligation must be calculated based New EU filing for deals involving parties having received
on both the investor’s share of the share capital and share of the subsidies from third countries
votes, and consequently ownership of non-voting shares could As from 12 January 2023, the EU Foreign Subsidies Regula-
thus indirectly trigger the disclosure obligation. This represents tion (“FSR”) entered into force. This regulation introduces a
a deviation from the rules as currently set out in the EU Direc- filing requirement that is separate from and comes in addition
tive (2004/109/EC) adopted by Directive 2013/50/EU, as well to EU and national merger control/anti-trust filing regimes and
as supplementary provisions in Regulation (EU) 2015/761. Still, will have significant impact on large M&A transactions also
the right to acquire non-voting shares does not in itself trigger going forward in the Norwegian market. The regulation aims
any disclosure obligation. to address distortion caused by subsidies from third countries
As from 1 September 2022, both the lenders and borrowers of outside the EU to companies or groups of companies operating
shares must disclose their position, both at the time of lending within the EU and to level the playing field for all companies
and at the time of return, regardless of whether the loan of shares operating within the EU market.
can be classified as a real acquisition of the relevant shares. A transaction will become subject to a filing obligation, when:
The rule under which shares controlled by spouses and chil- (i) at least one of the merging entities, acquired companies or
dren, etc. shall be consolidated when calculating the disclo- joint ventures established in the EU generates turnover exceeding
sure threshold has been abolished and, from now, only personal €500 million; and (ii) the entities involved have been granted a
and legal persons who have committed to a long-term common combined financial contribution of more than €50 million from
strategy for the exercise of voting rights or who are controlled by third countries outside the EU in the past three years. Only the
the investor according to specific criteria shall be consolidated. target’s turnover and the buyer’s turnover at group level and their
Certain other adjustments have also been made to the excep- combined financial contribution will be relevant. It should be
tions from the disclosure obligation/consolidation. noted that both parties’ financial contributions must be included
The new disclosure rules also introduce an option for the FSA when calculating the combined financial contribution.
to decide on the temporary suspension of voting rights in the event The filing obligation is imposed on a buyer and will be trig-
of a breach of the disclosure rules as an administrative measure. gered by transactions involving a change in control. If a trans-
action is captured by such notification requirement, it will
Regulatory fees on non-Norwegian AIFMs and UCITS become subject to a standstill obligation until the transaction has
It should be noted that the Ministry of Finance has now been cleared by the European Commission (“EC”). The FSR
amended the rules governing levy of supervisory fees by the provides the EC with extensive competence to investigate trans-
Norwegian regulator so that one-off fees will be levied upon actions falling below the thresholds on an ex officio basis. The EC
application for authorisation to market AIFs under the national may also impose filings in case it suspects that foreign subsidies
private placement regime, and filing for marketing under the may have been granted in the three years prior to the transaction.

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172 Norway

Ole Kristian Aabø-Evensen is one of the founding partners of Aabø-Evensen & Co, a Norwegian boutique M&A law firm. Ole assists industrial
investors, financial advisors and PE funds, as well as other corporations in friendly and hostile takeovers, public and private M&A, corporate
finance and other corporate matters. He has extensive practice from all relevant aspects of transactions, both nationally and internationally,
and is widely used as a legal and strategic advisor in connection with the follow-up of his clients’ investments.
Mr. Aabø-Evensen is also the author of a 1,500-page Norwegian textbook on M&A. He is recognised as a “leading individual” within M&A by
The Legal 500, and during the last 14 years he has been rated among the top three M&A lawyers in Norway by his peers in the annual surveys
conducted by the Norwegian Financial Daily (Finansavisen). In the 2012, 2013, 2017, 2018, 2019, 2021 and 2023 editions of this survey, the
Norwegian Financial Daily named Mr. Aabø-Evensen as Norway’s No. 1 M&A lawyer. He is also the former head of M&A and corporate legal
services of KPMG Norway. Mr. Aabø-Evensen is the co-head of Aabø-Evensen & Co’s M&A team.

Aabø-Evensen & Co Tel: +47 2415 9010

Karl Johans gate 27 Email: oka@aaboevensen.com
P.O. Box 1789 Vika URL: www.aaboevensen.com
N-0122 Oslo
Norway

Aabø-Evensen & Co is a leading M&A boutique law firm in the Nordic region, antitrust and TUPE issues. A large amount of our work relates to cross-
operating out of Oslo, Norway. The firm is not, nor does it strive to be, the border transactions and our approach to international work is driven by the
largest law firm measured by number of offices or lawyers – instead it principle that complex transactions require first-class independent legal
endeavours to find the best solutions for its clients’ legal and commercial expertise, rooted in local practice, procedures and culture.
challenges, and securing their business transactions. www.aaboevensen.com
Our M&A and equity capital practitioners are recognised for their high
level of expertise and experience. We advise bidders, targets and financial
advisers on all aspects of public and private M&A deals. Our work covers
the gamut of M&A and corporate finance, including tender offers and
take-private transactions, mergers, demergers (spin-off), share exchange,
asset acquisitions, share acquisitions, group restructuring, joint ventures,
LBO, MBO, MBI, IBO and PE acquisitions and exits therewith, due diligence,
takeover defence, shareholder activism, M&A tax, securities and securities
offerings including credit and equity derivatives, acquisition financing,

Private Equity 2023

 Chapter
Chapter
Number
19 173

Singapore

Singapore
Christian Chin

Allen & Gledhill LLP Lee Kee Yeng

effect such grant had on the adoption of the variable capital

12 Overview company structure when the Variable Capital Companies Grant
Scheme was first introduced in January 2020.
1.1 What are the most common types of private equity In 2021, the Singapore Exchange introduced rules allowing
transactions in your jurisdiction? What is the current
for the listing of special purpose acquisition companies (SPACs)
state of the market for these transactions?
on the Mainboard of Singapore Exchange Securities Trading
Limited. Since then, three SPACs have listed on the Singapore
The most common types of private equity transactions in Singa- Exchange. Further, in July 2022, the Singapore Exchange and
pore are growth capital, venture capital and buyout transactions, the New York Stock Exchange agreed to collaborate on the dual
minority investments in portfolio companies and exits via trade listing of companies on both exchanges.
sales or listings. In July 2023, the Monetary Authority of Singapore announced
Even with a record US$24.5 billion raised by Singapore-based the expansion of its scope of tax incentives for single-family
private capital funds in 2022, the volume of private equity offices through recognising a broader range of investments in
deals declined by 10% and the deal value dropped close to 50% Singapore (including overseas climate-related investments) to
compared to 2021. Whilst there was an uptick in exits compared encourage more purposeful deployment of capital.
to 2021, the exit value reduced by half. Despite the downturn in These developments provide investors with more choice and
deal activity in Southeast Asia, Singapore, together with Indo- opportunities, and make Singapore an attractive gateway to
nesia, attracted close to 80% of the total deal value and deal investing in the region.
count for the region.
Headline-making deals include Smash Capital, Insight Part-
ners and GIC’s US$690 million investment in Coda Payments, 1.3 Are you seeing any types of investors other
than traditional private equity firms executing private
SATS’ acquisition of Worldwide Flight Services from Cerberus
equity-style transactions in your jurisdiction? If so,
Capital Management for €1.3 billion and SK Ecoplant and Navis please explain which investors, and briefly identify any
Capital Partners’ US$1 billion acquisition of TES Envirocorp. significant points of difference between the deal terms
offered, or approach taken, by this type of investor and
that of traditional private equity firms.
1.2 What are the most significant factors currently
encouraging or inhibiting private equity transactions in
your jurisdiction? The region has also seen a growing trend of shadow capital
investments from large institutional investors (including family
Singapore is the most developed market in Southeast Asia, with offices), sovereign wealth funds and/or pension funds seeking
a stable political-economic environment, robust infrastructure, co-investment opportunities with private equity funds. Larger
an investor-friendly tax regime, a transparent and stable regula- family offices are now making direct investments, particularly
tory environment and a skilled workforce with a strong pool of in industries where they already have domain expertise and can
professional talent. create value.
The variable capital company structure introduced in 2020 The number of family offices in Singapore has grown signif-
plugs a gap in the Singapore fund ecosystem and gives Singa- icantly, with approximately 700 family offices opening in 2022
pore a boost as a wealth and fund management hub. It offers and another 200 opening in 2023. While the approach taken
investment funds and fund managers significant operational by each family office differs, they generally have greater speed
flexibility, less cumbersome capital maintenance requirements and flexibility in terms of their strategy, structure and process
(allowing payment of dividends out of capital) and greater tax compared to private equity firms. Family offices may not seek
efficiency. As of October 2022, there were more than 660 vari- to have a dominant or direct influence on management, they
able capital companies domiciled in Singapore. In January 2023, may choose to invest based on non-financial matrices, and they
the Monetary Authority of Singapore extended the Variable tend to have a longer investment horizon and may not prioritise
Capital Companies Grant Scheme for two years. Applicants can exits, especially if wealth preservation is the main goal. Further,
seek co-funding for 30% of qualifying expenses paid to Singa- family offices may not allocate a fixed amount of capital to
pore-based service providers for qualifying work performed in different asset classes for diversification.
Singapore in relation to the incorporation or registration of a
variable capital company. This seeks to build on the catalytic

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174 Singapore

22 Structuring Matters 32 Governance Matters

2.1 What are the most common acquisition structures 3.1 What are the typical governance arrangements
adopted for private equity transactions in your for private equity portfolio companies? Are such
jurisdiction? arrangements required to be made publicly available in
your jurisdiction?
Private equity investments are typically structured with an
off-shore holding company whose shares are held by the private The governance arrangements of private equity portfolio
equity investor and management. A BidCo is sometimes used companies with more than one shareholder are usually set out
under the holding company to hold the target’s shares and/or to in a shareholder agreement. Typical arrangements include veto
take on acquisition debt. rights, restrictions on the transfer of securities, covenants on
the continued operation of the business, non-compete under-
takings, and deadlock resolution procedures.
2.2 What are the main drivers for these acquisition
Some of the arrangements will also be set out in the portfolio
structures?
company’s constitution, which is made available to the public
upon filing with the Accounting and Corporate Regulatory
The main drivers for these acquisition structures are tax effi- Authority (ACRA). Shareholders’ agreements are, however, not
ciency and financing requirements. required to be filed with ACRA and are generally not required
to be made publicly available unless they contain arrangements
2.3 How is the equity commonly structured in private entered into as part of a take-private transaction governed by the
equity transactions in your jurisdiction (including Singapore Takeover Code.
institutional, management and carried interests)?
3.2 Do private equity investors and/or their director
Private equity investors typically invest through a combination nominees typically enjoy veto rights over major
of ordinary and/or preference equity and convertible debt, with corporate actions (such as acquisitions and disposals,
the latter two forming the bulk of the investment. business plans, related party transactions, etc.)? If a
Key management may be granted equity sweeteners whose private equity investor takes a minority position, what
veto rights would they typically enjoy?
structures can vary substantially – from ordinary shares with a
vesting schedule, profit participating options exercisable on exit,
to subordinated equity. Yes, private equity investors typically enjoy veto rights over
material corporate actions. Typical veto rights enjoyed by
private equity investors include restrictions on further issuances
2.4 If a private equity investor is taking a minority
of debt/equity, change of business, winding up and related party
position, are there different structuring considerations?
transactions. Depending on the size of the minority stake, the
private equity investor may also have veto rights over opera-
The key considerations when taking minority positions are tional matters such as the annual budget and business plan,
governance (as specified in section 3 below) and the need to capital expenditures above a certain threshold and material
ensure preferred returns. Minority investments by private acquisitions and disposals.
equity investors usually take the form of convertible or mezza-
nine debt (to maintain priority) or preferred shares.
3.3 Are there any limitations on the effectiveness of
veto arrangements: (i) at the shareholder level; and (ii) at
2.5 In relation to management equity, what is the the director nominee level? If so, how are these typically
typical range of equity allocated to the management, and addressed?
what are the typical vesting and compulsory acquisition
provisions?
Singapore courts will generally enforce veto arrangements at
both the shareholder level and the board level. However, veto
The typical range of equity allocated to management is 10% to rights exercised by directors are subject to their overriding fidu-
20%. Management equity typically vests over three to five years, ciary duty to the company on whose board they sit. Where there
or upon an exit. Management equity is usually subject to (a) “good is a concern that the directors’ ability to exercise their veto rights
leaver” and “bad leaver” provisions under which such equity may may be limited by their fiduciary duty owed to the company,
be acquired at either fair value or at cost, and (b) a drag-along right such concern is often addressed by giving such veto rights to the
in the event of an exit by the private equity investor. shareholders instead of the directors.

2.6 For what reasons is a management equity holder 3.4 Are there any duties owed by a private equity
usually treated as a good leaver or a bad leaver in your investor to minority shareholders such as management
jurisdiction? shareholders (or vice versa)? If so, how are these
typically addressed?
Persons who leave due to death or disability will usually be
treated as good leavers, and persons who are dismissed for A private equity investor does not owe any duty to minority
causes or in other circumstances justifying summary dismissal shareholders such as management shareholders (or vice versa).
will usually be treated as bad leavers. However, minority shareholders can seek recourse under Section
216 of the Companies Act if the affairs of a Singapore company

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 Allen & Gledhill LLP 175

are conducted in a manner that is oppressive to one or more

minority shareholders. If a finding of oppression is made, the
42 Transaction Terms: General
court may order such remedies as it deems fit, including orders
regulating the future conduct of the company or a winding up. 4.1 What are the major issues impacting the timetable
for transactions in your jurisdiction, including antitrust,
foreign direct investment and other regulatory approval
3.5 Are there any limitations or restrictions on the requirements, disclosure obligations and financing
contents or enforceability of shareholder agreements issues?
(including (i) governing law and jurisdiction, and (ii)
non-compete and non-solicit provisions)?
For public-to-private transactions, the key drivers of the time-
table are the mandatory timelines imposed by the Singapore
Singapore courts generally uphold the provisions of a share- Takeover Code and the clearances required from the Securities
holder agreement in relation to a Singapore company, except Industry Council prior to announcing the transaction. Privatisa-
for those provisions that are unlawful or otherwise regarded as tion transactions subject to the Singapore Takeover Code gener-
contrary to public policy. ally take between two to three months to complete, assuming no
Non-compete and non-solicit provisions are regarded as a other regulatory clearances are required. Where the privatisation
restraint on trade and against public policy. These are unen- is subject to shareholders’ approval, the timetable will be stretched
forceable unless the party seeking enforcement can show that by an additional five to seven weeks to include the time needed
the restraint is reasonable and seeks to protect a legitimate for clearance by the Singapore Exchange and the notice period for
proprietary interest. the shareholders’ meeting. As public-to-private transactions are
Provisions that are regarded as penal in nature will also be subject to certain funds requirements (i.e., the financial adviser or
struck down. an appropriate third party must be satisfied the offeror has suffi-
cient resources to consummate the offer) prior to launching the
3.6 Are there any legal restrictions or other transaction, the time needed for the financial adviser or appro-
requirements that a private equity investor should priate third party to satisfy this requirement should also be taken
be aware of in appointing its nominees to boards of into account.
portfolio companies? What are the key potential risks Other factors that may affect the timetable for transactions
and liabilities for (i) directors nominated by private include the scope of due diligence (including the preparation of
equity investors to portfolio company boards, and (ii) financials for the purposes of locked-box structures) and other
private equity investors that nominate directors to regulatory approvals. Key regulatory approvals that may mate-
boards of portfolio companies?
rially affect the timeline include industry-specific approvals in
relation to holdings in regulated industries (e.g., investments in
Singapore companies require at least one Singapore-resident the banking, insurance, or telecommunications industries) and
director. Certain persons (e.g., an undischarged bankrupt or a competition clearances. The timeframe for competition clear-
person who has been convicted for offences relating to fraud ance is approximately 30 working days (in respect of a Phase 1
or dishonesty) are not eligible to be directors of a Singapore review) and 120 working days (in respect of a Phase 2 review).
company. Directors of Singapore companies have duties under
the Companies Act vis-à-vis the Singapore company. These
4.2 Have there been any discernible trends in
include obligations to disclose their interests in transactions with
transaction terms over recent years?
the company (Section 156 of the Companies Act), an obliga-
tion to seek authorisation from the company prior to disclosing
information received in their capacity as directors (Section 158 Transacting parties have been paying more attention to clauses
of the Companies Act) and a duty to act honestly at all times and allocating risk arising from matters outside such parties’ control.
with reasonable diligence in the discharge of its duties (Section These include material adverse change and force majeure clauses
157 of the Companies Act). Such directors also owe a common dealing specifically with outbreaks of disease (driven by the
law fiduciary duty to the company. These obligations apply not COVID-19 pandemic) and war (due to the war in Ukraine), and
only to persons formally appointed as directors of the company, governments’ and central banks’ reactions to such matters.
but also to any person whom the court considers a “shadow With the uncertain economic climate, transacting parties are
director” (usually a person whose directions or instructions an increasingly looking to incorporate earnouts in their acquisi-
appointed director is accustomed to act upon). tions to bridge the valuation gaps.
The inclusion of ESG-specific deal terms, such as representa-
tions and warranties addressing specific ESG issues, or cove-
3.7 How do directors nominated by private equity nants to ensure compliance with ESG disclosure requirements
investors deal with actual and potential conflicts of
or to meet ESG targets are also on the rise.
interest arising from (i) their relationship with the party
nominating them, and (ii) positions as directors of other
portfolio companies? 52 Transaction Terms: Public Acquisitions

Directors who face a conflict of interests (whether actual or 5.1 What particular features and/or challenges apply
potential) should disclose the nature of the conflict to the board to private equity investors involved in public-to-private
and abstain from voting on the resolution. Private equity inves- transactions (and their financing) and how are these
commonly dealt with?
tors should craft their veto rights accordingly so that the investor
as a shareholder has the ability to ensure that certain decisions
cannot be taken without their consent, even if their directors Public-to-private transactions are governed by the Singapore
must abstain from voting. Takeover Code, which imposes certain rules and restrictions
that have a significant impact on deal structuring. A firm inten-
tion to make a public takeover, once announced, cannot be

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subject to, or conditional upon, financing being obtained. The 6.3 What is the typical scope of other covenants,
certain funds requirement means that deal financing must be in undertakings and indemnities provided by a private
place at the time of announcement, with limited circumstances equity seller and its management team to a buyer?
under which the financing can be withdrawn.
The Singapore Takeover Code requirement for all shareholders Private equity sellers typically agree to a set of undertakings as
to be treated equally also limits the ability of private equity inves- to the conduct of business pre-completion in order to ensure
tors to offer sweeteners to key shareholders, and this often results the business is carried on in the ordinary course and to mini-
in higher acquisition costs for public-to-private transactions. mise any value leakage. Non-competes or non-solicits are gener-
ally not given by the private equity seller, though these would be
5.2 What deal protections are available to private given by the management team.
equity investors in your jurisdiction in relation to public
acquisitions?
6.4 To what extent is representation & warranty
insurance used in your jurisdiction? If so, what are the
Deal protections available to private equity investors in Singa- typical (i) excesses / policy limits, and (ii) carve-outs /
pore in relation to public acquisitions include break fees (levied exclusions from such insurance policies, and what is the
on a target company) and reverse break fees (levied on an offeror). typical cost of such insurance?
Where a break fee is imposed, the Singapore Takeover Code
requires that it be no more than 1% of the value of the offeree Warranty and indemnity insurance is popular among private
company and confirmations must be made by the board of the equity investors. It is used on the sell-side to bridge the gap on
offeree company and its financial adviser that break fee provi- liability caps and on the buy-side to improve the attractiveness
sions were agreed upon during ordinary commercial negotiations of the private equity investor’s bid in competitive bid situations.
and it is in the best interests of shareholders; if a break fee has Typical excesses range from 0.5% to 1% of the insured
been assessed as a penalty as opposed to a pre-estimate of a loss, amount, and typical policy limits range from 20% to 30% of
it will not be enforceable. While break fees are permitted under the insured amount. Customary carve-outs/exclusions include
the Singapore Takeover Code, they are not commonly used. known/disclosed matters, forward-looking warranties, civil or
Deal protections on the buy-side include no-shop or exclu- criminal fines, consequential losses, purchase price adjustments,
sivity clauses that limit the seller’s ability to actively pursue other secondary tax liabilities, transfer pricing risks, environmental
buyers for a specified period of time. On the sell-side, stand- and anti-bribery/corruption liabilities.
still clauses protect the seller’s ability to control the sale process The typical cost of such insurance is around 1.5% of the
by preventing potential purchasers from acquiring a stake other insured amount.
than via the negotiated deal with the seller.
6.5 What limitations will typically apply to the liability
62 Transaction Terms: Private Acquisitions of a private equity seller and management team under
warranties, covenants, indemnities and undertakings?
6.1 What consideration structures are typically
preferred by private equity investors (i) on the sell-side, Where the warranties are limited to title, capacity and authority,
and (ii) on the buy-side, in your jurisdiction?
the private equity seller’s liability is either uncapped or capped
at the amount of consideration paid. The private equity seller
Private equity investors on the sell-side tend to prefer all cash and management team’s liabilities for other warranties are
consideration structures that are subject to adjustments based on usually capped, and the amount of the cap may range from 10%
completion accounts to be prepared post-completion (typically to to 100% of the consideration paid, depending on the type of
adjust for working capital levels). Locked-box structures are some- warranty and the strength of each party’s bargaining position.
times used but are less common. Liability under covenants, indemnities and undertakings may
Buy-side private equity investors also tend to prefer all cash not be subject to such caps.
consideration structures, and typically require an escrow amount Where known risks are identified, an escrow amount may be
to be set aside for warranty claims. Earn-out payments or profit set aside from the consideration to satisfy such claims.
guarantees are also preferred mechanisms to bridge valuation gaps. General limitations such as time limits within which claims
must be made and a de minimis threshold before claims can be
6.2 What is the typical package of warranties / made are also customary.
indemnities offered by (i) a private equity seller, and (ii)
the management team to a buyer? 6.6 Do (i) private equity sellers provide security (e.g.,
escrow accounts) for any warranties / liabilities, and
Private equity sellers would typically seek to limit their warranties (ii) private equity buyers insist on any security for
and/or indemnities to warranties on title, capacity and authority. warranties / liabilities (including any obtained from the
management team)?
Where management holds a significant stake, they are expected
to give comprehensive warranties to the buyer, together with a
management representation made to the private equity sellers. Generally, private equity sellers do not provide security for
Where the management stake is not significant, the private warranty claims.
equity sellers may be prepared to increase the scope of warran- While private equity buyers will try to insist on such security
ties subject to limited liability caps of between 10% to 25% of being provided by sellers, the agreement reached between buyer
the consideration. and seller ultimately depends on their respective bargaining
Warranty and indemnity insurance remains a popular way to strengths.
bridge liability gaps (see question 6.4 below).

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 Allen & Gledhill LLP 177

6.7 How do private equity buyers typically provide ■ Takeovers. The conversion of the portfolio company into
comfort as to the availability of (i) debt finance, and (ii) a public company will subject its shareholders to the take-
equity finance? What rights of enforcement do sellers over regime under Singapore law, which requires a general
typically obtain in the absence of compliance by the offer to be made by any person who, together with its
buyer (e.g., equity underwrite of debt funding, right to concert parties, either: (a) acquires 30% or more of the
specific performance of obligations under an equity voting rights of the company; or (b) holds at least 30% but
commitment letter, damages, etc.)?
not more than 50% of the voting rights of the company,
and acquires additional shares carrying more than 1% of
The purchase agreements or bid letters typically include a the voting rights within any six-month period. A private
commitment or warranty from the private equity fund that it equity seller considering an IPO exit should bear these
has sufficient financial resource to complete the transaction. A thresholds in mind when structuring its anticipated level
bank commitment letter may also be provided in certain cases of post-listing shareholding interest.
to provide comfort on the availability of financing where certain
funds are required. Such commitments are generally enforce-
7.2 What customary lock-ups would be imposed on
able by the seller against the private equity fund, but bank
private equity sellers on an IPO exit?
commitment letters are only intended to provide soft comfort to
sellers and are usually not enforceable against the bank.
If the private equity seller retains a shareholding of 15% or more
at the time of listing, the listing rules of the Singapore Exchange
6.8 Are reverse break fees prevalent in private equity will require a lock-up to be given by the seller over all of their
transactions to limit private equity buyers’ exposure? If
shares for a period of either six or 12 months after listing,
so, what terms are typical?
depending on the admission criteria upon which the company
is listed. If the private equity seller acquired and paid for its
Reverse break fees are not common in Singapore. shares within a period of 12 months preceding the date of the
listing application, the listing rules of the Singapore Exchange
72 Transaction Terms: IPOs will also require a six-month lock-up to be given over a propor-
tion of such shares, the proportion of shares subject to the
7.1 What particular features and/or challenges should lock-up reflecting the proportionate price discount enjoyed by
a private equity seller be aware of in considering an IPO the private equity seller in acquiring such shares, compared to
exit? the IPO price for the shares.

■ Prospectus Liability. A private equity seller participating 7.3 Do private equity sellers generally pursue a dual-
as a vendor in an IPO is responsible for the accuracy of track exit process? If so, (i) how late in the process are
the prospectus to be issued as part of the public offering private equity sellers continuing to run the dual-track,
of securities under the IPO. Singapore law imposes crim- and (ii) were more dual-track deals ultimately realised
inal and civil penalties for false or misleading statements through a sale or IPO?
or omissions in the prospectus.
■ Prospectus Disclosure. An IPO prospectus is required to Because they are costly and time/resource consuming, dual-
disclose all material information, including background track exit processes are only undertaken when private equity
information on all vendors (including information relating sellers are unsure which option is more likely to be consum-
to their shareholding) in the IPO. mated. It follows that private equity sellers are also keen to end
■ Lock-ups. A private equity seller may be subject to lock-up dual-track deals as soon as it becomes apparent that consumma-
requirements under the listing rules of the Singapore tion of the preferred option is imminent.
Exchange – please see the discussion in question 7.2 below. Recently, most dual-track deals have been realised through a
■ Interested Person Transactions. If the private equity seller sale and not an IPO.
retains a shareholding of 15% or more post-listing, it will be
an “interested person” for the purposes of the listing rules 82 Financing
of the Singapore Exchange and any transactions between
the private equity seller (or any of its associates) and the
8.1 Please outline the most common sources of debt
listed company (or any of its subsidiaries or unlisted asso- finance used to fund private equity transactions in your
ciated companies) will be “interested person transactions” jurisdiction and provide an overview of the current state
that will need to be disclosed in the prospectus. Depending of the finance market in your jurisdiction for such debt
on the materiality of the value of the transaction, the listing (including the syndicated loan market, private credit
rules may require announcements to be made and/or prior market and the high-yield bond market).
shareholder approval to be obtained.
■ Shareholders’ Rights. Generally, the specific contractual Traditional bank financing through loans remains the most
rights of private equity shareholders (such as in relation common source of debt finance for private equity transac-
to board appointment and veto rights) are expected to fall tions in Singapore. The financing market remains fairly stable
away upon listing. and banks continue to show a willingness to support leveraged
■ Underwriting Agreement. The private equity seller finance transactions, taking into consideration factors such as
will need to enter into an underwriting agreement with the quality of target assets, the track record of the sponsor, the
the underwriters for the IPO and will need to provide debt quantum, pricing and security package.
customary representations and warranties (including,
potentially, representations and warranties in relation to
the listed group) and indemnities.

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178 Singapore

8.2 Are there any relevant legal requirements or 102 Tax Matters
restrictions impacting the nature or structure of the debt
financing (or any particular type of debt financing) of
private equity transactions? 10.1 What are the key tax considerations for private
equity investors and transactions in your jurisdiction?
Are off-shore structures common?
Leveraged buyouts typically involve a debt pushdown following
completion, where the target company takes over the acquisition
debt and gives a security package over its assets to the lender. Any income accruing in or derived from Singapore (i.e., sourced
Such an arrangement constitutes financial assistance on the in Singapore) or accruing or derived from outside Singapore
part of the target company and may need to be whitewashed (i.e., sourced outside Singapore) that is received or deemed
by its shareholders if it is a public company or a subsidiary of a received in Singapore, is subject to income tax in Singapore.
public company. The prohibition against giving such financial There is generally no capital gains tax in Singapore, but legis-
assistance no longer applies to private companies, unless their lative amendments are being considered to tax gains from the
parent is a public company. sale of foreign assets that are received in Singapore or deemed as
such, where certain conditions are met.
Foreign-sourced income in the form of dividends, branch
8.3 What recent trends have there been in the debt- profits and service income received or deemed to be received in
financing market in your jurisdiction? Singapore by a Singapore tax resident company are exempt from
tax if certain conditions are met, including: (i) such income is
In line with continued interest in socially responsible invest- subject to tax of a similar character to income tax under the law
ments, there are more instances of green debt or sustainability of the jurisdiction from which such income is received; and (ii)
financing. Such borrowings may enjoy better rates if they are at the time the income is received in Singapore, the highest rate
utilised towards sustainability projects or if the borrower main- of tax of a similar character to income tax levied under the law
tains or improves on its environmental, social or governance of the territory from which the income is received, on any gains
targets. In view of the impending cessation of the traditional or profits from any trade or business carried on by any company
benchmark rates of the currencies relevant for Singapore financ- in that territory at that time, is not less than 15%.
ings (such as USD LIBOR and SGD Swap Offer Rate), lenders All Singapore tax resident companies are under the one-tier
and borrowers continue to actively transition their financings corporate tax system. Under this system, the tax on corporate
(both existing and new) over to risk-free rates such as USD profits is final and dividends paid by a Singapore tax resident
SOFR and SGD SORA. company are tax-exempt in the hands of a shareholder (regard-
less of whether the recipients of such dividends are individuals
92 Alternative Liquidity Solutions or corporate entities) and no Singapore withholding tax will be
imposed on such dividends.
Where private equity acquisitions are financed (wholly or
9.1 How prevalent is the use of continuation fund
vehicles or GP-led secondary transactions as a deal type
partly) through debt, any payments in connection with such
in your jurisdiction? indebtedness (including but not limited to interest) that are
borne by a person or permanent establishment in Singapore
and paid to a person not known to be tax resident in Singapore
Continuation fund vehicles or GP-led secondary transactions
would be subject to withholding tax in Singapore. However,
are gaining traction as exit strategies across the sector as the
the withholding tax rates may be reduced by tax treaties, and
uncertain economic landscape necessitates alternative solutions
certain exceptions from withholding tax may also be applicable.
to provide liquidity.
For instance, a withholding tax exemption may be available for
In early 2023, Capital Square Partners and Basil Technology
qualifying debt securities where certain conditions are met, and
Partners partnered to close a US$700 million continuation fund,
where Singapore financial institutions with the relevant tax
which will acquire a portfolio of companies from both Capital
incentives have arranged such issuance.
Square Partners and Basil Technology Partners’ existing funds
Certain tax incentive schemes may also be available for quali-
under management. This is touted as being a first-of-its-kind
fying Singapore tax resident or non-Singapore tax resident funds
deal in Asia.
that are managed by Singapore-based fund managers. Speci-
GIC and NewQuest Capital Partners have also backed a
fied income of qualifying funds derived from a prescribed list of
US$267 million continuation fund by Everbridge Partners, a
designated investments may be exempt from tax under the fund
spinout from Capital Group Private Markets.
management incentive schemes. Various conditions must be
met by both the fund and the fund manager. However, Singa-
9.2 Are there any particular legal requirements or pore will be implementing the Pillar 2 Global Anti-Base Erosion
restrictions impacting their use? (GloBE) Rules of the Base Erosion and Profit Shifting (BEPS)
2.0 project, and it is unclear whether such implementation will
In a GP-led secondary transaction and the use of continuation have any impact on these tax incentive schemes.
fund vehicles, there is an inherent conflict of interest as the enti- Off-shore structures are quite commonly used – please see
ties are controlled by the same general partner. Directors of such the discussion in question 2.1 above, but off-shore structures
entities should be mindful of their fiduciary duty to act in the best utilising the traditional tax haven jurisdictions may come under
interests of the company on whose board they sit rather than a increased scrutiny and the impending implementation of the
particular stakeholder. Directors who face a conflict of interests OECD’s Action Plan on Base Erosion and Profit Shifting may
(whether actual or potential) should disclose the nature of the affect the popularity of such off-shore structures.
conflict to the board and abstain from voting on the resolution.

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10.2 What are the key tax-efficient arrangements that 10.4 Have there been any significant changes in tax
are typically considered by management teams in private legislation or the practices of tax authorities (including
equity acquisitions (such as growth shares, incentive in relation to tax rulings or clearances) impacting private
shares, deferred / vesting arrangements)? equity investors, management teams or private equity
transactions and are any anticipated?
There are no key tax-efficient arrangements for management
compensation available in Singapore. Share-based equity plans Additional conveyance duties (ACD) are payable on the acquisi-
may be implemented, and awards pursuant to such plans are tion and disposal of certain equity interests in property holding
generally taxable, depending on when they vest (or are exercised, entities that have an interest (directly or indirectly through other
in the case of options) and whether disposal restrictions apply to entities) in Singapore residential properties (as defined for stamp
the shares awarded. duty purposes), which meet certain conditions. ACD was intro-
Separately, with respect to any sale of shares, as there is gener- duced to ensure some level of parity of treatment (if certain
ally no capital gains tax in Singapore (legislative amendments conditions are met) in the stamp duty to be paid when a person
are being considered to tax gains from the sale of foreign assets acquires or disposes Singapore residential property directly,
that are received in Singapore or deemed as such, where certain versus acquiring or disposing the equity interests of the prop-
conditions are met, however), one of the key considerations for erty holding entity that has an interest in the Singapore residen-
private equity transactions is whether the gains from such trans- tial property.
actions constitute capital gains or trading income, the latter of An electronic instrument may be subject to stamp duty no
which is subject to Singapore income tax. For example, the differently from a physical or paper instrument. An electronic
gains from a sale of shares may be regarded as trading income instrument refers to:
and subject to income tax if the entity disposing the shares is (a) an electronic record that effects, or an electronic record
regarded by the Inland Revenue Authority of Singapore (IRAS) and a physical document that together effect, the same
to be trading in such shares or having acquired such shares for transaction, whether directly or indirectly, and if the same
subsequent disposal for a profit (as opposed to acquiring such transaction is effected whether directly or indirectly by a
shares for long-term investment holding purposes). verbal communication and an electronic record, the elec-
Certain “safe harbour” rules have been enacted in Singapore tronic record, but only if the transaction is concluded by
whereby gains derived by a divesting company from its disposal means of the electronic record; and
of ordinary shares in an investee company are not taxable if (b) an electronic record that evidences or signifies a matter
certain conditions are met. This rule provides that gains derived (where there is no physical document evidencing or signi-
by a qualifying divesting company from its disposal of ordinary fying the same).
shares in an investee company during the period from 1 June An electronic record refers to a record generated, commu-
2012 to 31 December 2027 are not taxable if: (a) the divesting nicated, received or stored by electronic means in an informa-
company has legally and beneficially owned at least 20% of the tion system or for transmission from one information system to
ordinary shares in the investee company for a continuous period another, for example, emails, WhatsApp messages, internet-based
of at least 24 months ending on the date immediately prior to the messages, etc.
date of the disposal; and (b) the shares disposed of are ordinary There are specific prescribed rules on, inter alia, the circumstances
shares, and not preference, redeemable or convertible shares. in which, and the place and time at which, an electronic instrument
This safe harbour does not apply to: (i) gains or profits from the is treated as executed and signed for stamp duty purposes.
disposal of shares, which are included as part of the income of Certain stamp duty rates have been increased in Singa-
an insurer; (ii) an unlisted investee company that is in the busi- pore, some quite significantly; therefore, a proper investigation
ness of trading or holding immovable properties, or has under- should be made as to the possible stamp duty liability that may
taken property development, except where (A) the immovable be involved prior to making or divesting any direct or indirect
property developed is used by the company to carry on its trade investment in Singapore immovable property, especially Singa-
or business (including the business of letting immovable prop- pore residential properties (as defined for stamp duty purposes).
erties), not being a business of trading immovable properties, As mentioned earlier, legislative amendments are being
and (B) the company did not undertake any property devel- considered to tax gains from the sale of foreign assets that are
opment for a period of at least 60 consecutive months before received in Singapore or deemed as such, where certain condi-
the disposal of shares; and (iii) the disposal of shares by a part- tions are met, and Singapore will be implementing the Pillar 2
nership, limited partnership, or limited liability partnership Global Anti-Base Erosion (GloBE) Rules of the Base Erosion
in which one or more of the partners is a company or compa- and Profit Shifting (BEPS) 2.0 project.
nies. This safe harbour rule may be excluded with respect to the
proposed new tax to be imposed under the legislative amend- 112 Legal and Regulatory Matters
ments that are being considered, as referred to above.
11.1 Have there been any significant legal and/or
10.3 What are the key tax considerations for regulatory developments over recent years impacting
management teams that are selling and/or rolling over private equity investors or transactions and are any
part of their investment into a new acquisition structure? anticipated?

As mentioned above, there are no key tax-efficient arrangements Amendments to requirements for voluntary delisting
for management compensation available in Singapore. Share- In 2019, the Singapore Exchange made certain amendments
based equity plans may be implemented, and awards pursuant to to its listing rules on the requirements for a voluntary delisting
such plans are generally taxable, depending on when they vest by the listed company. These amendments were intended to
(or are exercised, in the case of options) and whether disposal strengthen minority protection by requiring offerors and their
restrictions apply to the shares awarded. concert parties to abstain from voting on any resolution to
approve the voluntary delisting. It also requires the exit offer,

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which must accompany the voluntary delisting to be supported 11.4 How detailed is the legal due diligence (including
by the opinion of an independent financial adviser who must compliance) conducted by private equity investors prior
determine that the terms are both fair and reasonable (and not to any acquisitions (e.g., typical timeframes, materiality,
just reasonable, as was the prior requirement). Privatisation via scope, etc.)?
schemes of arrangements will also require a similar opinion.
Offers that are not made pursuant to the listing rules are not Private equity investors typically engage outside counsel to
subject to these requirements but will continue to be subject to conduct legal due diligence on the target prior to any acquisi-
the rules and regulations of the Takeover Code. tion. Timeframes for conducting legal due diligence vary, and
These changes have tightened the requirements for privatisa- usually take between one to three months. Such legal due dili-
tion transactions and, in particular, for transactions where the gence is usually conducted on an “exceptions only” basis, and
private equity investor is in a consortium with the existing major the materiality and scope will depend on the private equity
shareholder. investor’s internal compliance and financing requirements, the
complexity of the target’s business, and the timeframe for the
Companies Act amendments to requirements for exercise particular acquisition.
of compulsory acquisition
With effect from 1 July 2023, amendments were made to the
computation of the 90% threshold, which allows an offeror to 11.5 Has anti-bribery or anti-corruption legislation
impacted private equity investment and/or investors’
exercise the compulsory acquisition of shares from non-accepting
approach to private equity transactions (e.g., diligence,
shareholders. For the purposes of determining whether the contractual protection, etc.)?
offeror has achieved the 90% threshold, the amendments now
require the offeror to exclude shares held by an expanded class
of persons, including shares held by body corporates in which the Compliance with applicable anti-bribery and anti-corruption
offeror is able to exercise 50% or more of the voting power or laws is a prerequisite to most, if not all private equity trans-
such other percentage as may be prescribed (whichever is lower). actions in Singapore. If non-compliance is a concern, private
The amendments effectively raise the squeeze-out threshold for equity investors will usually seek to restructure the transaction
offerors by expanding the class of excluded shares. to isolate the risk (e.g., by acquiring assets instead of shares).

VCCs 11.6 Are there any circumstances in which: (i) a private

A new corporate structure tailored for investment funds known equity investor may be held liable for the liabilities of
as the Variable Capital Company (VCC), was introduced in the underlying portfolio companies (including due to
2020. The new corporate structure provides more operational breach of applicable laws by the portfolio companies);
flexibility to investment fund managers and allows: (i) invest- and (ii) one portfolio company may be held liable for the
liabilities of another portfolio company?
ment funds to use a single entity to house multiple sub-funds;
(ii) dividends to be distributed from capital; and (iii) segregation
of the assets and liabilities of the sub-funds. Since the intro- Singapore courts would generally not pierce the corporate veil
duction of the regime, more than 400 VCCs have been incorpo- and/or hold a private equity investor liable for the liabilities of
rated in Singapore. underlying portfolio companies or hold one portfolio company
liable for the liabilities of another portfolio company in the
SPACs absence of fraud or bad faith.
SPACs have been allowed to list on the Singapore Exchange
since 3 September 2021, and this has given private equity an 122 Other Useful Facts
alternative means to tap capital markets funding. Since the
introduction of the regulations, three SPAC listings have been 12.1 What other factors commonly give rise to concerns
completed on the Singapore Exchange in the first half of 2022. for private equity investors in your jurisdiction or should
such investors otherwise be aware of in considering an
investment in your jurisdiction?
11.2 Are private equity investors or particular
transactions subject to enhanced regulatory scrutiny in
your jurisdiction (e.g., on national security grounds)? Singapore is an investor-friendly jurisdiction and is consistently
ranked as one of the easiest countries in which to do business.
Private equity investors are not subject to enhanced regula- In 2023, the Economic Intelligence Unit ranked Singapore as
tory scrutiny. Generally, only transactions involving regulated the world’s leading business environment for the 15th consecu-
industries will be subject to enhanced regulatory approvals – tive year, praising its policy towards foreign investment, foreign
these include, inter alia, acquisitions exceeding the prescribed trade and exchange controls and technological readiness. Most
percentage in Singapore incorporated banks, capital markets laws and regulations are in line with international best practices
services licensees, licensed insurers and telecommunications and should be familiar to experienced private equity investors.
providers. Public-to-private transactions will also need to
comply with the regulatory regime under the Singapore Code on
Takeovers and Mergers.

11.3 Are impact investments subject to any additional

legal or regulatory requirements?

There are currently no additional legal or regulatory require-

ments specifically relevant to impact investments.

Private Equity 2023

 Allen & Gledhill LLP 181

Christian Chin is Co-Head of the Corporate Mergers & Acquisitions Department at Allen & Gledhill. His areas of practice include M&A,
venture capital, corporate restructuring, joint ventures, employment law and general commercial contracts.
Christian represents investment and commercial banks, private equity and sovereign funds and strategic corporate clients on domestic and
cross-border M&A, joint ventures and private equity transactions. He also acts for venture capital investors and companies in Series A and
subsequent funding rounds.
Christian has been a Legal Case Studies Instructor at the NUS Law School and a Lecturer and Instructor for the Corporate & Commercial
Practice module of the Singapore Bar Examinations. He has been cited as a notable individual in Corporate and M&A by The Legal 500 Asia
Pacific and also noted for his work in M&A by IFLR1000.

Allen & Gledhill LLP Tel: +65 6890 7616

One Marina Boulevard #28-00 Email: christian.chin@allenandgledhill.com
018989 URL: www.allenandgledhill.com
Singapore

Lee Kee Yeng is Co-Head of the Firm’s ESG & Public Policy Practice. Her areas of practice encompass M&A (for both public and private
companies), equity capital markets and corporate advisory work for financial institutions and public companies listed on the Singapore
Exchange. Kee Yeng has advised sovereign funds, private equity firms and multinational corporates in an extensive range of domestic and
cross-border transactions including public takeovers, private acquisitions, and joint ventures. She is also actively involved in the listing of
structured warrant programmes on the Singapore Exchange.
Kee Yeng has been recognised for her work in Corporate and M&A in Chambers Global, Chambers Asia-Pacific and IFLR1000. She has also been
recommended by The Legal 500 Asia Pacific for public M&A.
Prior to joining the Firm, she served as a Justices’ Law Clerk and as an Assistant Registrar with the Supreme Court of Singapore.

Allen & Gledhill LLP Tel: +65 6890 7783

One Marina Boulevard #28-00 Email: lee.keeyeng@allenandgledhill.com
018989 URL: www.allenandgledhill.com
Singapore

Allen & Gledhill is an award-winning full-service South-east Asian law firm

providing legal services to a wide range of premier clients, including local
and multinational corporations and financial institutions. The Firm is
consistently ranked as a market leader in Singapore and South-east Asia,
having been involved in a number of challenging, complex and significant
deals, many of which are the first of its kind. The Firm’s reputation for high-
quality advice is regularly affirmed by the strong rankings in leading publi-
cations, and by the various awards and accolades. With a growing network
of associate firms and offices, it is well placed to advise clients on their
business interests in Singapore and beyond, on matters involving South-
east Asia and the Asian region. With its offices in Singapore, Myanmar and
Vietnam, as well as its associate firm Rahmat Lim & Partners in Malaysia,
and its network firm Soemadipradja & Taher in Indonesia, Allen & Gledhill
has over 650 lawyers in its network across the region, making it one of the
largest law firms in South-east Asia.
www.allenandgledhill.com

Private Equity 2023

182 Chapter 20

Spain
Spain

Ferran Escayola

Garrigues María Fernández-Picazo

situation in which a special focus will need to be made to port-

12 Overview folio companies, and such uncertainty and high interest rates
will most likely reduce the number and volume of PE trans-
1.1 What are the most common types of private equity actions in 2023. However, the results for 2022 show that the
transactions in your jurisdiction? What is the current
geopolitical environment did not affect the number and volume
state of the market for these transactions?
of transactions ongoing, quite the contrary.
Likewise, following an extraordinary year in 2022, in which
According to the Spanish Venture Capital & Private Equity confidence in the economic recovery drove to a significant
Association (Asociación Española de Capital, Crecimiento e increase in activity, several factors will most probably have an
Inversión), (“SpainCap”), the Spanish Private Equity (“PE”) adverse effect on the PE transactional market in 2023: (i) the
industry grew substantially in 2022. In 2021, Spanish PE reached costs in the investee portfolio have increased significantly in
its second-best record of all times in terms of investment volume. 2022 and are far from being corrected; (ii) penalties will certainly
In 2022, investment continued to grow, remaining behind only be imposed on valuations because of current general market
the figures recorded in 2019. Nine hundred and thirty-five trans- uncertainty; (iii) PE funds’ average waiting times for divesti-
actions were reported, and companies received EUR 8.7 billion tures will again increase; and (iv) interest rates will increase.
in equity, which represents a significant increase compared to From a strictly legal standpoint, and as in most European
2021 (EUR 7.5 billion). Middle-market transactions (between Union Member States, the restrictions and control over essen-
EUR 10 million and EUR 100 million) also marked a new record tial freedoms, such as the freedom of movement of capitals and
high for the fourth year in a row in terms of number of transac- the limitations on foreign investments imposed in Spain will
tions (108) and in terms of investment volume (EUR 2.8 billion), continue to substantially impact the way and timing of closing
representing an 18% increase over 2021. The increase in large transactions. Pursuant to this: (1) certain investments from
transactions (over EUR 100 million per transaction) where inter- foreign-controlled PE funds; and (2) exit strategies to certain
national PE funds have their sweet spot, together with an excep- third-party acquirers may need to complete a prior authori-
tional investment level in start-ups in mature stages, are some sation process. To respond to the COVID-19 situation, the
of the main reasons for such improvement. With a total of 15 Spanish Government passed a new regulation, which suspended
investments, high-end transactions were significantly relevant, the general deregulation approach Spain enjoyed. Since 2020,
accounting for more than half of the total volume invested. certain “Foreign Direct Investments” (“FDI”) made: (a) in
Spanish investors, mainly family offices, also played a relevant specific “Strategic Sectors” of the Spanish economy affecting
role in 2022, with an increase of 15% in terms of investment the national security, public policy and public health; and (b) by
volume (EUR 1.5 billion, compared to EUR 1.3 billion in 2021) certain foreign investors that meet certain subjective conditions,
with an increase in transactions from 554 in 2021 to 570 in 2022. as further explained in question 4.1 below, may require the prior
The most active sectors in terms of PE investment in 2022 authorisation of the Spanish Council of Ministers.
were IT (24.5%), followed by industrial products and services
(14%) and, closely, hospitality/leisure (13%).
In contrast, in 2022 there was a drop in fundraising from 1.3 Are you seeing any types of investors other
than traditional private equity firms executing private
domestic private investors, showing a 36% decrease versus 2021.
equity-style transactions in your jurisdiction? If so,
please explain which investors, and briefly identify any
1.2 What are the most significant factors currently significant points of difference between the deal terms
encouraging or inhibiting private equity transactions in offered, or approach taken, by this type of investor and
your jurisdiction? that of traditional private equity firms.

Increased visibility of economic recovery in 2022, partly driven Without yet representing a consistent trend, family offices or
by the definitive overcoming of the COVID-19 crisis and the structures managing the capital of third parties as well as other
available liquidity, led to a strong reactivation of investments funds, which in the past focused more on mezzanine financing
through 2022. Unfortunately, 2022’s optimism was corrected or opportunistic transactions, are now engaging more in tradi-
based on the new geopolitical framework that began in the first tional PE style transactions.
quarter of 2022 and the corresponding effects on inflation and Some large industrial companies with liquidity are investing
increase in interest rates. Current uncertainty affects PE and in companies that develop new technologies linked to their core
all M&A markets across all industries, which may return to a business. Some differences between those kinds of transactions

Private Equity 2023

 Garrigues 183

and traditional PE deals are: (i) more flexibility in the exit 2.3 How is the equity commonly structured in private
horizon; (ii) the investment is sometimes driven by the access equity transactions in your jurisdiction (including
to the information and/or technology, instead of pure financial institutional, management and carried interests)?
return; and (iii) more difficulties in terms of corporate govern-
ance, remuneration/ratchets of the management team and will- As described above, PE transactions can be executed directly in
ingness to retain access to the developed technology after exit. the target company or channelled through BidCos.
The equity investment of the management team is often
22 Structuring Matters financed (partially) through loans that can be provided by PE
sponsors and are repayable as management bonus compen-
2.1 What are the most common acquisition structures sation, or even at exit. This financing could also be provided
adopted for private equity transactions in your by the target company, if not restricted by financial assistance
jurisdiction? provisions under Spanish or other applicable laws. It is also
customary that management invests only in equity, whilst the PE
The most common structures are: (i) acquisition of compa- sponsor provides both equity (common shares) and subordinated
nies in which a part of the purchase price is financed either by financing (through profit participating loans or preferred shares).
financial entities or through vendor loans (leveraged buyouts, However, the management team – other than the top
or “LBOs”); (ii) financing of the growth of companies that are manager(s) of the target – is not always required to invest in
certainly consolidated or already have profits; (iii) replacement equity, but is, on many occasions, provided with sweet equity
of part of the current shareholding structure (typically for family or a ratchet that vests upon exit, provided that a minimum
businesses and in succession situations); and (iv) investment for internal rate of return (“IRR”) is obtained and/or certain invest-
the restructuring or turnaround of certain troubled companies. ment multiples are achieved. The usual thresholds would be
Transactions may be executed by regulated funds (“entidades de an IRR of 18–20% and return multiples in the range of 2× to
capital riesgo”) through direct investment in the target companies 3.5× (with intermediate levels vesting a portion of the marginal
or through holding vehicles (“BidCos”) – the acquiring entities gain obtained at exit). The managers’ rights under the ratchet
– whose shareholders are the PE funds, jointly with its share- arrangements are usually vested throughout agreed vesting
holders and the fund management team, when applicable. A periods (typically four to five years) and subject to good-
BidCo structure is more commonly used to channel acquisition leaver (as further explained in questions 2.5 and 2.6 below) and
financing, in part to avoid financial assistance restrictions and to bad-leaver events. Carried interests paid to managers typically
benefit – when financing is needed – from the ability to collater- include a hurdle rate or cumulative compounded rate of return
alise target group’s shares and assets. (usually 8% p.a.) once all the capital invested is distributed to all
Transaction structures for foreign PE investments focus, in investors pro rata to their respective investments. Thereafter,
general, on certain tax aspects (mainly the acquisition structure, a full catch-up is usually distributed to management until they
its financing and the tax treatment of dividends and capital gains recover the amounts not received up until that moment, and
at the exit). International PE companies sometimes channel the then the amounts are distributed equally to both investors and
investment through Spanish companies subject to the ETVE management, pro rata, until that distributed to investors equals
regime (“entidad tenedora de valores extranjeros”) to invest in most around 20–25% and/or a certain multiple of aggregate capital
Latin American countries, considering the wide net of the bilat- invested by them. From that moment onwards, there has been a
eral Double Tax Treaties signed by Spain and Latin American split of all distributions, in which amounts received by manage-
countries. Alternatively, subject to the tax residency of the inves- ment are substantially higher than would correspond to them
tors, another frequently used structure consists of the incorpo- according to their investment.
ration of a vehicle in the European Union on top of the Spanish
target, which are commonly incorporated in Luxembourg or the 2.4 If a private equity investor is taking a minority
Netherlands (provided that valid economic reasons and suffi- position, are there different structuring considerations?
cient substance following OECD’s BEPS regulations are met).
Majority or minority positions do not usually affect the invest-
2.2 What are the main drivers for these acquisition ment structuring unless they entail “control”, as such term is
structures? defined in the Spanish Competition Laws.
In Spain, PE funds usually acquire majority stakes, unless
The main drivers for PE transactions essentially relate to: (i) their investment policies require otherwise or they agree to
financial considerations and the ability to grant sufficient warran- hold non-controlling positions alone or in combination with
ties to the financial entities; and (ii) tax reasons, not only looking other partners; either other strategic investors, PE sponsors, or
for tax-efficiencies but also due to the requirements imposed founding families. In such cases where the PE sponsor will have
by the country of origin or by Spanish tax regulations for tax limited control or influence over the management of the port-
deductibility. folio company and probably a reduced market to sell the shares
Other drivers are: (a) the expected returns for the investor; (b) and realise the investment, the negotiation of the shareholders’
the role and incentives of the management team and PE sponsors; agreement becomes a key aspect of the transaction. The PE
(c) the economic and operational costs related to the post-closing sponsor will usually focus on ensuring that adequate protections
restructuring of the company; and (d) the rules and costs of exit. of its investment are put in place, such as corporate govern-
In relation to driver (c) mentioned above, special attention is ance arrangements (e.g., veto rights and/or reinforced majori-
usually paid to minimise the costs arising as a consequence of ties for certain matters, a seat at the managing body, etc.), exit
the acquisition, organising the group existing after the acquisi- provisions (tag-along rights, put options against majority share-
tion for the taxation to be as efficient as possible (which usually holders upon certain milestones, etc.) and key management
requires tax consolidation), and taking into account the rules retention schemes.
and costs that might apply upon exit.

Private Equity 2023

184 Spain

2.5 In relation to management equity, what is the 32 Governance Matters

typical range of equity allocated to the management, and
what are the typical vesting and compulsory acquisition
provisions? 3.1 What are the typical governance arrangements
for private equity portfolio companies? Are such
arrangements required to be made publicly available in
Management teams usually take 5–10% of the share capital of your jurisdiction?
BidCos or 15–20% in secondary PE deals.
Vesting provisions for ratchets and other incentives may be
PE investors usually have the right to appoint members of the
structured, depending on the relevant PE sponsor, based upon:
managing body of their portfolio companies, even when their
(i) the time elapsed from the investment or commencement of
representation in such body is higher than in the share capital.
the relationship of the manager with the company to the time of
They control the decision-making process and are involved with
the departure of the relevant manager; and (ii) the time from the
the company’s business and day-to-day operations. However,
termination of the manager’s relationship with the target and
in cases where the PE investor holds a minority stake or for any
the exit.
other reason is not allowed to appoint a director, PE investors
In this regard, good-leaver and bad-leaver provisions (see
usually reserve the right to appoint an observer, who can partic-
question 2.6 below) play an important role in management
ipate in the managing body’s meetings without voting rights.
incentives, as they encourage the management team to remain
PE investors can usually impose super-majority voting
in the company and to properly carry out its duties. These provi-
requirements for the passing of certain key decisions of the
sions allow the sponsor (and usually also the other shareholders)
company, both in general shareholders’ meetings and managing
and/or, subsidiarily the company, to purchase the equity that
body’s meetings, as well as impose to the company and managers
a manager leaving the company held at a pre-agreed purchase
to provide information to shareholders that might not otherwise
price. Share transfer conditions usually vary depending on
be entitled by law.
whether it is a good-leaver (where the shares’ price is commonly
The most common type of managing body is a board of direc-
the market price, or it is sometimes allowed that the leaving
tors. In this regard, the composition of the board is public as
manager keeps the shares) or bad-leaver situation. Outstanding
the appointment of directors shall be registered at the Mercan-
financing at the moment of exit initially granted to the managers
tile Register. Agreed super-majorities and veto rights are
for the acquisition of their stake is commonly compensated with
usually reflected in the by-laws and, as such, registered and
the shares’ price and any other compensation that the manager
public. Incorporation in the by-laws and registration grants
might be entitled to as a result of the exit.
more certainty on enforceability of such provisions. In any case,
Call options may also be granted to ensure effectiveness of the
shareholders’ agreements, which are usually private and confi-
transfer obligation, which, on some occasions, are reinforced with
dential documents, also include these provisions, as well as any
irrevocable powers of attorney granted by the managers in favour
other governance matters, such as the structure and role of the
of the PE sponsor (or the representative of the other shareholders,
management group, the limitation to the powers of attorney of
as applicable). Put options in favour of the managers are some-
some directors and managers, etc. Additionally, shareholders’
times contemplated, but PE sponsors generally try to avoid them.
agreements often contain rules of preference between their
provisions and the by-laws, granting priority to the former in
2.6 For what reasons is a management equity holder cases of contradictions or inaccuracies.
usually treated as a good leaver or a bad leaver in your
jurisdiction?
3.2 Do private equity investors and/or their director
nominees typically enjoy veto rights over major
“Good leaver” usually refers to the cessation of a management corporate actions (such as acquisitions and disposals,
equity holder for a reason they cannot control, such as: (i) death; (ii) business plans, related party transactions, etc.)? If a
retirement; (iii) permanent illness or physical disability that renders private equity investor takes a minority position, what
them incapable of continued employment in their current position; veto rights would they typically enjoy?
and (iv) voluntary non-justified termination by the company.
“Bad leaver” situations include, amongst others: (i) discipli- PE investors with a majority stake may have influence over the
nary dismissal based on misbehaviour in the workplace; (ii) being decisions (as they are entitled to appoint the majority or a wide
found guilty by a court of a criminal offence jeopardising the number of members of the board), except over those decisions
company; (iii) voluntary resignation of the management equity subject to veto rights for minority shareholders. When a minority
holder (except if as a “good leaver”); and (iv) termination by the stake is held and the PE investor does not have enough director
company with fair cause based on a material breach of which nominees representing its interests, veto rights and reinforced
they are liable. majorities are usually negotiated and granted in their favour,
Good leavers may be granted the right to keep their shares generally in respect of increases/reductions of capital, mergers,
of the company and certain vested rights under the ratchet, if spin-offs, liquidation, engagement in new activities, relevant
applicable. Bad leavers, however, are usually forced to transfer acquisition and disposals, capex above a certain threshold, level
their shares, which are distributed proportionally amongst the of indebtedness, related party transactions, approval of the busi-
remaining equity holders or by the company. ness plan, etc.
It may also be the case that both good and bad leavers may Veto rights and reinforced majorities not only apply to deci-
be obliged to transfer their shares. Thereupon, it is common to sions to be adopted in board of directors’ meetings but also in
include a clause in the by-laws that states the sale price of the good general shareholders’ meetings. These provisions are usually
leaver’s shares shall be the greater amount between the acquisi- included in the by-laws of the company and/or in the corre-
tion cost and the market value of such shares. Conversely, in a sponding shareholders’ agreements, with the rules of preference
bad-leaver situation, the sale price of the manager’s shares is the mentioned in question 3.1 above.
lower amount between the market value and the acquisition cost.

Private Equity 2023

 Garrigues 185

3.3 Are there any limitations on the effectiveness of 3.6 Are there any legal restrictions or other
veto arrangements: (i) at the shareholder level; and (ii) at requirements that a private equity investor should
the director nominee level? If so, how are these typically be aware of in appointing its nominees to boards of
addressed? portfolio companies? What are the key potential risks
and liabilities for (i) directors nominated by private
equity investors to portfolio company boards, and (ii)
The Spanish Capital Companies Act (“LSC”) sets forth some private equity investors that nominate directors to
binding minimum and maximum majorities to vote on certain boards of portfolio companies?
matters (such as the removal of directors, amendment of the
company’s by-laws or corporate restructurings, to name a few)
A PE investor should be aware of the fiduciary duties it may
or on some matters restricting the rights of certain shareholders
have as director or as member of the board of directors, or those
with the express consent of the affected shareholder. These
of its appointed directors. Directors may not be subject to any
limitations can be modified or agreed differently between the
ground of prohibition or incompatibility to discharge their office
parties in the shareholders’ agreement but may not be included
and, in particular, to any of those established in the Law 3/2015,
in the by-laws of the company or registered and, therefore, they
of March 30, 2015 and other related legislation or any statutory
become private agreements amongst the shareholders enforce-
prohibition and, in particular, those established in the LSC.
able amongst them but not against any third parties.
Directors’ duties are, among others, diligence, loyalty,
Likewise, the requirement of the unanimous favourable vote
avoiding conflict of interest situations and secrecy. Direc-
for the adoption of certain matters at the board of directors’
tors are held personally accountable for any damage caused by
level can be included in the shareholders’ agreement but not in
their acts performed without diligence or against the law or
the by-laws, as such provisions are rendered void and, there-
the company’s by-laws. Directors are liable to the company, its
fore, not enforceable with third parties. If the parties want to
shareholders and the creditors of the company for any damage
include this unanimous favourable vote, it is accepted to set a
they may cause through acts (or omissions) contrary to the law
high majority, which only can be achieved if all the members
or the by-laws or carried out in violation of the duties inherent
vote in favour.
to their office, provided that there has been intentional miscon-
duct or negligence.
3.4 Are there any duties owed by a private equity Additionally, it is also important to consider that these duties
investor to minority shareholders such as management of directors and the related liability resulting from a breach of
shareholders (or vice versa)? If so, how are these these duties are also extended to those persons or entities acting
typically addressed?
as “shadow” directors or “de facto” directors. This is the main
risk applicable to PE investors that nominate directors to boards
PE investors have no specific duties towards minority share- of portfolio companies.
holders, unless voluntarily assumed by the PE investor. None- Most directors of PE-invested companies in Spain usually
theless, pursuant to the LSC, resolutions of the company may be contract D&O insurance to cover their civil liability to a certain
challenged when they are contrary to the Law, the by-laws or the extent.
company’s meeting regulation, or may damage the interest of
the company to the benefit of one or more shareholders or third
3.7 How do directors nominated by private equity
parties. Also, directors shall refrain from voting in respect of
investors deal with actual and potential conflicts of
resolutions where they may incur in a conflict of interest. interest arising from (i) their relationship with the party
Damage to the interest of the company also occurs when nominating them, and (ii) positions as directors of other
the resolution, although not causing damage to the company’s portfolio companies?
assets, is imposed in an abusive manner by the majority (that
is, when, without being in response to a reasonable need of the
Directors must refrain from discussing and voting on resolutions
company, it is adopted by the majority in its own interest to the
or passing decisions in which the director or a related person
unjustified detriment of the other shareholders).
may have a direct or indirect conflict of interest. Excluded from
the foregoing prohibition are the resolutions or decisions that
3.5 Are there any limitations or restrictions on the affect the director in its condition as such, such as the director’s
contents or enforceability of shareholder agreements appointment or removal from positions on the administration
(including (i) governing law and jurisdiction, and (ii) body or others similar.
non-compete and non-solicit provisions)? In any event, directors have the duty to adopt the necessary
measures to avoid situations in which their personal interests,
As mentioned in question 3.3 above, shareholders’ agreements or those on behalf of others, can conflict with the company’s
are private and only enforceable against the parties who have interests and their duties to it. Therefore, directors must also
signed them, while by-laws and other corporate documents are refrain from, among others, engaging in activities on their own
public and thus enforceable against not only the company and its behalf or on behalf of others that involve effective competition
shareholders but also against third parties. (whether actual or potential) with the company or that in any
There are no limitations or restrictions on the contents of other way place it in permanent conflict with the interests of
shareholders’ agreements other than the observance of law. In the company. Notwithstanding the above, the LSC allows, in
Spanish PE deals, the parties usually agree to subject the share- certain cases, the general meeting of shareholders to exempt
holders’ agreement to Spanish law and to submit any disputes directors from the prohibition to compete with the company
to arbitration, to ensure confidentiality and a fast process as or to exempt them from the duty of loyalty for singular and
opposed to slower, public Spanish courts. It is also common to extraordinary situations.
incorporate them into public deed in order to ensure enforcea-
bility between the signing parties.

Private Equity 2023

186 Spain

42 Transaction Terms: General 52 Transaction Terms: Public Acquisitions

4.1 What are the major issues impacting the timetable 5.1 What particular features and/or challenges apply
for transactions in your jurisdiction, including antitrust, to private equity investors involved in public-to-private
foreign direct investment and other regulatory approval transactions (and their financing) and how are these
requirements, disclosure obligations and financing commonly dealt with?
issues?
Spanish takeover regulations establish that PE investors
In general terms, PE transactions do not usually require prior shall detail the full control chain of the funds into the take-
authorisation, except for those undertaken in regulated sectors over prospectus and that all documentation must be submitted
such as, but not limited to, gaming, financing, telecom, public in Spanish as it will be addressed to all potential or actual
concessions, energy, air transport, sports, media sectors and shareholders.
tour operators. Authorisations can be at the European Union,
national or local levels depending on the applicable regulation.
5.2 What deal protections are available to private
In addition, as explained above, the new article 7-bis of
equity investors in your jurisdiction in relation to public
Spanish Law 19/2003, of July 4, subjects FDI in strategic sectors acquisitions?
(critical physical or virtual infrastructures, critical technology
and dual-use items, essential commodities, in particular, energy,
sectors with access to sensitive data and media), made by resi- PE investors are usually requested to accept break-up fees when
dents (or which beneficial owner is resident) of countries outside entering into auctions or competitive bids. However, these fees
the European Union and the EFTA, to prior administrative do not usually exceed 1% of the total transaction costs. The
authorisation by the Spanish Government (Council of Minis- board of directors of the target company must have approved
ters) if, as a consequence of such investments, the investor holds such fee, a favourable report by the target’s financial advisors
a stake equal to or greater than 10% of the capital stock of the must be submitted, and the terms and conditions of the break-up
Spanish company or effectively participates in the management fee must be described in the takeover prospectus.
of the Spanish company or in its control.
As of March 18, 2020, FDI is also restricted (and may be 62 Transaction Terms: Private Acquisitions
subject to prior authorisation) to foreign investors that are
directly or indirectly controlled by a third-country govern- 6.1 What consideration structures are typically
ment (including public agencies, the military or armed forces), preferred by private equity investors (i) on the sell-side,
amongst others. This subjective condition may impact sover- and (ii) on the buy-side, in your jurisdiction?
eign wealth and certain pension funds and other institutional
investors who are natural investors in PE funds. Irrespective of the transaction side, PE investors usually prefer
Finally, authorisations are also required for those acquisi- locked-box structures due to the certainty they provide (as there
tions that result in a business concentration that exceeds certain are no adjustments) and the simplicity and cost-efficiency in
antitrust thresholds (supervised by both Spanish and European setting the price (using the latest approved financial statements).
Union competition authorities). In this regard, for proper buyer protection under this structure,
These restrictions were originally introduced in the frame- the seller will have to warrant the non-existence of undisclosed
work of the COVID-19 crisis, but with the new Royal Decree leakage in the financial statements until the closing date, and
571/2023 of July 4, 2023, the Spanish government has shown respect the strict, ordinary course of business provisions from the
its intention to continue with these policies. The new Royal reference date of the financial statements until the closing date.
Decree establishes the types of foreign companies and opera- Earn-out structures are still used, enabling the buyer to
tions that do or do not need to request an investment authorisa- maximise the price if the seller keeps control over the compa-
tion from the administration, which improves the predictability ny’s management and allow the buyer to reduce overpayment
of the rule and a series of exemptions to the prior authorisa- risks. Most of the time, earn-outs are conflictive and easily lead
tion regime are established. Among other measures, admin- to arbitration/litigation.
istrative deadlines for foreign investors are also improved and
shortened. In this regard, the resolution period is reduced from
the current six months to three months. In addition, the possi- 6.2 What is the typical package of warranties /
indemnities offered by (i) a private equity seller, and (ii)
bility of voluntary consultation, binding on the administration
the management team to a buyer?
and with a response period of 30 working days, is provided for.

PE sellers commonly have to offer a set of representations about

4.2 Have there been any discernible trends in the target company and the shares, although the scope and time
transaction terms over recent years?
are limited. Escrow deposits are still the most common warranty
granted by PE sellers, in which a percentage of the purchase price
In recent years, auctions and initial public offerings (“IPOs”) is deposited in a bank account for a period of time and partial
have gained special prominence with respect to bilateral trans- releases can be agreed. Escrow deposits are used much more
actions. Recent trends include the increasing use of locked-box frequently than price retentions, set-offs or on-demand bank
and earn-out structures in lieu of post-closing adjustments of guarantees. Management team members do not usually offer
the purchase price, and vendors’ loans replacing (on occasion) representations to the buyer, except for those that might corre-
financial entities financing, as well as the use of representations spond to them as selling shareholders in proportion to their stake.
and warranties insurance.

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 Garrigues 187

6.3 What is the typical scope of other covenants, 6.7 How do private equity buyers typically provide
undertakings and indemnities provided by a private comfort as to the availability of (i) debt finance, and (ii)
equity seller and its management team to a buyer? equity finance? What rights of enforcement do sellers
typically obtain in the absence of compliance by the
buyer (e.g., equity underwrite of debt funding, right to
Covenants, undertakings and indemnities are avoided as much as specific performance of obligations under an equity
possible by PE sellers. The most typically requested and contro- commitment letter, damages, etc.)?
versial covenant is non-compete, which is usually provided by
the management team but generally not by the PE seller.
In Spain, the most common scenario is the buyer providing the
seller with an equity commitment letter, which sets forth the avail-
6.4 To what extent is representation & warranty ability of debt and/or equity finance. Staple financing or a pre-
insurance used in your jurisdiction? If so, what are the arranged financing package offered to potential bidders for an
typical (i) excesses / policy limits, and (ii) carve-outs / acquisition and arranged by an investment bank is not yet common.
exclusions from such insurance policies, and what is the
Where equity finance is required, the commitment letter is
typical cost of such insurance?
usually provided by the PE funds controlling the companies.
Where debt financing is required, such letters (usually of a soft
The use of representations and warranties insurance is signifi- nature) are issued by financial entities, although they are, in
cantly increasing in Spain, particularly in auctions or competitive general, subject to the fulfilment of certain conditions: confirm-
bid acquisition processes, and affects both PE and regular M&A. atory due diligence; final agreement on contractual terms and
Any parameter of the insurance policies is determined by each conditions; and no material adverse change occurrence.
insurance company considering the coverage needed, the char- In the absence of compliance by the buying entity, sellers
acteristics of the transaction and the target company. However, have the right to request specific performance of obligations
to provide an estimated average of the market, the policy limit under the commitment letter and/or to be indemnified for the
ranges between 10% and 20% of the target’s enterprise value, damages caused. However, due to the soft nature of the letters
the deductible is fixed between 0.5% and 1% and the recovery and since they are commonly subject to certain conditions prec-
policy period is generally seven years. edent, it may be difficult to obtain their enforcement. As a
Insurance premiums vary depending on the target company, consequence, the reputational risk of non-performing PE funds
the insurer’s associated costs, the coverage requested and the is also valued by sellers when considering assuming such risk.
timing of the transaction among other factors, but usually range
between 0.5% and 2% of the policy limit.
6.8 Are reverse break fees prevalent in private equity
transactions to limit private equity buyers’ exposure? If
6.5 What limitations will typically apply to the liability so, what terms are typical?
of a private equity seller and management team under
warranties, covenants, indemnities and undertakings?
Reverse break fees are relatively unusual in PE transactions in
Spain because they are difficult to negotiate and enforce in case
PE sellers usually cap their liability at a percentage of the price of breach. Notwithstanding the above, article 42.4 of the Royal
(between 5% and 20%) and for a period of up to two years from Decree 1066/2007 of July 27, 2007 expressly allows a target to
closing, except for matters such as tax, labour, social security, grant a break fee to an initial bidder (although not to any subse-
personal data protection or environmental matters, which are quent bidder) as compensation for the bidder’s expenses in prepa-
usually subject to their relevant statutory limitation periods (e.g., ration of the offer. The break fee is payable if a competing bid is
four to five years). launched and, as a result, the initial bid does not succeed. In addi-
Warranties are usually provided for specifically identified tion, the break fee to be paid by the target is subject to four condi-
potential and relevant liabilities or to cover any potential damages tions: (i) its amount must not be greater than 1% of the total value
arising from the breach of the representations and warranties or of the bid; (ii) it must be approved by the target’s board of directors;
any covenant agreed in the share and purchase agreement. The (iii) the target’s financial adviser must provide a report in favour of
extension of the definition of damages is also negotiated and the fee; and (iv) it must be disclosed in the offer document.
limited to the item provided for in the Spanish Civil Code.
72 Transaction Terms: IPOs
6.6 Do (i) private equity sellers provide security (e.g.,
escrow accounts) for any warranties / liabilities, and 7.1 What particular features and/or challenges should
(ii) private equity buyers insist on any security for a private equity seller be aware of in considering an IPO
warranties / liabilities (including any obtained from the exit?
management team)?

No particular features and/or challenges shall concern PE

As mentioned, escrow accounts are the most common warranties sellers in considering an IPO exit, further than those applicable
granted by PE sellers. These warranties are usually requested by by law to any other seller.
buyers to cover certain potential liabilities and ensure retention
and faster access to the seller’s money, although they are mone-
tarily limited to a percentage of the purchase price, limited to a 7.2 What customary lock-ups would be imposed on
period of time, and partial releases of the amount deposited are private equity sellers on an IPO exit?
usually agreed between the parties.
Warranties in PE transactions are rarely granted, except where Lock-ups are imposed for 180 days, with a possibility of being
the management team are also selling shareholders. increased up to 360 days depending on the participation that the
PE investor might still have remaining in the target company
after the IPO exit.

Private Equity 2023

188 Spain

7.3 Do private equity sellers generally pursue a dual- 8.3 What recent trends have there been in the debt-
track exit process? If so, (i) how late in the process are financing market in your jurisdiction?
private equity sellers continuing to run the dual-track,
and (ii) were more dual-track deals ultimately realised
through a sale or IPO? Despite the fact that, in past years, financial entities and banks
were offering high liquidity and lower interest rates in the
Spanish market, driven by a macroeconomic positive environ-
Dual-track exit processes are not implemented in all transac- ment and a record of PE transactions, a significant increase in
tions but can be seen, particularly, in large deals and when the direct lending from funds has been observed. Thus, both bank
IPO market is favourable. financing and direct lending have co-existed providing inves-
PE sellers can continue to run the dual-track exit process tors and companies with a diversified menu of debt structures.
until pricing, but it usually depends on the particularities of each Nevertheless, the perceived increasing economic uncertainty
transaction. In Spain, both sales and IPOs have turned out to (e.g., rising inflation, the economic effects of the Ukraine war,
be successful, so both structures have the same possibilities to rising interest rates and the associated regulatory developments
be ultimately realised. intending to mitigate them) slowed down debt-financing activity
Stock exchange markets’ instability and geopolitical environ- during the last quarter of 2022.
ment may have a material impact on the use of dual-track trans-
action structures in 2023 and beyond as price optimisation may
advise those following both tracks.
92 Alternative Liquidity Solutions

9.1 How prevalent is the use of continuation fund

82 Financing vehicles or GP-led secondary transactions as a deal type
in your jurisdiction?
8.1 Please outline the most common sources of debt
finance used to fund private equity transactions in your
jurisdiction and provide an overview of the current state The PE secondary market has grown and become significantly
of the finance market in your jurisdiction for such debt sophisticated. The use of continuation fund vehicles aims, on
(including the syndicated loan market, private credit the one hand, to provide liquidity to existing investors and, on
market and the high-yield bond market). the other hand, to extend the holding period of assets, which,
with more time and capital, can generate attractive additional
The most common source of debt is bank financing. However, returns. The rise and growth of the secondary market is also
alternative financing tools have arisen, especially since the last explained by its flexible liquidity solutions that allow for the
global crisis where banks were not providing liquidity enough, renewal or replacement of part of the investor base.
such as in direct lending (vendor’s loans or direct financing at In this regard, it is expected that over the next few years that
the target company) and financing obtained from some mezza- the presence of this type of transaction will increase due to the
nine debt funds. advantages it brings to certain PE investors. In any case, the
The combination of both banking financing and alternative future evolution and consolidation of the secondary market in
financing has proved interesting since it allows for far more Spain will depend, to a large extent, on the ability of portfolio
complex and flexible structures, with higher returns. This is companies to maintain growth.
typically applied in hybrid structures where debt funds not only
provide equity but also debt. 9.2 Are there any particular legal requirements or
Despite the high dependence on financing from traditional restrictions impacting their use?
banks, the trend for Spanish corporates is to actively source
alternative financing. This trend has been reinforced in post- At a Spanish level, for the time being, there are no different
COVID-19 transactions and in the present geopolitical frame- restrictions or legal requirements defined for this type of trans-
work, which has raised the rate interests and the finance asso- action (beyond the regulations explained above applicable to all
ciated costs. PE transactions). However, this is an issue that may change
Regarding syndicated loan structures, rising interest rates in the coming years, as in jurisdictions such as the U.S., where
have increased their funding costs and the pricing differential the Securities Exchange Commission (“SEC”) has already
between private debt players and banks has narrowed. Private expressed its willingness to focus on this type of transactions
debt funds, which hold loans on their balance sheets, can also and regulate certain matters associated with them.
close deals faster than banks.
102 Tax Matters
8.2 Are there any relevant legal requirements or
restrictions impacting the nature or structure of the debt
10.1 What are the key tax considerations for private
financing (or any particular type of debt financing) of
equity investors and transactions in your jurisdiction?
private equity transactions?
Are off-shore structures common?

Financial assistance (that is, to advance funds, extend credits Unless the investor is resident in a tax haven, income obtained by
or loans, grant security, or provide financial assistance for the non-resident investors in Spanish PE-regulated vehicles (both
acquisition of its own quotas or shares) is the main legal restric- dividends and capital gains derived from the transfer of shares
tion under the LSC. in the Spanish PE) is not usually subject to taxation in Spain.
Additionally, there are some tax limitations imposed to tax Subject to the investor tax residency, interest income obtained
deductibility of interests (as further explained in section 10 below). by non-resident investors could be subject to Withholding Tax
(except if the lender is the beneficial owner of the interest and

Private Equity 2023

 Garrigues 189

they are a European Union resident). Other types of vehicles are fulfilled (i) the economic rights will have to be conditional
require careful analysis to facilitate efficient cash-back channels on the other investors at the entity obtaining a minimum level
to investors. of profitability defined in the entity’s regulations or bylaws, and
Off-shore structures are also common in Spanish PE deals (ii) the shares or rights must be held for at least five years, unless
for international Funds. However, it is important to undertake a transfer following death occurs, or they are liquidated earlier
a particular analysis of certain tax issues like the tax deduct- or become null and void due to a change of management entity.
ibility of the interest expense incurred by the Spanish entity This last requirement will be laid down, as applicable, for the
acquiring the target and the option for the tax consolidation entities owning the shares or rights.
regime. A 95% participation exemption regime (a 100% partic- This tax treatment will not be applicable where the special
ipation exemption until 2020) also applies to domestic invest- economic rights come directly or indirectly from an entity resi-
ments when the shareholding in the target is higher than 5%, dent in a country or territory considered as a non-cooperative
that is, dividends obtained by Spanish entities from Spanish jurisdiction or with which there is legislation on mutual assis-
subsidiaries are 95%-exempt from Corporate Income Tax tance regarding the exchange of tax information.
(“CIT”). Likewise, capital gains obtained by Spanish entities
from the transfer of Spanish subsidiaries are also entitled to the
10.3 What are the key tax considerations for
95% exemption to the extent that certain requirements are met. management teams that are selling and/or rolling over
The standard CIT rate is 25%, so the 95% participation part of their investment into a new acquisition structure?
exemption leads to an effective 1.25% (25% × 5%) taxation on
qualifying dividends and capital gains.
As mentioned in question 10.2 above, capital gains at exit are
generally subject to Personal Income Tax at a 28% maximum
10.2 What are the key tax-efficient arrangements that marginal tax rate (depending on the Autonomous Community).
are typically considered by management teams in private The main tax consideration in the reinvestment of part of the
equity acquisitions (such as growth shares, incentive management team’s investment into a new acquisition struc-
shares, deferred / vesting arrangements)?
ture is that the exchange of shares is qualified as tax-neutral.
However, recent tax audits and court resolutions have denied
It is common practice for the management team to receive incen- the application of the tax neutrality regime to exchanges of
tive packages based on risk-sharing principles and the maximisa- shares in certain cases (e.g., when “coexisting” an exchange of
tion of value at exit. Considering tax-efficiency reasons, manage- shares and a transfer of shares, under certain conditions). To
ment teams usually focus their attention on: (i) sweet equity apply for the tax neutrality regime in share-for-share exchanges,
or ratchets; (ii) payments of deferred bonus (which may enjoy the issuer of the new shares (i) should hold more than 50% of
certain reductions for tax purposes if generated over more than the share capital in the target company as a result of the shares’
two years); or (iii) stock appreciation or similar rights (“SAR”). exchange, and (ii) cannot pay more than 10% in cash.
If the management team also holds a minority stake in share
capital of the target company, capital gains upon exit would be
10.4 Have there been any significant changes in tax
generated in the same way as the financial investors and would
legislation or the practices of tax authorities (including
be subject to a maximum 28% Personal Income Tax general rate in relation to tax rulings or clearances) impacting private
(depending on the Autonomous Community), which is lower equity investors, management teams or private equity
than the taxation of the income received as employment remu- transactions and are any anticipated?
neration (which, depending on the Autonomous Community,
may reach a 50% marginal rate). Likewise, ratchet payments
The last legal reform operated in the tax area with a significant
upon exit up to EUR 300,000 may benefit from a 30% tax reduc-
impact in the PE industry and structures was carried out in 2014,
tion provided for gains accrued in periods longer than two years.
with effect as of January 1, 2015 (mainly due to the amendments
Nevertheless, there is a certain discussion about the taxation
on interest deductibility – specific limits for LBO transactions
of these instruments and their risk of re-classification, due to
– and tax consolidation). As explained in question 10.2 above,
the wide definition of “salary” or “work-related income” for
Spain has enacted certain regulations on carried interest (previ-
tax purposes, and the already existing anti-avoidance rules (e.g.,
ously, only the territories of the Basque Country and Navarra
any assets, including securities or derivatives, acquired by an
had specific regulations on this topic). In 2020, a reform, effec-
employee below market price are deemed to be “salary” from a
tive as of January 1, 2021 has brought certain additional tax
Personal Income Tax point of view).
reforms that may have an impact on the traditional PE struc-
Starting to apply on January 1, 2023, new personal income tax
tures, such as the reduction to 95% of the participation exemp-
rules have been introduced regulating taxation of the on carried
tion on dividends and capital gains.
interest. Previously, only the territories of the Basque Country
As to the approach of the tax authorities, interest deduction in
and Navarra had rules on this topic.
PE structures has been the main area of discussion over the last
The new rules apply to income obtained from the successful
few years (especially in intra-group indebtedness), together with
management of PE entities: (a) closed-ended alternative invest-
the remuneration of the management team (see question 10.2
ment funds, as defined in Directive 2011/61/EU, falling into any
above) and the analysis of the rationale and substance of struc-
of the following categories (i) PE entities as defined in article 3
tures as a whole (following OECD/BEPS approach). This has
of Law 22/2014 of November 12, 2014, (ii) European venture
been reinforced with the implementation into Spanish regula-
capital funds, (iii) European social entrepreneurship funds, and
tions of the provisions of ATAD 2 Directive, covering all types
(iv) European long-term investment funds; and (b) other similar
of hybrid situations and hybrid mismatches.
investment schemes to those mentioned.
Tax rulings aimed at providing legal security to particular
The specific provisions are as follows: (a) carried interest is
situations or transactions may be more difficult to obtain, as the
defined expressly in the law as salary income; (b) a 50% portion
Directorate General of Taxes is focusing on the technical inter-
of this income will be included without applying any exemption
pretation of the rules, rather than on its application to particular
or reduction whatsoever, provided the following requirements
transactions.

Private Equity 2023

190 Spain

Furthermore, there is recent ECJ case-law (known as the financial, commercial, tax, technical, regulatory and compli-
Danish cases) and domestic case-law, where the Danish cases ance. However, red-flag reports, sample-based due diligence
have already been transferred to the Spanish context, which and materiality thresholds are common as well. The scope and
refers to the “beneficial ownership” clause as an autonomous detail of the analysis are also adjusted depending on the insur-
anti-abuse provision, potentially leading to the denial of the ance requirements and limitations of coverage.
benefits of the European Union Directives in terms of exemp- It is generally conducted by outside advisors specialised in
tion on withholding taxes on dividends and interest paid to each area. The usual timeframe covers between two to four
European Union residents. weeks, depending on the information available, the commit-
ment, the resources devoted by each party and the technology
112 Legal and Regulatory Matters used in the process. Publicly traded companies are normally
exempt from due diligence work.
11.1 Have there been any significant legal and/or
regulatory developments over recent years impacting 11.5 Has anti-bribery or anti-corruption legislation
private equity investors or transactions and are any impacted private equity investment and/or investors’
anticipated? approach to private equity transactions (e.g., diligence,
contractual protection, etc.)?
The regulatory framework for PE investors has remained stable
since the Spanish Law 22/2014 on regulated PE vehicles and PE houses have one or more compliance-dedicated officers
close-ended collective investment (the “PE Law”) transposed taking care, among other tasks, of conducting (at least) certain
the AIFM directive for Spanish PE vehicles. Since then, the PE preliminary due diligence when approaching a potential invest-
Law has granted a stable regulatory framework for PE vehicles. ment. Additionally, certain compliance provisions and covenants
are usually seen in investment and/or shareholders’ agreements.
11.2 Are private equity investors or particular
transactions subject to enhanced regulatory scrutiny in 11.6 Are there any circumstances in which: (i) a private
your jurisdiction (e.g., on national security grounds)? equity investor may be held liable for the liabilities of
the underlying portfolio companies (including due to
breach of applicable laws by the portfolio companies);
PE transactions are not subject to any prior authorisation unless,
and (ii) one portfolio company may be held liable for the
as stated in question 4.1 above, the company is engaged in a liabilities of another portfolio company?
regulated sector, the transaction results in a concentration of
companies that exceeds certain antitrust thresholds, or the
transaction requires prior FDI authorisation. A PE investor may be held accountable for the liabilities of the
Further, any foreign investments or divestments in Spanish underlying portfolio companies: (i) if the PE investor is consid-
companies (no matter who the final foreign investor is) must, ered a company “shadow director”; or (ii) if the court lifts the
however, be communicated to Spanish authorities once executed, corporate veil of the portfolio company and, consequently, the
for statistical purposes only. action or omission for which a liability has risen is attributed to
the PE investor.
Otherwise, a portfolio company (or its directors, officers
11.3 Are impact investments subject to any additional or employees) cannot be held accountable for the liabilities of
legal or regulatory requirements? another portfolio company.

Impact investments are not subject to any additional require- 122 Other Useful Facts
ments unless, as stated in question 4.1 above, the company is
engaged in a regulated sector, the transaction results in a concen-
12.1 What other factors commonly give rise to concerns
tration of companies that exceeds certain antitrust thresholds, for private equity investors in your jurisdiction or should
or the transaction requires prior FDI authorisation. such investors otherwise be aware of in considering an
investment in your jurisdiction?
11.4 How detailed is the legal due diligence (including
compliance) conducted by private equity investors prior Most of the relevant factors that a potential PE investor must
to any acquisitions (e.g., typical timeframes, materiality, consider when approaching a Spanish investment have already
scope, etc.)? been addressed in the previous sections. As in any other
economy, legal certainty, political stability, foreign exchange
Due diligence work is a process to be performed thoroughly, rates, labour and union regulations, and other rights become
since the report usually covers an extensive analysis of the major considerations to investment in our jurisdiction.
potential investment from several perspectives, including legal,

Private Equity 2023

 Garrigues 191

Ferran Escayola is a Corporate, M&A and PE partner based in Spain, co-chairs the Firm’s U.S. Desk and currently coordinates the M&A group
in Barcelona, Palma and Zaragoza. Until 2016, he headed the Firm’s office in New York.
His practice focuses on Spanish M&A and PE, with a particular emphasis in cross-border transactions with the U.S. and LatAm and American
investments in Spain. Ferran has a significant track record and experience with multijurisdictional acquisitions and foreign investments.
He graduated from the Autonomous University of Barcelona where he completed a specialisation in European Community Law. He later
obtained his LL.M. in International Economic Law (honours) from Howard University School of Law in Washington, D.C. and supplemented
his studies by completing a postgraduate programme at Harvard Law School. From 2005–2006, he worked as an associate in the M&A
department of Skadden, Arps, Slate, Meagher & Flom, LLP, in New York.

Garrigues Tel: +34 93 253 37 00

Avinguda Diagonal, 654 Email: ferran.escayola@garrigues.com
08034 Barcelona URL: www.garrigues.com
Spain

María Fernández-Picazo is a Corporate, M&A and PE partner based in Madrid (Spain). María is an expert in commercial law, specifically
corporate law and M&A, with a special focus on PE (both transactions and fundraising), leveraged financing and MBIs/MBOs. She has
participated in numerous M&A transactions, reorganisations and PE operations, covering a broad range of industries. She has advised many
national and international funds that operate in the PE industry.
She also has a wealth of experience in providing corporate advice, an area in which she is a recognised expert, and has participated in
numerous joint venture operations and corporate reorganisations involving multinational groups. Moreover, she acts as a board secretary to
many companies. Most of the international legal directories, such as Chambers and Partners, The Legal 500 and Best Lawyers, have identified
her as an outstanding lawyer in the PE practice area.

Garrigues Tel: +34 91 514 52 00

Calle Hermosilla, 3 Email: maria.fernandez-picazo@garrigues.com
28034 Madrid URL: www.garrigues.com
Spain

Garrigues is a leading legal and tax services firm with international coverage industry players. Garrigues M&A and PE partners are highly and consist-
through our dedicated offices in Beijing, Brussels, Bogota, Casablanca, ently recognised by the most prestigious rankings and international legal
Lima, Lisbon, London, Mexico D.F., New York, Porto, Santiago de Chile, São directories and by their clients.
Paulo, Shanghai, and Warsaw, in addition to our 18 offices in Spain. www.garrigues.com
Our PE teams sit in the main offices of the firm’s extensive Spanish and
international network, thereby finding the right blend between specialist
expertise and local market knowledge. The PE group works in close collab-
oration with other industry specialists, ensuring optimum quality and tailor-
based analysis for each acquisition and for each investor.
Our PE practice covers areas such as setting-up funds, acting on behalf
of management teams and investors, advising transactions in seed or
venture stages, LBOs or MBOs and funds of funds transactions.
Our experience accumulated in the sector has made Garrigues one of the
leading providers of legal and tax services to PE firms, LPs, GPs and other

Private Equity 2023

192 Chapter 21

Switzerland
Switzerland

Dr. Christoph Neeracher

Bär & Karrer Ltd. Dr. Luca Jagmetti

vehicle. The NewCo is held either directly or via Luxembourg,

12 Overview the Netherlands or a similar structure. We have also seen
AcquiCos incorporated outside of Switzerland.
1.1 What are the most common types of private equity Management usually invests directly in the AcquiCo rather
transactions in your jurisdiction? What is the current
than via a management participation company. Often, a single
state of the market for these transactions?
shareholders’ agreement (“SHA”) is concluded between the
financial investor(s) and management, which governs all aspects
All of the standard transaction strategies to acquire portfolio of the investment (governance, exit procedures, share trans-
companies are commonly used in Switzerland. We assume fers, good/bad leaver provisions, etc.). In other cases, a main
that regular leveraged buyouts have accounted for the majority SHA is concluded between the financial sponsors and a sepa-
of the transactions in recent years. After 2021 being a record rate, smaller SHA with management.
deal-making year for private equity, activity in 2022 returned to
more regular levels and the total deal value dropped due to the
absence of any large-scale transactions (according to the KPMG 2.2 What are the main drivers for these acquisition
M&A Sector Reports for Switzerland in 2022). structures?

The acquisition structure is mainly tax-driven (tax-efficient

1.2 What are the most significant factors currently
encouraging or inhibiting private equity transactions in
repatriation of dividends/application of double taxation treaties,
your jurisdiction? tax-exempt exit). Directly investing in the AcquiCo may allow
Swiss-domiciled managers to realise a tax-free capital gain on
their investment when the AcquiCo is sold on exit.
M&A activity in Switzerland decreased in early 2023, likely due
to inflation and therefore higher interest rates for transaction
financing. It is further possible that the shock of the downfall 2.3 How is the equity commonly structured in private
of Credit Suisse is still causing hesitation among deal makers to equity transactions in your jurisdiction (including
initiate new projects. institutional, management and carried interests)?

A Swiss NewCo often has only one class (or a maximum of two
1.3 Are you seeing any types of investors other
than traditional private equity firms executing private classes) of shares. Preferential rights, exit waterfall, etc. are
equity-style transactions in your jurisdiction? If so, implemented on a contractual level in the SHA. NewCos incor-
please explain which investors, and briefly identify any porated abroad often have several classes of shares.
significant points of difference between the deal terms
offered, or approach taken, by this type of investor and
that of traditional private equity firms. 2.4 If a private equity investor is taking a minority
position, are there different structuring considerations?

A number of family offices are playing an active role in Swiss

private equity-style transactions, both in co-investments with Structuring is, in principle, not fundamentally different from
private equity funds and as sole investors. In particular, in the majority investments. Pre-existing structures are often main-
latter case, their approach can differ from traditional private tained to a certain extent. However, on a contractual level,
equity firms, e.g. in terms of structuring in connection with tax increased protection is sought (veto rights, the right to trigger
considerations. an exit, etc.).

22 Structuring Matters 2.5 In relation to management equity, what is the

typical range of equity allocated to the management, and
what are the typical vesting and compulsory acquisition
2.1 What are the most common acquisition structures
provisions?
adopted for private equity transactions in your
jurisdiction?
Management equity amounts and terms depend very much on
Usually, private equity funds investing in Swiss portfolio compa- the individual deal. Typically, the management stake ranges
nies set up a NewCo/AcquiCo in Switzerland as an acquisition between 3–10%. In most cases, standard drag-along and

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 Bär & Karrer Ltd. 193

tag-along provisions and good/bad leaver call options for the business plans, related party transactions, etc.)? If a
benefit of the financial sponsor will apply. Put options for the private equity investor takes a minority position, what
benefit of management are less prevalent. veto rights would they typically enjoy?

2.6 For what reasons is a management equity holder If a private equity investor holds a minority of the voting rights, its
usually treated as a good leaver or a bad leaver in your veto rights usually depend on the stake held: while a small investor
jurisdiction? (up to 20%) normally enjoys only fundamental veto rights aimed
at the protection of its financial interest (dissolution, pro rata
Good leaver cases typically encompass: (i) termination of right to capital increases, no fundamental change in business,
maximum leverage, etc.), investors holding a more significant
employment by the company absent cause set by the manager;
minority stake (20–49%) usually also have veto/influence rights
(ii) termination of employment by the manager with cause set by
regarding important business decisions and the composition of
the company; and (iii) death, incapability, reaching of retirement
senior management. The exit rights for private equity investors
age or mutual termination.
holding a minority position are usually heavily negotiated.
Bad leaver cases on the other hand usually include (i) termi-
nation of employment by the company with cause set by the
manager, (ii) termination of employment by the manager 3.3 Are there any limitations on the effectiveness of
absent cause set by the company, and (iii) material breach by the veto arrangements: (i) at the shareholder level; and (ii) at
the director nominee level? If so, how are these typically
manager of the SHA or criminal acts.
addressed?

32 Governance Matters
At shareholder level, veto rights may be created by introducing
high quorums for certain shareholders’ decisions in the arti-
3.1 What are the typical governance arrangements cles of association and the SHA. Such veto rights are generally
for private equity portfolio companies? Are such regarded as permissive, provided the arrangement does not lead
arrangements required to be made publicly available in
to a blockade of decision-taking in the company per se.
your jurisdiction?
At board level, individual veto rights of certain board members
cannot be implemented based on the articles of association or
The predominant model for acquisitions of portfolio compa- other corporate documents. However, such individual veto
nies in Switzerland is the stock corporation (Aktiengesellschaft). rights are regularly incorporated in the SHA; i.e. the parties agree
Sometimes, limited liability companies (“LLCs” or “GmbH”) that the board shall not take certain decisions without the affirm-
are used, which have the advantage of being treated as trans- ative vote of certain nominees. A board decision taken in contra-
parent for US tax purposes. diction to such contractual arrangement would still be valid but
The stock corporation is governed by a board of directors that may trigger consequences under the SHA. Furthermore, direc-
has a supervisory function and resolves on strategic and impor- tors are bound by a duty of care and loyalty vis-à-vis the company.
tant issues (appointment of senior management, etc.). A director If abiding by instructions given by another person based on
is elected ad personam; proxies (e.g. in the case of absence at meet- contractual provisions leads to a breach of such duties, the board
ings) are not possible. member may not follow such instructions and will likely not be in
Day-to-day management is normally delegated to manage- breach of the SHA (at least if the latter is governed by Swiss law).
ment, based on organisational regulations. They often contain
a competence matrix defining the competences of each manage- 3.4 Are there any duties owed by a private equity
ment level and the decisions that need approval by the board or investor to minority shareholders such as management
even shareholders. shareholders (or vice versa)? If so, how are these
Such division of competence is – together with board compo- typically addressed?
sition, quorum requirements, etc. – also reflected on a contrac-
tual level in the SHA. Purely from its position as a shareholder, in principle, a private
Neither the organisational regulations nor the SHA are equity investor does not have such duties; shareholders of a
required to be made publicly available in Switzerland; only the Swiss stock corporation do not have any duty of loyalty.
articles of association. However, directors, officers and management have a duty of
Our comments in question 3.1 above regarding stock corpo- care and loyalty towards the company and, to a certain extent,
rations apply largely also to LLCs. also to the minority shareholders. Under special, limited
On 1 January 2023, Switzerland saw a general corporate law circumstances, a private equity investor or an individual acting
reform enter into force. The aim of the reform was to modernise for it may be regarded as de facto/shadow director of the company
corporate governance by strengthening (minority) shareholder and, consequently, also be bound by such duties. The claim that
rights and, for listed companies, promoting gender equality in a shareholder or one of its representatives is a shadow director
boards of directors and in senior management. Furthermore, might be successfully made if such person has de facto acted as
the new law facilitates company formation, makes capital rules an officer of the company, e.g. by directly taking decisions that
more flexible (e.g. allows for capital to be denominated in certain would actually be within the competence of the board, etc.
foreign currencies) and partially amends the rules on corporate
restructurings. 3.5 Are there any limitations or restrictions on the
contents or enforceability of shareholder agreements
(including (i) governing law and jurisdiction, and (ii)
3.2 Do private equity investors and/or their director
non-compete and non-solicit provisions)?
nominees typically enjoy veto rights over major
corporate actions (such as acquisitions and disposals,
SHAs are common in Switzerland and are normally governed by

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Swiss law. The parties are largely free to determine the rights sponsor(s) that are each represented on the board, issues related
and duties but there are certain limitations. The most impor- to conflicts of interest are of limited relevance in practice.
tant are:
■ an SHA may not be unlimited in time/valid during the 42 Transaction Terms: General
entire lifetime of the company, but may have a maximum
term of ca. 20–30 years; and
4.1 What are the major issues impacting the timetable
■ as per mandatory corporate law, directors must act in the for transactions in your jurisdiction, including antitrust,
best interests of the company (duty of care and loyalty), foreign direct investment and other regulatory approval
which may hinder the enforcement of the SHA if its terms requirements, disclosure obligations and financing
would conflict with such duties. issues?
An SHA is only enforceable against its parties. There is a
debate in Swiss legal doctrine as to what extent the company itself If certain turnover thresholds are met, a Swiss merger filing
may be party to an SHA and be bound by its terms. While a must be made. Unless the Competition Commission (“CC”)
majority acknowledges that the company may fulfil some admin- decides to initiate a four-month phase II investigation, clearance
istrative duties, entering into further obligations is questionable. is granted within one month (phase I) after filing the complete
Non-compete obligations of the shareholders in favour of the application. It is strongly recommended that a draft filing be
company are typically enforceable if the respective shareholders submitted for review by the Secretariat (which usually takes one
are (jointly) controlling the company. Furthermore, non-compete to two weeks) to make sure that the filing is complete (thereby
obligations need to be limited to the geographical scope and scope triggering the one-month period) and not rejected as incomplete
of activity of the company. 10 days after filing.
To secure share transfer provisions of the SHA, the parties For transactions regarding certain industries, governmental
often deposit their shares with an escrow agent under a sepa- approvals must be obtained (e.g. banks, telecoms, etc.). The
rate share escrow agreement. Sometimes, SHAs also provide for impact on the timetable depends on the respective regulation and
penalty payments in case of breach. on the authorities involved. While a general regime on foreign
direct investments is currently in discussion, it is not yet clear if
3.6 Are there any legal restrictions or other any of the proposed rules will be adopted.
requirements that a private equity investor should Other than that, practical timing constraints such as setting up
be aware of in appointing its nominees to boards of a NewCo (ca. 10 days) are similar to other European jurisdictions.
portfolio companies? What are the key potential risks
and liabilities for (i) directors nominated by private
equity investors to portfolio company boards, and (ii) 4.2 Have there been any discernible trends in
private equity investors that nominate directors to transaction terms over recent years?
boards of portfolio companies?
With a clear sellers’ market, the recent trend of share purchase
On a practical note, at least (i) one person with individual signa- agreements tending to be more seller-friendly (e.g. with regard to
tory power residing in Switzerland, or (ii) two individuals with representations and warranties (“R&W”), warranty and indem-
joint signatory power both residing in Switzerland, must be nity (“W&I”) insurances, no CPs, etc.), is gradually shifting back
able to fully represent the company (entry into the commer- to more balanced terms.
cial register). It is not necessary that such persons are board As a general observation, typical Swiss share/asset purchase
members (but, e.g. managers). Additional individual or collec- agreements still tend to be significantly shorter in length than US/
tive signatory rights may also be granted for persons residing UK agreements – a consequence of Switzerland’s civil law system.
outside Switzerland.
Directors, officers and managers of the company (including 52 Transaction Terms: Public Acquisitions
nominees of the private equity investor) have a duty of care and
loyalty towards the company and must safeguard the (sole) interest 5.1 What particular features and/or challenges apply
of the portfolio company, even if such interest is contrary to the to private equity investors involved in public-to-private
interest of the appointing private investor. Under special, limited transactions (and their financing) and how are these
circumstances, a private equity investor or an individual acting for commonly dealt with?
it may be regarded as a de facto/shadow director of the company
and, consequently, also be bound by such duties. To prevent such a Anyone who acquires equity securities that, when added to equity
scenario, decisions should solely be taken by the competent bodies. securities already owned, exceed the threshold of one-third of
Further, directors, officers and managers may be held liable in the voting rights (irrespective of whether these voting rights
case of non-payment of certain social security contributions and are exercisable) of a Swiss listed company, is obliged to make a
taxes by the company. public tender offer for all listed equity securities of the company
(mandatory tender offer), barring exemptions granted by the
3.7 How do directors nominated by private equity Swiss Takeover Board. The target company may, however, have
investors deal with actual and potential conflicts of either increased such threshold in its articles of association to a
interest arising from (i) their relationship with the party maximum of 49% of the voting rights (opting up), or completely
nominating them, and (ii) positions as directors of other excluded the obligation to make an offer (opting out).
portfolio companies? Further, anyone who exceeds certain thresholds of the voting
rights in a Swiss listed company (the lowest triggering threshold
In case of a conflict of interest, the concerned director must is 3%) is obliged to make a notification to the company and the
inform the other board members and abstain from participating stock exchange (disclosure obligation).
in the respective discussion and decision-making process. In Moreover, to carry out a statutory squeeze-out or a
typical Swiss private equity set-ups with one or few financial squeeze-out merger subsequent to a public tender offer, the

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bidder must hold at least 98% (for a statutory squeeze-out) or 6.4 To what extent is representation & warranty
90% (for a squeeze-out merger) of the voting rights of the target insurance used in your jurisdiction? If so, what are the
company. Voluntary tender offers are regularly made subject typical (i) excesses / policy limits, and (ii) carve-outs /
to a minimum acceptance condition, which, however, does exclusions from such insurance policies, and what is the
normally not exceed two-thirds of the target company’s shares typical cost of such insurance?
(depending on the circumstances, the Takeover Board may
grant exemptions). Thus, the bidder can typically not structure W&I insurance has become quite common in Switzerland.
the offer in a way to exclude the risk of ending up holding less Usually, a W&I insurance policy will usually not cover: (i) liabil-
than 90% and, consequently, not being able to squeeze out the ities arising from known facts, matters identified in the due dili-
remaining minority shareholders. In practice, however, bidders gence (“DD”) or information otherwise disclosed by the seller; (ii)
reach squeeze-out levels in most Swiss public acquisitions. forward-looking warranties; (iii) certain tax matters, e.g. transfer
pricing and secondary tax liabilities; (iv) pension underfunding;
5.2 What deal protections are available to private (v) civil or criminal fines or penalties where insurance cover may
equity investors in your jurisdiction in relation to public not legally be provided; (vi) post-completion price adjustments and
acquisitions? non-leakage covenants in locked-box deals; (vii) certain categories
of warranties, e.g. environmental warranties or product liability;
and (viii) liabilities arising as a result of fraud, corruption or bribery.
Both takeover parties can agree on break fees unless the fee
payable by the target company will result in coercing share-
holders to accept the offer or deter third parties from submitting 6.5 What limitations will typically apply to the liability
an offer. As a rough rule of thumb, break fees should not consid- of a private equity seller and management team under
erably exceed the costs in connection with the offer. The parties warranties, covenants, indemnities and undertakings?
must also disclose such agreements in the offer documents.
In addition, block trades secure an improved starting position The liability for breaches of R&W is typically subject to a de
and decrease the likelihood of a competing bid (although disclo- minimis amount (depending on deal size) and a threshold amount
sure obligations must be complied with). An alternative would (often approximately 1% in mid-cap transactions), as well as a
be tender obligations from major shareholders. These would, cap in the range of 10–30%. Title and tax representations are
however, not be binding in the event of a competing offer. often not subject to such limitations.
Managers are only liable in proportion to their shareholding.
62 Transaction Terms: Private Acquisitions
6.6 Do (i) private equity sellers provide security (e.g.,
6.1 What consideration structures are typically escrow accounts) for any warranties / liabilities, and
preferred by private equity investors (i) on the sell-side, (ii) private equity buyers insist on any security for
and (ii) on the buy-side, in your jurisdiction? warranties / liabilities (including any obtained from the
management team)?
The locked-box mechanism (with anti-leakage protection)
preferred on the sell-side, and NWC/Net Debt adjustments, Escrows to secure R&W are not uncommon; in particular, in
based on closing accounts, preferred on the buy-side, are equally case of multiple sellers (e.g. when a large number of managers
common in Switzerland. However, the seller-friendly market in are co-sellers).
recent years has led to an increase in the use of the locked-box
mechanism. Earn-outs and vendor loans have been seen less 6.7 How do private equity buyers typically provide
often recently. comfort as to the availability of (i) debt finance, and (ii)
equity finance? What rights of enforcement do sellers
typically obtain in the absence of compliance by the
6.2 What is the typical package of warranties /
buyer (e.g., equity underwrite of debt funding, right to
indemnities offered by (i) a private equity seller, and (ii)
specific performance of obligations under an equity
the management team to a buyer?
commitment letter, damages, etc.)?

Usually, a customary set of R&W is granted by a private equity

Typically, in relation to the equity portion, the private equity fund
seller and co-selling managers, which is not materially different
provides an equity commitment letter that may be enforced by the
from what strategic sellers offer. Quite often, tax indemnities
seller (obliging the private equity fund to provide the NewCo with
are seen.
the necessary funds). The debt portion is usually comforted by
If W&I insurance is taken out, claims can only be brought
binding financing term sheets, interim loan agreements or similar.
against the latter.
In the context of public transactions, the availability of funds must
be confirmed by the review body before the launch of the offering.
6.3 What is the typical scope of other covenants,
undertakings and indemnities provided by a private
equity seller and its management team to a buyer? 6.8 Are reverse break fees prevalent in private equity
transactions to limit private equity buyers’ exposure? If
so, what terms are typical?
Typically, the parties agree on non-compete and non-solicitation
obligations for a period of one to three years.
Reverse break fees are relatively rarely seen in private equity trans-
actions; sellers often insist on actual financing proof (see above).

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196 Switzerland

72 Transaction Terms: IPOs 7.3 Do private equity sellers generally pursue a dual-
track exit process? If so, (i) how late in the process are
private equity sellers continuing to run the dual-track,
7.1 What particular features and/or challenges should and (ii) were more dual-track deals ultimately realised
a private equity seller be aware of in considering an IPO through a sale or IPO?
exit?

This is heavily dependent on the general market conditions. If an

A private equity seller should be aware of the following features IPO is considered, dual-track processes are often seen. However,
and challenges for a company going public: if an IPO is not the preferred route at the beginning, a trade sale
■ Lock-up: typically, existing shareholders holding more (auction) process will often just take place. Dual-track processes
than 3% of the share capital prior to the offering, as well are being pursued until very late in the process, although parties
as the members of the board of directors and the execu- try to make their final decision before the intention to float is
tive management, will be required by the underwriters to published. Preferably, the timelines for both tracks are aligned so
sign lock-up undertakings of six to 18 months after the that the analyst reports and investor feedback on the IPO track
initial public offering (“IPO”). Therefore, SHAs among are available simultaneously with the binding offers on the trade
private equity investors and agreements with directors sale track. This allows the decision on the track to be made once
and managers should provide for respective undertakings. there is a relatively clear view on the valuation.
■ Drag-along rights: SHAs should also include drag-along
rights to ensure that there are sufficient shares to be sold
in the secondary tranche.
82 Financing
■ Corporate governance: private equity-owned companies
will have to adapt their corporate governance regimes 8.1 Please outline the most common sources of debt
finance used to fund private equity transactions in your
in order to make the company fit for an IPO (including
jurisdiction and provide an overview of the current state
amendments to the articles of association, board compo- of the finance market in your jurisdiction for such debt
sition, internal regulations, executive compensation, etc.). (including the syndicated loan market, private credit
■ Regulation: as in most jurisdictions, Swiss law and the listing market and the high-yield bond market).
rules of the SIX Swiss Exchange provide for additional obli-
gations of a public company (e.g. obligations regarding
Private equity investors usually provide financing in the form of
financial reporting, compensation of the board of direc-
subordinated loans. In the context of leveraged buyouts, inves-
tors and the senior management, ad hoc announcements,
tors will typically use senior and junior debt in the form of credit
disclosure of major shareholdings and obligations regarding
facilities provided by financial institutions. In the context of
transparency on non-financial matters such as ESG). These
acquisitions, debt providers usually require that existing debt is
obligations require additional resources within the company
refinanced at the level of the acquisition debt providers. Security
and the support of an external specialist.
released in connection with the refinancing typically serves as
■ Liability: the liability regime and exposure in connec-
collateral for the new acquisition financing. The ability of Swiss
tion with an IPO is different to a trade sale. While in a
target group companies to provide collateral is limited under
trade sale, the liability of the seller(s) is primarily contrac-
Swiss law due to Swiss corporate law restrictions. Upstream
tual (i.e. under the SPA) and, therefore, subject to nego-
and cross-stream security may only be granted if certain prereq-
tiation, the main liability risk in an IPO results from the
uisites are met, and only in the amount of the relevant Swiss
statutory prospectus liability. However, since the company
company’s freely distributable reserves.
going public is primarily responsible for preparing the
prospectus, the sellers’ exposure under this statutory regime
is limited in most cases. In addition, the underwriters typi- 8.2 Are there any relevant legal requirements or
cally require the selling shareholder(s) to also make some restrictions impacting the nature or structure of the debt
limited representations in the underwriting agreement and financing (or any particular type of debt financing) of
private equity transactions?
it is advisable that these are agreed early in the process.
■ Full exit: a full exit at the listing, i.e. a sale of all shares held
by the private equity seller, is typically not possible via an Certain limitations on leverage result from the thin capitalisa-
IPO. Therefore, the private equity seller will need to sell tion rules applied by Swiss tax authorities with respect to relat-
the remaining shares gradually or in one or more block ed-party debt. Additionally, interest paid on amounts of debt
trades after the lock-up expired. provided by shareholders exceeding certain thresholds may be
requalified as a hidden dividend if paid to a shareholder or a
related party of a shareholder. Consequently, such interest
7.2 What customary lock-ups would be imposed on
would not be tax-deductible and subject to 35% dividend with-
private equity sellers on an IPO exit?
holding tax. The Swiss tax authorities publish maximum safe
haven interest rates for intercompany loans on an annual basis.
Existing shareholders holding more than 3% of the share capital Higher interest rates can be justified with a third-party test.
prior to the offering, as well as the members of the board of Furthermore, there are restrictions on Swiss companies
directors and the executive management, will typically be granting loans or providing security that are of an upstream or
required by the underwriters to sign lock-up undertakings of six cross-stream nature (see question 8.1 above).
to 18 months after the IPO. Therefore, SHAs among private In order to avoid interest withholding tax of 35%, financing
equity investors and agreements with directors and managers of a Swiss acquisition company must comply with the so-called
should provide for respective undertakings. 10/20 non-bank rules. While interest paid on loans is generally
not subject to Swiss withholding tax, withholding tax applies
to interest payments on bonds (at a rate of 35%). According
to guidelines of the Swiss tax authorities, a loan is considered

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 Bär & Karrer Ltd. 197

a bond if either the aggregate number of non-bank lenders 10.2 What are the key tax-efficient arrangements that
(including sub-participations) exceeds 10 under financing are typically considered by management teams in private
arrangements with identical terms, or if the aggregate number equity acquisitions (such as growth shares, incentive
of non-bank lenders of a Swiss borrower exceeds 20. Against shares, deferred / vesting arrangements)?
this background, transfer restrictions and other Swiss 10/20
non-bank rules-related language must be incorporated into the From a Swiss tax point of view, “genuine” employee shares (i.e.
relevant loan document. participation instruments that qualify for dividend rights and
liquidation proceeds) are generally more favourable, compared
8.3 What recent trends have there been in the debt- to instruments, which qualify as “non-genuine” employee partic-
financing market in your jurisdiction? ipations (such as synthetic bonus schemes, phantom shares that
are taxed upon realisation/exercise). Options for shares are taxed
upon exercise or sale. The acquisition of shares at fair market value
M&A activities remain a major driver for debt-financing trans-
(“FMV”) does not lead to taxable income. A capital gain on the
actions. However, the debt-financing market is also impacted by
sale of shares that have been acquired at FMV by a Swiss resident
the following trends:
manager will generally qualify for a tax exemption. However,
■ competition on the lending market between traditional
the determination of FMV is often difficult for non-listed shares
bank and syndicated lending, and non-bank lenders
and as a fall-back, a formula value can be applied as approximate
showing an appetite for higher leverage;
for the FMV. The formula value, once chosen, must generally
■ a growing interest for ESG-related financing; and
be applied for the entire duration of the employee share incen-
■ a hike in interest rates.
tive plan. There are no specific tax reliefs or tax provisions for
management share participations if shares are acquired below
92 Alternative Liquidity Solutions FMV (formula value), except for blocking period discounts (6%
per blocking year for a blocking period of up to 10 years with a
9.1 How prevalent is the use of continuation fund maximum discount of 44.161%). The taxable income at acquisi-
vehicles or GP-led secondary transactions as a deal type tion is calculated as the difference between the (reduced) FMV of
in your jurisdiction? the shares and the price at which they are sold to the employee (if
the latter is lower). A capital gain on the sale of shares that have
Because private equity funds are typically not structured as been acquired at formula value by a Swiss resident manager more
Swiss collective investment schemes, these types of transactions than five years ago will generally qualify for a tax exemption. A
are not seen in Switzerland as a fund jurisdiction. However, sale before the expiration of the blocking period may result in a
GP-led secondaries and stapled transactions are also extended taxable salary in the amount of the remaining blocking period
to Swiss investors from time to time. discount applied at the FMV (formula value) at that time.

9.2 Are there any particular legal requirements or 10.3 What are the key tax considerations for
restrictions impacting their use? management teams that are selling and/or rolling over
part of their investment into a new acquisition structure?
See above. Where Swiss investors are targeted in GP-led
secondary transactions, the Swiss fund marketing regime may Swiss-resident managers generally try to achieve a tax-exempt
need to be considered (cf. also section 11 below). capital gain upon the sale of privately held shares. In order not
to qualify as salary (like synthetic bonus schemes), the managers
102 Tax Matters should have full ownership rights (dividend, liquidation, voting
rights). A tax-neutral roll-over may be structured in certain
circumstances. Whether the sale of shares under a management
10.1 What are the key tax considerations for private
equity investors and transactions in your jurisdiction?
participation qualifies as a tax-exempt capital gain or as taxable
Are off-shore structures common? salary is a case-by-case decision, since preferential terms (like
sweet equity) or a later investment at a formula value could lead to
(partial) taxable salary for the managers upon sale and social secu-
Switzerland is not known as a very attractive location for the rity charges for the manager as well as the Swiss employer (as well
establishment of private equity funds, mainly due to the Swiss as wage withholding tax, if applicable). Thus, it is recommendable
withholding tax (Verrechnungssteuer) and securities transfer tax to confirm the consequences of a specific management partici-
(Umsatzabgabe) regimes. Therefore, private equity funds are pation in an advance tax ruling (Swiss social security authorities
typically established in jurisdictions such as Cayman Islands, generally follow the Swiss employment income tax treatment).
Guernsey, Jersey, Luxembourg or Scotland, but also Germany,
Liechtenstein or the Netherlands.
Private equity acquisitions in Switzerland are mainly 10.4 Have there been any significant changes in tax
performed by NewCo acquisition vehicles (holding company) legislation or the practices of tax authorities (including
from jurisdictions with which Switzerland has concluded a in relation to tax rulings or clearances) impacting private
equity investors, management teams or private equity
double taxation treaty and which foresee a 0% Swiss withholding
transactions and are any anticipated?
tax for a qualifying (generally a minimum of 10% shareholding)
dividend distribution from a Swiss company. The entitlement
for a withholding tax reduction requires sufficient substance The substance of foreign acquisition companies and their quali-
and beneficial ownership of the shareholder in the Swiss target. fication as beneficial owners of the shares in the Swiss target in
For financing considerations, see question 8.2. above. order to benefit from a Swiss dividend withholding tax reduc-
tion are important. Thus, a diligent set-up and advance tax
ruling confirmation are recommended, in particular since a

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198 Switzerland

future buyer will generally inherit the current withholding tax Compared with the old law, the FinSA/CISA regime is more
situation under the so-called “old reserve” regime and address closely integrated with general financial instruments regulations
such withholding tax risks in the purchase price determina- and enables the offering of foreign investment funds, including
tion. Under the OECD’s multilateral instrument, Switzer- private equity funds, to a broader audience of qualified inves-
land has opted to apply a principal purpose test, which should, tors (including, for instance, regulated financial institutions,
however, not change the currently applied practice. A recent but also large corporates, occupational pension schemes and
anti-abuse practice may result in non-refundable Swiss with- other companies with professional treasury operations) without
holding tax on dividends by the Swiss target in cases where the having to seek approval of the fund by the Swiss Financial
Swiss acquisition company is held by a fund/non-treaty share- Market Supervisory Authority (“FINMA”) and/or having to
holder and is financed with intercompany debt/capital contri- appoint a Swiss paying agent and representative. Furthermore,
bution reserves, which can be repaid without withholding tax the licence/supervision requirement for distributors of collec-
(so called “extended international transposition”). Economic tive investment schemes was abolished with the revised CISA.
reasons for the Swiss acquisition company may help and should However, activities in or into Switzerland, aimed at the purchase
be confirmed in an advance tax ruling. of fund interests by Swiss investors, may qualify as a “financial
Further, Swiss tax authorities tend to scrutinise tax-exempt service” under the FinSA and may trigger specific point-of-sale
capital gains for selling managers, in particular within five years duties and other regulatory requirements, even if conducted on
(see question 10.2. above). Also, purchase price components or a cross-border basis from abroad into Switzerland.
transaction boni may result in taxable salary (and social security In December 2021, the Swiss parliament adopted another revi-
charges for the Swiss target). Earn-out arrangements for sellers sion of the CISA, by which a new fund category, the so-called
continuing to work for the target or non-compete agreements Limited Qualified Investor Fund (“L-QIF”) will be introduced
may partly qualify as taxable income for the seller and should in Switzerland. The L-QIF will be exempt from the require-
be structured carefully. It is important to also note that similar ment to obtain authorisation and approval from FINMA and
payments by related parties (instead of by the target company will not have any specific limitations regarding the investment
itself) could qualify as (taxable) salary, which is generally subject universe and risk diversification. As such, the L-QIF will be
to social security contributions on the level of the employee and broadly comparable to similar unregulated fund categories in
the Swiss employer as well as wage withholding tax, if applicable. known fund jurisdictions. This should increase Switzerland’s
competitiveness as a fund location in the future. The bill is
expected to come into force in late 2023 or early 2024.
112 Legal and Regulatory Matters

11.1 Have there been any significant legal and/or 11.2 Are private equity investors or particular
regulatory developments over recent years impacting transactions subject to enhanced regulatory scrutiny in
private equity investors or transactions and are any your jurisdiction (e.g., on national security grounds)?
anticipated?
Switzerland does not have any generally applicable restric-
The Swiss corporate law reform (see question 3.1 above) entered tions, notification duties or approval requirements in place with
into force in January 2023. This also includes provisions on regard to foreign direct investments (“FDI”). As mentioned in
excessive compensation for listed companies, which already question 4.1 above, an FDI regime is currently in discussion.
existed at the level of a separate ordinance and have been moved Specific restrictions exist for companies that are publicly owned
into the Swiss Code of Obligations. (at federal, cantonal or municipal level), such as in telecommu-
Another notable change in Swiss corporate law was imple- nications, radio and TV broadcasting, defence, nuclear energy
mented in November 2019 and concerns the regime for the and aviation. Furthermore, sector-specific restrictions apply
notification of the beneficial owner of shareholders acquiring regarding foreign control over Swiss regulated entities, such as
more than 25% in a Swiss company. Failure to comply with the banks or securities firms.
obligations to disclose the beneficial owners to the company is The preliminary draft of the Investment Control Act was
subject to a fine, as are intentional breaches of directors’ obliga- published on 18 May 2022 and provides for a notification and
tions relating to the keeping of a share register and register of approval requirement for certain acquisitions of domestic
beneficial owners. These criminal sanctions apply in addition companies by foreign investors. It distinguishes between state-
to corporate law consequences of non-compliance with disclo- owned or state-related and private foreign investors. For both
sure duties, which include the suspension of voting rights and investor groups, de minimis thresholds apply, below which the
the loss of property rights (e.g. the right to participate in divi- transaction does not have to be notified. The preliminary draft
dend distributions) until due notice is given to the company by further provides for sanctions that can be as high as 10% of the
the relevant shareholder. The amended rules also brought about transaction value, among others. Due to mostly negative reviews
a de facto abolition of bearer shares. of the preliminary draft, the Federal Council ordered the Federal
On 1 January 2020, the Financial Services Act (“FinSA”) and Department of Economic Affairs, Education and Research on
Financial Institutions Act (“FinIA”) entered into force, changing 10 May 2023 to draw up a draft bill until the end of 2023, with a
the Swiss financial regulatory landscape significantly. The revised more limited scope. Such bill should only apply to acquisitions
regime was initially subject to transitional rules of up to two years, of domestic businesses in critical infrastructures such as defence
meaning that the new laws have, with few exceptions, become equipment, electricity transmission and production, or health
fully effective at the beginning of 2022. The FinSA introduced and telecoms infrastructures by state-owned foreign investors.
new concepts of financial services regulation, partly modelled on
MiFID, to Switzerland. In this context, the Collective Invest- 11.3 Are impact investments subject to any additional
ment Schemes Act (“CISA”) was also revised, affecting among legal or regulatory requirements?
other aspects the regulatory framework for the marketing and
offering of interests in private equity funds and other investment In its strategic goals for the years 2021–2024, FINMA
funds in or into Switzerland. committed to contributing to the sustainable development of

Private Equity 2023

 Bär & Karrer Ltd. 199

the Swiss financial centre. The focus of FINMA is primarily A private equity investor that (solely or jointly) controls a port-
on the sustainability-related financial risks for financial insti- folio company that has infringed competition law could be made
tutions and the financial system. Currently, FINMA considers jointly and severally liable for paying the resulting fine. While
climate-related financial risks as the most measurable and it is possible that a portfolio company may be made liable for
significant financial risks in connection with sustainability. In the liabilities of another portfolio company, this is a less likely
addition, FINMA focuses in particular on the client protection scenario. See also section 12 below.
issue of greenwashing in the distribution of financial products Under normal circumstances, it is highly unlikely that a port-
and services. Clients may not be deceived by exaggerated or folio company will be liable for another portfolio company.
misleading claims about sustainable attributes, e.g. of invest-
ment products. 122 Other Useful Facts

11.4 How detailed is the legal due diligence (including 12.1 What other factors commonly give rise to concerns
compliance) conducted by private equity investors prior for private equity investors in your jurisdiction or should
to any acquisitions (e.g., typical timeframes, materiality, such investors otherwise be aware of in considering an
scope, etc.)? investment in your jurisdiction?

The legal DD usually covers the following areas: corporate; In April 2014, the European Commission imposed a €37 million
financing agreements; business agreements; employment; real fine on Goldman Sachs for antitrust breaches committed by a
property/lease; and IP/IT, data protection and litigation. The portfolio company that was formerly owned by its private equity
handling of compliance and regulatory matters depends on the arm, GS Capital Partners. GS and the portfolio company were
specific case. Typically, an external legal counsel is engaged to held jointly and severally liable for the fine. GS was held liable
conduct a red flag legal DD of two to four weeks’ duration. on the basis that it exercised decisive influence over the port-
folio company, although GS was not alleged to have partici-
pated in, been aware of or facilitated the alleged cartel in any
11.5 Has anti-bribery or anti-corruption legislation
impacted private equity investment and/or investors’
way. Even though in Switzerland no such precedents in rela-
approach to private equity transactions (e.g., diligence, tion to private equity companies exist so far, it is possible that
contractual protection, etc.)? the Swiss CC could follow the European Commission’s line of
thinking. In Switzerland, holding companies tend to be found
to be jointly and severally liable for the antitrust fines of their
In DD as well as transaction agreements, a focus on compli-
subsidiaries. Private equity investors should, therefore, imple-
ance of target companies with anti-bribery, anti-corruption and
ment a robust compliance programme in their portfolio compa-
economic sanctions has increased in recent years.
nies to avoid antitrust law infringements.

11.6 Are there any circumstances in which: (i) a private

equity investor may be held liable for the liabilities of
the underlying portfolio companies (including due to
breach of applicable laws by the portfolio companies);
and (ii) one portfolio company may be held liable for the
liabilities of another portfolio company?

Under special, limited circumstances, a private equity investor

or an individual acting for it may be regarded as a de facto/shadow
director of the company and, consequently, be bound by direc-
tors’ duties (see question 3.6 above).

Private Equity 2023

200 Switzerland

Dr. Christoph Neeracher is a partner at Bär & Karrer and Head of the Private M&A and Private Equity Practice Group. He specialises in inter-
national and domestic M&A transactions (focusing on private M&A and private equity transactions, including auction processes, secondary
buyouts, public to private transactions and distressed equity), transaction finance, venture capital, startups, corporate restructurings, reloca-
tions, corporate law, general contract matters (e.g. joint ventures, partnerships and shareholders agreements) and all directly related areas,
such as employment matters for key employees (e.g. employee participation and incentive agreements). Additionally, Christoph Neeracher
represents clients in litigation proceedings relating to his specialisation. He has received the highest recognition by the Chambers Global
guide in the Global Ranking 2021 in Band 1. Chambers Global and Europe rank him as a leader in the field of M&A (since 2010) and IFLR1000
lists him as one of the leading lawyers in Switzerland (since 2012). The International Who’s Who of M&A Lawyers lists Christoph Neeracher as
one of the world’s leading M&A lawyers. The Legal 500 (2012) describes him as “extremely experienced in M&A matters and very strong in
negotiations” and ranks him among the leading individuals.

Bär & Karrer Ltd. Tel: +41 79 619 98 53

Brandschenkestrasse 90 Email: christoph.neeracher@baerkarrer.ch
CH-8002 Zurich URL: www.baerkarrer.ch
Switzerland

Dr. Luca Jagmetti is a partner at Bär & Karrer in the Private M&A and Private Equity Practice Group. He has vast experience in domestic and
international M&A transactions in different industries, venture capital investments, corporate restructurings and general corporate, commer-
cial and employment matters, including related litigation and administrative proceedings. During his practice, he gained particular experience
in complex asset deals, management participation schemes and accounting-related M&A disputes.
Luca Jagmetti has several speaking engagements on asset transactions, legal DD and other M&A topics (e.g. a Course on Commercial Law
of the University of St. Gallen; an LL.M. programme at the University of Zurich). According to The Legal 500, he is “very knowledgeable and
speedy”. IFLR lists him as highly regarded.

Bär & Karrer Ltd. Tel: +41 58 261 52 62

Brandschenkestrasse 90 Email: luca.jagmetti@baerkarrer.ch
CH-8002 Zurich URL: www.baerkarrer.ch
Switzerland

Bär & Karrer is a leading Swiss law firm with more than 200 lawyers in „ 2019 STEP Awards (“International Legal Team of the Year”).
Zurich, Geneva, Lugano, Zug and Basel. The core business is advising „ 2019 Citywealth Magic Circle Awards (“Law Firm of the Year
clients on innovative and complex transactions and representing them in – Switzerland”).
litigation, arbitration and regulatory proceedings. The clients range from „ 2019 IFLR Awards (“Debt and Equity-linked Deal of the Year”).
multinational corporations to private individuals in Switzerland and around „ 2019, 2015 and 2014 IFLR Awards (“Legal Adviser of the Year
the world. Bär & Karrer was repeatedly awarded “Switzerland Law Firm – Switzerland”).
„ 2019, 2018, 2016, 2015 and 2014 Mergermarket M&A Awards.
of the Year” by the most important international legal ranking agencies in
„ 2018 IFLR Awards (“Deal of the Year”).
recent years. Almost all leading private equity funds active in Switzerland
„ 2016, 2013 and 2012 Chambers European Awards (“Switzerland Law
form part of our client basis.
Firm of the Year”).
„ 2023 Citywealth IFC Awards (“Law Firm of the Year – Switzerland”).
„ 2016, 2015 and 2014 The Legal 500 (“Most Recommended Law Firm
„ 2022 Mergermarket European M&A Awards (“Switzerland Legal
in Switzerland”).
Advisor of the Year”).
„ 2015, 2014, 2013, 2011 and 2010 The Lawyer’s European Awards.
„ 2022 Women in Business Law Awards EMEA (“Switzerland Firm of
„ 2015 Citywealth Magic Circle Awards (“International Law Firm of the
the Year” and “Gender Diversity International Firm of the Year”).
Year – EMEA”).
„ 2022 International Legal Alliance Summit & Awards (“Law Firm of the
„ 2014 Citywealth International Financial Centre Awards.
Year – Switzerland”).
www.baerkarrer.ch
„ 2022 Legal Community Awards Switzerland (“Law Firm of the Year”
(general), “Law Firm of the Year – Corporate and M&A”, and “Law
Firm of the Year – Sustainability”).
„ 2021 IFLR European Awards (“Debt and Equity-linked Deal of the
Year” for the Novartis Sustainability-Linked Bonds Deal).
„ 2021 Who’s Who Legal (“Law Firm of the Year” in Litigation, Private
Clients and Sports).
„ 2020 IP Global Awards (“Swiss IP-Transactions Firm of the Year”).
„ 2020, 2019, 2018, 2017 and 2016 Trophées du Droit Gold or Silver.

Private Equity 2023

 Chapter 22 201

United Kingdom

United Kingdom
Mark Evans

Dechert LLP Sam Whittaker

activity in recent years. As discussed above, activity has slowed

12 Overview due to, amongst other issues, high levels of inflation; this has not
been an issue exclusive to the UK market.
1.1 What are the most common types of private equity
transactions in your jurisdiction? What is the current
state of the market for these transactions? 1.3 Are you seeing any types of investors other
than traditional private equity firms executing private
equity-style transactions in your jurisdiction? If so,
The most common types of private equity (“PE”) transactions please explain which investors, and briefly identify any
in the UK are leveraged buyouts (predominantly in the form of a significant points of difference between the deal terms
share sale, but they may also take the form of asset acquisitions). offered, or approach taken, by this type of investor and
Additional types of PE transactions include take-private trans- that of traditional private equity firms.
actions, flotations and bolt-on transactions. Accompanying the
majority of these transactions will also be the leveraged financing/ There has been a continuation of the recent shift in non-tra-
refinancing of such deals from a variety of debt sources. ditional PE funds, such as sovereign wealth funds, pension
A notable trend in the PE market between 2020 and 2022 plans and family offices moving beyond their primary focus on
(among many such trends) has been the number of take-private minority positions to increasingly serve in a “control” or lead
transactions by PE investors. This demonstrates the amount investor-type capacity on direct investments in the PE space.
of dry powder available in the PE markets and the perceived The genesis of this trend has been the desire of these investors for
relative value of public listed targets. It also reflects PE inves- greater control, greater returns, reduced fees and greater returns
tors’ willingness to pay higher premiums due to their ability to on invested capital, particularly in the traditional PE space.
maximise the value of such target entities post-acquisition, with This shift in focus has created additional competition for tradi-
fewer administrative and governance hurdles. Further trends tional PE funds and is resulting in increased variation in the
have included a larger than usual amount of club deals, with a deployment of capital by these non-traditional PE investors across
number of PE firms forming clubs to acquire larger assets. the capital structure. Many of these non-traditional PE funds are
However, 2023 to date has marked a relative slowdown in unused to a lead investor role and are therefore still refining their
PE M&A activity compared with previous years, reflecting approach to diligence, transaction terms and governance.
(amongst other things) the high levels of inflation in the market Given the profile of the stakeholders in sovereign wealth
and reducing revenues in many businesses. funds, pension plans and family offices, there is an added
emphasis on environmentally and socially responsible invest-
1.2 What are the most significant factors currently ments and this is expected to continue to be an area of signifi-
encouraging or inhibiting private equity transactions in cant focus looking ahead.
your jurisdiction?
22 Structuring Matters
The UK has historically been the largest PE market in Europe
and has a long and proud history in welcoming PE sponsors to 2.1 What are the most common acquisition structures
fundraise and invest there. As such, the UK has a well-estab- adopted for private equity transactions in your
lished legal system and regulatory footprint to deal with various jurisdiction?
outcomes and challenges that the PE industry may face from
time to time. PE transactions in the UK are typically structured using a UK
London, in particular, hosts many of the leading European private limited company limited by shares (“Topco”), commonly
markets and participants that are required for PE investing: owned by the PE fund and management executives, which acts
sources of investor capital; debt lenders; debt markets; and many as the holding company for a chain of corporate entities. The
others. This concentration of markets and market participants bottom entity in the acquisition chain (“Bidco”), acts as the
has led to most of the key U.S. and European PE investors purchaser of the target shares and may act as borrower under
having a presence in the city. any financing arrangements. A series of entities are typically
As dealmaking returned following the severe start to the incorporated between Topco and Bidco for tax and financing
COVID-19 pandemic, the large amounts of dry powder (raised purposes, so as to allow for financing by junior lenders to be
funds) and declining value of GBP vs USD led to a surge in structurally subordinated to that by senior lenders.

Private Equity 2023

202 United Kingdom

Where transactions involve a UK target, Bidco would typi- 2.5 In relation to management equity, what is the
cally be a UK-resident limited company. However, Topco (the typical range of equity allocated to the management, and
level at which a future sale by the PE fund of the UK acquisition what are the typical vesting and compulsory acquisition
usually takes place) may be a non-UK incorporated but UK-resi- provisions?
dent company as a means of mitigating UK stamp duty, which is
payable (usually) by a buyer at 0.5% on the future transfer or sale Management would typically hold between 5% and 15% of the
of shares in a UK company. equity, although this will be very transaction-specific and the
proportion may be lower in larger transactions and vice versa.
2.2 What are the main drivers for these acquisition Transaction documents will invariably include a right for
structures? the PE investor to acquire a manager’s equity following the
termination of his/her employment with the relevant portfolio
company. The terms of such compulsory acquisition will usually
Structures are typically driven by a number of factors, including:
depend on whether the manager is a good leaver or a bad leaver.
(i) the tax and other requirements of the PE funds investing in
“Good leavers” will commonly be entitled to receive the
the transaction; (ii) the requirements of the lenders financing
higher of their acquisition cost and, subject to vesting provi-
the transactions (for example, as to any required subordination);
sions, fair market value at the point of sale for their shares. A
(iii) the overall tax efficiency of the post-acquisition group (for
“bad leaver” would commonly be entitled to the lower of fair
example, as to achieving the maximum deductibility of interest
market value and cost. Vesting provisions will often deter-
expense); and, in some cases, (iv) the requirements of manage-
mine the proportion of a good leaver’s shares that will qualify
ment (for example, if they are seeking to qualify for business
for good leaver treatment. This will generally be based on the
asset disposal relief (formerly entrepreneurs’ relief )).
expiry of a specified vesting period (usually three to five years)
following the transaction to the termination of employment.
2.3 How is the equity commonly structured in private Vesting may take place on a pro rata “straight line” basis over the
equity transactions in your jurisdiction (including vesting period or on a “cliff edge” basis only on completion of
institutional, management and carried interests)? the vesting period.

PE investors will typically subscribe for ordinary shares in the

2.6 For what reasons is a management equity holder
top holding entity in the structure (“Topco”). However, the usually treated as a good leaver or a bad leaver in your
ordinary shares subscribed by the PE investor typically repre- jurisdiction?
sent only a small proportion of its funding of the transaction.
The majority of the PE investor’s commitment is typically
Good leavers are typically those who cease to be employed by
funded as shareholder debt or preferred equity, often in the form
reason of their death or disability, retirement (although care
of “payment in kind” (“PIK”) loan notes or preference shares,
should be taken with regard to potential discrimination under
which carry a right to annual interest or coupon. The combi-
UK employment law) or, in some cases, involuntary termina-
nation of ordinary share capital and preference shares/share-
tion without cause (for example, redundancy). There may be a
holder debt held by the PE investor is commonly referred to as
discretion for management not falling within such categories to
the “institutional strip”.
be treated as good leavers nonetheless. Typically, a leaver who is
Management will commonly also take an equity stake in Topco
not a good leaver is a bad leaver.
in order to ensure their interests are aligned with the PE inves-
tors. This is often referred to as “sweet equity” or “sweat equity”.
In some cases, in particular on a secondary buyout where they 32 Governance Matters
may be required to reinvest realised gains, senior executives
may invest in both the institutional strip and the sweet equity. 3.1 What are the typical governance arrangements
Management equity incentive plans will often be put in place to for private equity portfolio companies? Are such
further incentivise management and other employees. arrangements required to be made publicly available in
Carried interest (a performance-related share of the fund’s your jurisdiction?
overall profits) is typically structured through a limited part-
nership, with executives as limited partners. Often, the carried The primary contractual document controlling the govern-
interest limited partnership will itself be a special limited partner ance of a PE portfolio company in the UK is generally a share-
in the fund limited partnership to allow carried interest to flow holders’ agreement, setting out the arrangements agreed by the
through the structure on a transparent basis such that execu- PE Sponsor, management, and any other shareholders in the
tives can benefit from capital gains tax treatment on a future exit. company. The typical matters that this agreement will cover
Entitlement to carry is typically crystallised after investors have extend to day-to-day management appointments and behaviour,
received a return of their drawn-down capital, plus any preferred conduct of business of the company (generally expressed through
return accrued and after any other pre-agreed hurdles are achieved. the form of vetoes for the PE sponsor), positive covenants for
management to follow in their operation of the business, control
of share transfers, information rights for the PE sponsor and
2.4 If a private equity investor is taking a minority
position, are there different structuring considerations?
controls over the raising of further equity and share capital for
the company. This governance arrangement may be supported
by the presence of a PE sponsor-appointed director or observer
The drivers described in question 2.2 above will remain rele- on the board of the portfolio company. The shareholders’ agree-
vant but the minority position taken by a PE investor may limit ment is a private contract agreed between the shareholders of the
the ability of the investor to dictate the relative importance of portfolio and does not generally need to be filed publicly.
these factors. Additionally, the primary constitutional document of
an English company is its articles of association. Certain

Private Equity 2023

 Dechert LLP 203

governance controls tend to be included in the articles by the company (a derivative action), or by an aggrieved shareholder on
PE sponsor (as a breach of these provisions then becomes an the basis of unfair prejudice are rarely brought, and even more
ultra vires act of the company, as opposed to merely a contractual rarely successful, but are available in theory.
breach), particularly in relation to transfer rights. Articles of
association are a publicly filed document, so PE sponsors should
3.5 Are there any limitations or restrictions on the
be mindful of this in terms of the information included. contents or enforceability of shareholder agreements
(including (i) governing law and jurisdiction, and (ii)
3.2 Do private equity investors and/or their director non-compete and non-solicit provisions)?
nominees typically enjoy veto rights over major
corporate actions (such as acquisitions and disposals, English law shareholders’ agreements relating to an English
business plans, related party transactions, etc.)? If a company are generally effective and respected under English
private equity investor takes a minority position, what
law (which is generally accepted as governing law and the juris-
veto rights would they typically enjoy?
diction for resolving disputes), provided that they are properly
drafted. That said, provisions in shareholders’ agreements that
Yes. These veto rights tend to be expressed via a director’s veto purport to offend the principles around proper corporate behav-
(in circumstances where the PE Sponsor has a director appointed iour, outlined in the answer to question 3.3 above, can be prob-
to the board) and/or a shareholder veto. Inevitably, there is lematic to enforce. In addition, certain legislation, for instance
a balance that needs to be struck (in circumstances where PE the European General Data Protection Regulation (“GDPR”)
controls the majority of the investee company) between the need and the UK Data Protection Act 2018 and UK GDPR, which
for the PE Sponsor to protect and manage its investment, drive govern the transmission and collection of data in the European
an exit, and control strategic issues, and the ability of manage- Union and the UK, can add further challenges to older share-
ment to manage the portfolio company day-to-day. holders’ agreements, which may find their existing provisions
Where PE has a minority position, the veto rights tend to be (e.g. in relation to information) ceasing to be compliant with
focused on protection of economic interests, and only funda- new regulations.
mental strategic matters, i.e. anti-dilution, share transfers, exit Non-compete and non-solicit provisions need to be aimed at
below an agreed valuation, and fundamental change of business. providing reasonable protection for the relevant goodwill (i.e.
the investment of the PE sponsor in the company), for a reason-
3.3 Are there any limitations on the effectiveness of able period, and within a reasonable area in order to be effec-
veto arrangements: (i) at the shareholder level; and (ii) at tive under English law. As a basic position, English law dislikes
the director nominee level? If so, how are these typically covenants that attempt to unfairly restrain trade or prevent an
addressed? individual from working to support him or herself, so such
covenants will need to be carefully drafted in this context, in
At a shareholder level, veto rights are generally respected but can order to be effective.
run into issues if they fall foul of certain English law rules aimed at
promoting proper corporate behaviour, primarily (a) preventing 3.6 Are there any legal restrictions or other
actions that may unfairly prejudice a minority shareholder(s) of requirements that a private equity investor should
the company, (b) not allowing any inappropriate fettering of any be aware of in appointing its nominees to boards of
statutory powers of the company, or (c) preventing actions being portfolio companies? What are the key potential risks
taken that are contrary to UK public policy. and liabilities for (i) directors nominated by private
At the level of a director nominee, the same issues can arise as equity investors to portfolio company boards, and (ii)
private equity investors that nominate directors to
outlined above. Additionally, the relevant director will, by virtue
boards of portfolio companies?
of his or her directorship, also owe a wide range of duties to the
company, its shareholders (i.e. not just the appointing PE share-
holder) and, if a company nears insolvency, its creditors. These PE investors must ensure that nominee directors are eligible
duties override and can impede the exercise of certain vetoes. to act as directors, including, in particular, that they are
Vetoes that are contrary to law can be challenged and may not not disqualified from acting as a director, e.g. under the UK
be upheld. To ensure that a director’s veto is properly imple- Company Directors Disqualification Act 1986. As outlined
mented as between the company’s shareholders, it will typically above (particularly in the answer to question 3.3 above), direc-
be contained in a shareholders’ agreement and/or the company’s tors of an English company (whether considered “executive”
articles and so (subject to the points above) can be implemented or “non-executive”, and irrespective of their appointing share-
effectively among the company’s shareholders. holder(s)) share the same broad general fiduciary and statutory
duties to the company of which they are a director. This can
create personal risk and liability for the director concerned, if
3.4 Are there any duties owed by a private equity the director acts only in the best interests of his or her appointer.
investor to minority shareholders such as management
Although a PE sponsor will not incur direct liability for the
shareholders (or vice versa)? If so, how are these
typically addressed? actions of its appointed director, it could have indirect issues
caused, including: (a) a failure of the appointed director to act
as they expect or would prefer (for example, where the rele-
A PE sponsor shareholder does not prima facie owe duties to vant director is subject to statutory duties requiring certain
other shareholders in the company (save for those expressly set behaviour, such as placing a company into insolvency proceed-
out in any shareholders’ agreement). As explained in the answer ings where it is insolvent); and (b) consequential issues vis-à-vis
to question 3.3 above, however, a director appointee of a PE their investors due to their failure to procure that their investee
sponsor is subject to fiduciary and statutory duties to the wider company acts as they would prefer.
company and, in certain cases, its shareholders. Successful
actions brought against PE-appointed directors on behalf of the

Private Equity 2023

204 United Kingdom

3.7 How do directors nominated by private equity 4.2 Have there been any discernible trends in
investors deal with actual and potential conflicts of transaction terms over recent years?
interest arising from (i) their relationship with the party
nominating them, and (ii) positions as directors of other
portfolio companies? In recent months, the UK PE M&A landscape has switched
from being generally favourable to sellers (both PE and non-PE)
to favouring buyers. Due to a variety of reasons, including
As explained in the answer to question 3.6 above, direc- lower revenues in target businesses, high inflation and relatively
tors appointed by PE sponsors do not only owe duties to the expensive lending rates, PE buyers have not been willing to pay
sponsor, but to the companies of which they are directors more prices that are palatable to sellers. Sellers in turn appear to be
generally (and therefore to the entire cohort of shareholders of holding onto assets where they can, waiting for a more favour-
such company). able market.
The Companies Act 2006 imposes a duty on a director to It appears that many PE firms still have cash ready to deploy
avoid a “situational conflict”, i.e. a situation in which he or on transactions at the correct price.
she has, or can have, a direct or indirect interest that conflicts,
or possibly may conflict, with the interests of the company.
Clearly, a “situational conflict” could occur where the appointed
52 Transaction Terms: Public Acquisitions
director also has a directorship with companies with interests
adverse to those of another company to which he or she has 5.1 What particular features and/or challenges apply
been appointed as a director. It should, however, be noted that to private equity investors involved in public-to-private
transactions (and their financing) and how are these
a “situational conflict” can be authorised by the non-conflicted
commonly dealt with?
directors of the relevant company(ies), and so such authorisa-
tions should be obtained where relevant.
Additionally, directors may find themselves in a position of Acquisitions of the shares of public companies in the UK are
actual conflict in relation to existing or proposed transactions generally governed by the UK City Code on Takeovers and
or arrangements of companies they are appointed to. This is Mergers (the “Takeover Code”). The Takeover Code imposes
generally known as a “transactional conflict”. Directors are various rules on the conduct of such activity, generally aimed
generally required to declare their interests in such transactions at ensuring equality of information and treatment for all of the
or arrangements. Having made such a disclosure, the ability shareholders of the target public company, including its minority
for a director to participate in the decision-making process with shareholders. This framework is substantially more restrictive
regard to such transactions will be governed by the articles than the framework applicable to private transactions.
of association of the relevant company. It is not uncommon, Provisions of the Takeover Code that are likely to be particu-
once such interests have been declared, for a director to remain larly relevant to PE sponsors undertaking public to private deals
capable under the articles of participating in the relevant deci- are: (i) specific timetables applicable to such deals; (ii) a need
sions. A director will not be in breach of duties in relation to to announce whether or not an offer will be made for a public
conflicts to declare an interest in a proposed transaction if he or company within a 28-day period if the likelihood of an offer
she acts in accordance with any provisions of the company’s arti- being made becomes publicly known; (iii) requirements around
cles dealing with conflicts. the certainty of funding for such transactions and restrictions
on the payment of break fees by public company targets on
deals; and (iv) the Takeover Panel’s (the entity that governs the
42 Transaction Terms: General
application of the Takeover Code) increasing focus on a bidder’s
intentions regarding the target’s business following acquisi-
4.1 What are the major issues impacting the timetable tion, and the need for any plans for closures and lay-offs to be
for transactions in your jurisdiction, including antitrust,
disclosed when a bidder announces its firm intention to make
foreign direct investment and other regulatory approval
requirements, disclosure obligations and financing an offer. One year after completion of an acquisition, a bidder
issues? must confirm to the Takeover Panel whether or not it has taken
the intended course of action, and publish that confirmation.
Inevitable reputational consequences can follow from a failure
UK transaction closing timetables are largely driven by regula-
to owner specific communicated post-offer intentions.
tory approvals, most commonly mandatory and suspensory anti-
trust/foreign direct investment filings (including, in particular,
EU competition filings and U.S. CFIUS filings) and indus- 5.2 What deal protections are available to private
try-specific regulatory mandatory approvals or consents. As a equity investors in your jurisdiction in relation to public
rule, participants in the competitive PE market avoid including acquisitions?
conditionality in their deal documentation, to ensure a high
degree of deal certainty. Only somewhat limited protections are available. Normal
There has been a reduction in financing conditionality over measures used on private deals, such as break fees, are gener-
recent years, particularly given the prevalence of sales by way ally prohibited under the Takeover Code, because of concerns
of competitive auction processes where sellers are able to push that such protection mechanisms deter potential bidders from
bidders to obtain financing on a “certain funds” basis at the submitting competing bids and therefore maximise value for
binding bid stage. shareholders in publicly listed companies. That said, the Take-
During the spike in deal activity following the COVID-19 over Panel may allow break fees in very limited circumstances.
pandemic, auction processes demonstrated a general increase in This can include where the target is in financial distress and
the speed at which PE transactions are executed, with a rising seeking a bidder, or in certain hostile situations. Such break fees
number of auction processes being pre-empted by one bidder and are then typically limited to a 1% cap of the target’s value.
bidders being less aggressive in their deal asks. This trend has been
less prevalent in recent months as deal activity levels have fallen.

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62 Transaction Terms: Private Acquisitions 6.3 What is the typical scope of other covenants,
undertakings and indemnities provided by a private
equity seller and its management team to a buyer?
6.1 What consideration structures are typically
preferred by private equity investors (i) on the sell-side,
and (ii) on the buy-side, in your jurisdiction? PE sellers will customarily provide certain pre-completion cove-
nants and undertakings to a buyer, including: (i) a no-leakage
covenant (in the case of a “locked-box” deal) where the buyer
“Locked-box” consideration structures remain the preferred
will be able to recover any leakage on a £-for-£ basis; (ii) cove-
option for PE sellers in the UK market, largely due to the ease
nants to provide assistance with, and if relevant, obtain regu-
of negotiation and the certainty they provide with respect to
latory clearances or satisfaction of other conditions; (iii) oper-
the final consideration paid. They present a highly attractive
ational covenants as to how the business of the target may or
proposal when compared to a traditional completion accounts
may not be run in the pre-completion period; and (iv) certain
consideration structure. An additional benefit of a “locked-box”
limited covenants regarding the provision of information during
deal is that because there is no post-closing adjustment, funds
the pre-completion period. Indemnification for specific risks is
can be distributed immediately following closing, allowing a PE
relatively uncommon for PE sellers to give, although it is some-
seller to optimise investor/LP returns.
times seen where the PE seller and the buyer have a materially
“Locked-box” consideration structures are commonly accepted
different view on the likelihood of a specific risk crystallising.
by buyers except in limited circumstances, including where the
More commonly, PE sellers are pushing buyers to “price in”
target is a carve-out of a larger business and separate accounts
these types of risks.
are not maintained, where there have been historical issues with
PE sellers are unlikely to give non-compete covenants,
accounts or audits or where some other aspect of the target or the
whereas it is common for exiting members of management
seller profile makes the deal unsuitable for a “locked-box” consid-
or founders to give a full suite of restrictive covenants lasting
eration structure. A “locked-box” consideration structure when
throughout pre- and post-completion.
compared to a completion accounts consideration structure will
generally be seen as shifting risk from the seller to the buyer, as
the buyer (together with their advisors) will need to fully diligence 6.4 To what extent is representation & warranty
the relevant “locked-box accounts” and ensure they are comfort- insurance used in your jurisdiction? If so, what are the
able doing the deal on the basis of those accounts. typical (i) excesses / policy limits, and (ii) carve-outs /
Where a completion accounts consideration structure is used, exclusions from such insurance policies, and what is the
typical cost of such insurance?
it is common to see a portion of the purchase price placed into
escrow with a third-party escrow agent at closing as security
for any post-closing payment that is required to be made by the W&I insurance as a product is continuing to increase in popu-
seller as a result of the completion accounts adjustment. larity with buyers and sellers seeing the benefit of the product
Where an acquisition is made by a PE buyer in a “primary” in “bridging the divide” between sellers (including management
deal (i.e. not from a PE seller), it is not unusual for a portion of warrantors where relevant) and buyers in terms of residual post-
the consideration to paid on a deferred basis, most commonly closing liability. It is relatively standard in a competitive sell-side
pursuant to an “earn-out” where the performance or growth process for the seller to insist on use of W&I insurance by the
of the acquired business will be measured against an objec- buyer to cover the business and operational warranties that are
tive criteria (usually a financial-based criteria during a defined provided by management. In some transactions, more aggres-
time period) in order to determine what portion of the deferred sive sellers will also insist that the buyer obtains coverage for
consideration will be payable. the fundamental warranties as to title to shares, capacity and
authority up to the W&I insurance policy liability cap with the
seller standing behind the balance of liability above the W&I
6.2 What is the typical package of warranties /
insurance policy liability cap for the fundamental warranties.
indemnities offered by (i) a private equity seller, and (ii)
the management team to a buyer?
Excesses and policy limitations and resulting pricing will
differ based upon, and be impacted by, insurer, industry sector,
jurisdictions of operation, quality of diligence, thorough-
A PE seller will in most cases only provide “fundamental” ness of disclosure process and seller/management warrantor
warranties, being those regarding title to shares, capacity and liability cap. With respect to business and operational warran-
authority. A PE seller will only provide business and opera- ties, the usual buyer recourse profile will be first against the
tional warranties as to the target in limited circumstances and seller/management warrantor up to the relevant excess (which
this is becoming rarer. will usually match the attachment point under the W&I insur-
Business and operational warranties are usually given by certain ance policy) and then against the W&I policy up to the relevant
members of the senior management team of the target and will liability cap of the policy. The de minimis financial limitation that
be given subject to relatively low liability caps (dependent on the applies to claims under the business and operational warranties
deal proceeds received by management warrantors). These busi- will commonly match in the transaction documentation and the
ness and operational warranties will be contained in a separate W&I policy and is often driven by the W&I insurer. It is unusual
management warranty deed and a fulsome disclosure process for sellers/management warrantors to stand behind any addi-
will be carried out to disclose against these warranties. These tional liability above the relevant W&I policy liability cap, except
management warranties are more and more being seen as a tool where the fundamental warranties are being insured. In terms
to elicit accurate and fulsome disclosures regarding the target of the W&I policy liability caps being obtained in buy-side W&I
from the individuals who run the business of the target on a policies, these range from between 5% and 100% of the enter-
day-to-day basis. Given the low liability caps that generally apply prise value, with the most common range being between 15%
to these warranties from management, a buyer will typically seek and 40% of the enterprise value of the target.
to obtain coverage for these warranties above the liability cap of More recently, there has been a trend towards lower seller/
the management warrantors by putting in place W&I insurance. management warrantor excesses (i.e. liability caps in the

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transaction documentation) and an excess as low as £1 can be recourse with respect to warranties and covenants. Given the
obtained where the business of the target is considered particu- fact the current market is largely a seller’s market, this had been
larly “clean” and insurable. a major driving factor in the rise of W&I insurance.
The major downside of W&I insurance is that there are
certain exclusions, both general to all W&I insurance policies
6.7 How do private equity buyers typically provide
(i.e. secondary tax liabilities, anti-bribery and corruption) and comfort as to the availability of (i) debt finance, and (ii)
transaction-specific to address gaps in the scope of diligence equity finance? What rights of enforcement do sellers
carried out or particular risks relevant to the industry in which typically obtain in the absence of compliance by the
the target operates. In the current market, sellers/management buyer (e.g., equity underwrite of debt funding, right to
warrantors do not customarily stand behind warranty claims specific performance of obligations under an equity
that fall within the ambit of such policy exclusions and instead commitment letter, damages, etc.)?
this potential risk is borne by buyers and ultimately priced in.
The market has evolved such that buyers will typically provide
6.5 What limitations will typically apply to the liability (i) an equity commitment letter (“ECL”) in respect of the
of a private equity seller and management team under equity portion of their consideration, and (ii) “certain funds”
warranties, covenants, indemnities and undertakings? committed debt papers (“Debt Commitment Papers”) from a
lender in respect of the debt portion of their consideration. In
some circumstances, a buyer may provide an ECL in respect of
Given that a PE seller’s warranties will generally be limited to
the entire consideration and address the debt portion privately
certain fundamental warranties as to title, capacity and authority,
behind the scenes, although we see this less frequently in mid-
a PE seller’s liability for these warranties is typically capped at
and upper-market transactions.
the purchase price. Such fundamental warranties are not usually
The ECL will come from the buyer’s PE fund itself, will be
subject to additional financial limitations, such as a de minimis or
addressed to the buyer’s Bidco, and may sometimes also be
threshold (i.e. excess). The fundamental warranties are typically
addressed to the seller. Such ECL will generally include cove-
given subject to time limitations of between three and seven
nants that the fund will (i) call required capital from its inves-
years from closing.
tors to fund the equity portion of the purchase price, and (ii)
Seller liability under the “no-leakage” covenant is usually
fund Bidco with the equity capital required to fund such rele-
uncapped and recoverable from the seller on the basis of leakage
vant portion of the purchase price (or a seller’s damages claim
received or benefitted from, given that compliance with such a
for failure to complete), which is subject only to the satisfaction
covenant is entirely within the control of the seller.
of the conditions in the share purchase agreement. This ECL
The liability of management warrantors for the business
will customarily also include certain commitments from the
and operational warranties can be subject to various negoti-
PE sponsor aimed at ensuring Bidco draws down the requisite
ated limitations, including: (i) warranties are usually given on a
funds under the Debt Commitment Papers in order to complete
several basis only (i.e. each manager is only liable for its propor-
the transaction.
tionate share of liability for any claim and/or its own breach);
The seller will usually be able to enforce the ECL commit-
(ii) warranties can be given subject to actual awareness of the
ment directly, or on behalf of Bidco, against the PE fund to
relevant management warrantor group; (iii) financial limitations
the extent the transaction becomes unconditional and the buyer
as to (A) aggregate liability cap, (B) threshold, below which a
fails to comply with its obligations to pay the consideration
warranty claim cannot be made (which can be on a “tipping”
under the transaction documentation. If the banks under the
basis or “excess only” basis), and (C) de minimis, being the
Debt Commitment Papers do not fund when they are legally
minimum quantum of liability that a warranty claim must meet
required to, the PE buyer may be required to take certain steps
in order to count towards the threshold; and (iv) time limita-
to enforce against the banks and/or use reasonable endeavours
tions within which claims under the warranties must be made,
to obtain alternative debt financing.
which range from between one year and three years for claims
under the non-tax warranties and between four and seven years
for claims under the tax warranties. 6.8 Are reverse break fees prevalent in private equity
transactions to limit private equity buyers’ exposure? If
so, what terms are typical?
6.6 Do (i) private equity sellers provide security (e.g.,
escrow accounts) for any warranties / liabilities, and
(ii) private equity buyers insist on any security for Reverse break fees are uncommon in the current UK PE market
warranties / liabilities (including any obtained from the largely as a result of the fact that in the UK market it is not
management team)? typical for a buyer to have a walk-away right between signing
and closing, e.g. in the event of a “material adverse change” in
Given PE sellers generally only provide fundamental warranties the business or if the debt financing is not obtained (as opposed
as to title, capacity and authority, no security (financial or other- to the U.S., where both of these rights for buyers are more
wise) is provided as the risk of a breach of these warranties should common and hence so is the use of reverse break fees).
be very low. With respect to the no-leakage covenant provided in
“locked-box” deals, it is uncommon for PE sellers to provide any 72 Transaction Terms: IPOs
security in relation to this risk as most buyers take the view that the
reputational damage caused to a PE seller for a large leakage claim 7.1 What particular features and/or challenges should
is a material deterrent to the PE sponsor engaging in activity that a private equity seller be aware of in considering an IPO
constitutes leakage. This position also aligns with the PE industry exit?
focus of returning proceeds to LPs/investors as soon as possible
post-closing in order to maximise economic return metrics. Exiting from an investment by way of an initial public offering
This position is clearly at odds with the general desire of (“IPO”) raises a number of issues, including (but not limited to):
buyers (both PE and non-PE) to obtain meaningful post-closing

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■ Costs: Pursuing an IPO can be considerably more costly exit routes, with a greater number of deals being concluded by
than an exit by way of a private sale, due to the fees of way of bilateral or auction-driven private sales processes, as
the advisers involved, together with the fees of under- opposed to successful IPOs. This is reflective both of market
writing the exit. It is also likely to take longer to execute conditions and also a general preference by funds to conclude
a successful IPO, perhaps up to six months, due to the private deals where possible, in order to avoid some of the nega-
various processes involved in presenting a company prop- tive aspects of an IPO exit (as outlined in the answer to question
erly to the public markets. 7.1 above), provided that the valuations achieved on such deals
■ Uncertainty: Exiting from an investment via an IPO can are at an acceptable level.
expose PE sellers to significantly greater market risk than In order to preserve competitive tensions in deals, it is not
the relative certainty of a private deal. It is not guaranteed uncommon on dual-tracks to run such processes in parallel,
that sufficient investor capital will be available to support at least until the likely commencement of an investor “road
an exit or that the value that may be realised following the show” in relation to the IPO process. Immediately prior to
end of any applicable lock-up periods will be the same as the commencement of the road show, is usually a reasonable
the valuation of the investee company at the point of IPO. inflexion point for the PE sponsor to consider whether it has
In addition, any failures of an IPO are inevitably more an acceptable (and deliverable) private offer for the asset to be
“public” than the failure of a private disposal process. disposed; one reason for this being the level of information
This can add wider reputational risk to a disposal. about the target that will be shared with potential investors in
■ Incomplete exit: When an IPO is successful, that still the road show process, and a desire to avoid this if a private sale
does not generally enable an immediate full exit for the seems feasible. Noting that, given the private nature of many
PE fund on day one of the IPO. It is typical that the PE of these processes, full public information about dual-track
sponsor would be subject to a “lock-in” period for at least processes and their outcomes is not available, it is safe to say
six months following a successful IPO, during which time that it is comparatively rare for the IPO track to be abandoned
it will not be able to sell its shares in the listed company. during the period after the roadshows have finished, but prior to
Following the end of the “lock-in” period, it is likely that the expected date of listing and admission of the target.
an “orderly market” period (perhaps of up to 12 months)
will follow, during which the sale of the PE sponsor’s 82 Financing
stake in the business can only be sold in a staggered way,
to avoid affecting the price of the target company’s shares
8.1 Please outline the most common sources of debt
too significantly as a result of the disposal. finance used to fund private equity transactions in your
■ Unclean exit: The reluctance of a PE sponsor to provide jurisdiction and provide an overview of the current state
any ongoing W&I protections in relation to the sale of their of the finance market in your jurisdiction for such debt
target companies is well-understood. However, in rela- (including the syndicated loan market, private credit
tion to any IPO of a PE-invested business, the PE sponsor market and the high-yield bond market).
will find it increasingly challenging to resist providing an
investment bank underwriting the IPO with at least some Historically, bank-led leveraged loan financings were the most
warranties in relation to its ownership of the shares in the common source of debt finance used to fund both mid-market
company being floated, in relation to itself and, in certain and large PE transactions in the UK.
circumstances, in relation to an underlying business. However, in recent years, private credit funds have become a
mainstay funding solution for a significant share of the market,
7.2 What customary lock-ups would be imposed on with unitranche financing structures becoming commonplace.
private equity sellers on an IPO exit? Other debt instruments, such as holdco PIK remains a relatively
small portion of the overall financing provided by private credit
funds.
As mentioned in the answer to question 7.1 above, the dura-
For larger PE transactions, leveraged loans are often struc-
tion of the “lock-in” provided by the PE sponsor will vary from
tured as a term loan B (or “TLB”) – a non-amortising, senior
transaction to transaction but, typically, a period of at least six
secured term loan usually under NY law. Investors in TLB
months following an IPO will apply. This means that no actual
include a mix of traditional bank lenders and institutional inves-
“exit” (in terms of realising value from the investment) will have
tors and they are designed to tap greater availability in the U.S.
been effected by the PE sponsor at the completion of the IPO;
debt syndication markets, relative to the European Markets
but only once the lock-up period has expired. In the meantime,
(albeit the TLB market has been adversely affected by the down-
the PE sponsor remains exposed to market risk for the duration
turn over the last 12 months). For larger PE transactions too
of the “lock-in” period and, to a lesser extent, during the orderly
though, increasingly private credit funds are becoming a “go to”
market disposal period.
source of financing, sometimes with such funds now clubbing
together to form a syndicate to provide a funding solution to
7.3 Do private equity sellers generally pursue a dual- some of the larger transactions.
track exit process? If so, (i) how late in the process are Aside from leveraged loan financing, high-yield bond financing
private equity sellers continuing to run the dual-track, is an important source of funds and is commonly (albeit subject
and (ii) were more dual-track deals ultimately realised
to fluctuating availability in the market) used alongside traditional
through a sale or IPO?
senior secured bank loans although, as with the TLB market, dislo-
cation this year has muted issuance significantly.
Given current market volatility (due to the war in Ukraine and A key theme in the UK leveraged finance market in recent
other geopolitical, financial and supply chain issues), continued years – and a function of the increased appetite of institutional
high inflation, and rising interest rates, 2023 has seen fewer PE investors (who traditionally invested in high-yield bonds) for
exits than 2021 and 2022. In light of current economic chal- leveraged loans – has been the convergence of the terms of
lenges and the effect of these challenges on public markets more English law leveraged loans with both high-yield bonds and U.S.
generally, PE sponsors are generally not exploring dual-track

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leveraged loans. This has led to a general loosening of cove- 8.3 What recent trends have there been in the debt-
nants in English law leveraged loans, with the market becoming financing market in your jurisdiction?
more accepting of “covenant-loose” structures (that is, where
the relevant loan agreement contains only a single ongoing or
With the dislocation in the high-yield market, the impact of
maintenance financial covenant, usually a leverage ratio) and,
rising inflation, quantitative tightening, increasing interest rates
for stronger borrowers, “covenant-lite” structures (that is, where
and supply chain issues coupled with increased energy prices and
the loan agreement contains no maintenance financial cove-
the geo-political issues that have arisen around the world, this
nants or only a springing leverage covenant for the benefit of
has had a significant impact on PE deal flow generally; however,
the revolving creditors).
in this context, private credit as a funding solution has become
even more important for PE transactions given the committed
8.2 Are there any relevant legal requirements or nature of the capital available, its continued availability at scale
restrictions impacting the nature or structure of the debt and the flexibility of the product with generally sole counter-
financing (or any particular type of debt financing) of party execution risk. This source of financing has been seen
private equity transactions?
to fill the void in a number of instances to what would other-
wise have been a high-yield or TLB solution, as well as having
The UK is, generally speaking, an investor-friendly jurisdiction become a main stay of funding for the PE mid-market.
and there are no particular legal requirements or restrictions For those transactions being closed in the current environ-
that would affect the choice or structure of debt financing of PE ment, leverage levels have been reduced, day one equity cheques
transactions in the UK. from PE sponsors have increased (as an overall percentage of
That said, practical deal concerns play an obviously important the capital structure) and documentary terms and structures for
role in dictating the ultimate financing structure. For example, lenders have improved. There has been a period of lender push-
some PE funds have valued the lighter disclosure requirements back in light of the tightened liquidity conditions, particularly
of a leveraged bank loan or private credit solution compared with in limiting add backs to EBITDA in relation to synergies and
a high-yield bond issuance (which requires the preparation of, group initiatives.
amongst other things, a detailed offering memorandum). Further, Also, the custom of the borrower “designating” the lender
in an acquisition context, another advantage of a loan (compared counsel, which had become prevalent in the mid and upper mid
to a high-yield bond issuance) is that loans can typically be docu- markets, has seen some strong pushback from lenders following
mented and executed on a much shorter timetable that is more some high-profile fallouts over the practice. It remains to be seen
aligned with the timing constraints of the acquisition itself. With if this trend will continue in more buoyant market conditions.
its successful execution dependent on ever-fluctuating market ESG requirements have also become a feature of the market,
conditions and increased disclosure requirements, a high-yield with more loans having ESG ratchet triggers contained within
bond issuance, on the other hand, must typically either be bridged them, which is a feature being driven by some of the investors
by a loan or funded into an escrow arrangement if being used to investing into private credit funds.
finance an acquisition.
Aside from such practical concerns, market participants should
be aware of, and ensure compliance with, any industry-specific
92 Alternative Liquidity Solutions
laws and regulations, as well as the broader regulatory regime
affecting PE transactions. 9.1 How prevalent is the use of continuation fund
For example, in the current sensitive political and regulatory vehicles or GP-led secondary transactions as a deal type
in your jurisdiction?
climate, market participants need to be especially careful with
regard to compliance with anti-bribery, corruption and sanc-
tions laws, general competition and specific national security Outside of the US, the UK is the largest market in the world for
interest law issues. Aside from local laws, borrowers and spon- GP-led liquidity solutions. The most significant portion of these
sors should also be aware of the expansive nature and potential solutions is the use of continuation fund vehicles, namely GP-led
extraterritorial reach of such laws and regulations in the U.S., secondaries. These transactions have become a well-accepted
which can necessitate compliance by many non-U.S. entities (or form of exit for fund managers seeking an alternative to an M&A
entities that have only limited U.S. ties). sale or a public offering. In many cases, GP-led secondary trans-
In the context of buyout transactions of public (as opposed to actions are conducted along lines not dissimilar to an M&A sale
private) companies in the UK involving debt finance, a key issue process, such as running a competitive auction to solicit multiple
will be to ensure compliance with the “certain funds” and cash bids, the use of a financial advisor to run the process and the docu-
confirmation requirements of the UK Takeover Code. These mentation underlying the transaction (e.g. a sale and purchase
principles require that a bidder have the funds and resources in agreement, the use of representation and warranty insurance and
place on a certain funds basis to finance a proposed acquisition, the use of fairness opinions).
prior to the public announcement of any bid (and the bidder’s
financial advisor must confirm the availability of such funds).
9.2 Are there any particular legal requirements or
In practical terms, this means that the bidder and its lenders will restrictions impacting their use?
need to finalise and have executed the required loan documen-
tation (and satisfy, subject to limited exceptions, the conditions
precedent to the loan) at the bid stage. Continuation fund vehicles, depending on the exact nature of
The “certain funds” concept has also increasingly permeated the transaction at hand may be “alternative investment funds”
and become a feature of private buyout transactions. Although (“AIFs”) within the meaning of the AIFMD or they may not. If
not a legal requirement in this context, in practical terms this they are AIFs, the GP will need to comply with the applicable
means that lenders will be required to confirm upfront the satis- provisions of the AIFMD. In addition, the GP itself will need
faction of all of their financing conditions and agree to disapply to comply with laws and regulations applying to it as the alter-
loan drawstop events (other than certain limited exceptions) native investment fund manager. Although not law or regula-
until after completion of the acquisition. tion, many GPs will have regard to the guidance issued by the

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Institutional Limited Partners Association (“ILPA”) on GP-led Growth shares and deferred/vesting arrangements remain
secondaries as a matter of best industry practice. ILPA has, relevant in the UK and are commonly used as a means of deliv-
this year, issued guidance on GP-led secondaries transactions, ering capital gains tax treatment on a future sale with a minimal
updating its previous guidance from 2019. Lastly, the use of income tax charge on acquisition. However, growth shares can
continuation vehicles in GP-led secondaries is impacted by a tax present relatively complex valuation issues.
analysis of whether the transaction terms produce tax-neutral or
tax-favourable outcomes for existing investors who choose to
10.3 What are the key tax considerations for
participate in the continuation fund. management teams that are selling and/or rolling over
part of their investment into a new acquisition structure?
102 Tax Matters
Management will generally be keen to ensure that tax is deferred
10.1 What are the key tax considerations for private until any disposal proceeds are received and will want to maximise
equity investors and transactions in your jurisdiction? the availability of business asset disposal relief (although this will
Are off-shore structures common? be less of a priority following the significant reduction in the life-
time allowance noted in question 9.2 above). Reorganisation
At a high level, the primary tax focus is to establish a tax-efficient reliefs are often available to escape a taxable disposal occurring
structure and, in particular, to mitigate tax leakage on payment on a rollover. Loan notes are frequently used for these purposes.
flows from the underlying portfolio companies through the A tax clearance will generally be sought from HM Revenue &
acquisition structure to investors. Customs (“HMRC”) in connection with any tax-neutral rollover
From an investor perspective, withholding tax is often a mate- and should be factored into the transaction timing.
rial factor. However, since the UK applies no withholding to divi-
dends or capital gains, withholding tax concerns in UK transac-
10.4 Have there been any significant changes in tax
tions tend to focus on interest and the ability to reduce the 20% legislation or the practices of tax authorities (including
rate of interest withholding through treaty relief or otherwise in relation to tax rulings or clearances) impacting private
(which can be relevant to both external and investor-related debt). equity investors, management teams or private equity
Achieving the maximum deductibility of interest expense transactions and are any anticipated?
on financing remains an important area. In addition to long-
standing restrictions on the deductibility of interest (such as under From a fund perspective, the recent introduction of the Qualified
the thin capitalisation rules), interest barrier rules (which generally Asset Holding Company (“QAHC”), a UK tax advantaged asset
restrict interest deductions to 30% of EBITDA) and increasingly holding company, potentially offers an attractive vehicle through
complex anti-hybrid rules provide further limitations, particularly which PE funds can hold assets onshore. For certain types of
where U.S. investors are concerned. assets, where the qualifying conditions can be satisfied, we are
From a management perspective, the key objective is to mini- likely to see an increased movement to the use of UK QAHCs over
mise income tax on acquisition of shares and to achieve capital more traditional Luxembourg asset-holding structures.
gains tax treatment on an exit (see questions 10.2 and 10.3 below). As is the case in most other jurisdictions, the UK tax rules
UK transactions tend to utilise UK-incorporated and -resident have changed significantly in recent years in response to the
companies in the acquisition structure, although non-UK incor- OECD’s Base Erosion and Profit Shifting (“BEPS”) project.
porated but UK tax-resident companies are sometimes preferred Measures impacting the PE industry include:
for stamp duty efficiency. (a) The anti-hybrid rules that potentially disallow deductions
for interest and other expenses in structures involving
10.2 What are the key tax-efficient arrangements that hybrid entities or instruments. The rules are commonly
are typically considered by management teams in private a cause of uncertainty in transactions involving U.S.
equity acquisitions (such as growth shares, incentive investors where check-the-box elections have been made
shares, deferred / vesting arrangements)? through the acquisition structure. This measure, together
with (b) below, has led to the increasing use of preference
Although favourable tax treatment for carried interest has shares rather than debt as a source of investor finance.
become more difficult to achieve, capital gains tax remains (b) The interest barrier rules (see question 9.1 above).
available on carried interest returns in certain circumstances (at (c) The changes to the availability of double tax treaty relief as
a 28% special rate for carried interest compared with the normal a consequence of the adoption of the OECD’s multi-lateral
20%). Management will look to ensure that carried interest is instrument (“MLI”), which overlays the application of the
not treated as income for tax purposes under the “disguised UK’s tax treaties with other participating jurisdictions. This
investment management fee” (“DIMF”) or income-based has led to the increasing need for “substance” in entities
carried interest rules. The availability of favourable tax treat- seeking treaty benefits.
ment for carried interest remains controversial politically and On an international level, the adoption of the second Anti-Tax
the chief opposition party, the Labour Party, has committed to Avoidance Directive (“ATAD II”) has extended the scope of the
abolish it should it come to power. hybrid mismatch tax rules to arrangements involving non-EU
For equity investment/co-investment, senior management countries and so-called “reverse hybrid” mismatches. This
may be able to claim business asset disposal relief (delivering further complicates the anti-hybrid issues discussed above.
a 10% rate of capital gains tax on sale) provided certain condi- ATAD III (the anti-shell directive) remains in the pipeline
tions are satisfied. In particular, to be eligible, an executive must (potentially effective 1 January 2024) and will impact on PE
hold at least 5% of the ordinary share capital and corresponding structures using so called “shell entities”. Following Brexit, the
economic and voting rights for at least two years. Since 2020, a UK has now stepped away from the mandatory disclosure rules
lifetime allowance of £1 million of gains is eligible for business introduced in Europe (“DAC6”) and has introduced new rules
asset disposal relief (a significant reduction from the £10 million (“MDR”) that are intended to align with the OECD’s Manda-
of lifetime gains eligible for relief prior to such date). tory Disclosure Rules.

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to the condition of the business being sold to them, PE sponsors

112 Legal and Regulatory Matters typically require detailed legal due diligence processes to be under-
taken on the assets they are considering buying. These investi-
11.1 Have there been any significant legal and/or gations will review most legal and business aspects of the target,
regulatory developments over recent years impacting
including (but not limited to) investigations into title, assets, mate-
private equity investors or transactions and are any
anticipated?
rial contracts, ESG, intellectual property, litigation, real estate,
and compliance. These investigations tend to be conducted on an
issues-focused “red-flag” basis, and to be governed by materiality
As outlined in the previous answers to the questions in this thresholds aligned to the size of the deal in question.
chapter, a range of UK and European laws affect PE investors
and transactions. Among the most important of these is the
Companies Act 2006 (which provides the basic framework of 11.5 Has anti-bribery or anti-corruption legislation
company law in England), the Financial Services and Markets impacted private equity investment and/or investors’
approach to private equity transactions (e.g., diligence,
Act 2000 (providing the basic framework of law relating to
contractual protection, etc.)?
financial services in the UK), the Bribery Act 2010 (legislation
aimed at prohibiting bribery and corruption by UK businesses
and individuals worldwide), GDPR (which governs the transmis- Anti-bribery legislation has further increased the focus of PE
sion and collection of data in Europe) and the Takeover Code sponsors on the day-to-day business activities of the targets they
(referred to above). The National Security and Investment Act are acquiring, and their sensitivities to various business practices
(“NSI”) will enter into force later this year (2021) and extend and corporate conduct. This trend (driven, for instance, by the
the Government’s powers to scrutinise and intervene in invest- Bribery Act 2010 in the UK), has impacted the thoroughness of
ments to protect national security. Although the UK chose not to due diligence investigations, the day-to-day governance rights
adopt the EU Sustainable Finance Disclosure Regulation or the insisted upon by PE sponsors and, in some cases, the abandon-
Taxonomy Regulation following Brexit, ESG matters remain high ment of proposed transactions due to insurmountable bribery or
on the legislative agenda and the UK’s evolving ESG regulations corruption issues in the relevant targets. In addition, the W&I
will affect both the operation of and reporting by PE investments. insurance policies that are very often placed in connection with
PE transactions generally exclude bribery and corruption from
their cover.
11.2 Are private equity investors or particular
transactions subject to enhanced regulatory scrutiny in
your jurisdiction (e.g., on national security grounds)? 11.6 Are there any circumstances in which: (i) a private
equity investor may be held liable for the liabilities of
the underlying portfolio companies (including due to
PE funds (like other funds) that are managed from or marketed breach of applicable laws by the portfolio companies);
within EU Member States will generally be subject to some, or and (ii) one portfolio company may be held liable for the
all, of the rules of the Alternative Investment Fund Managers liabilities of another portfolio company?
Directive (“AIFMD”) (an EU directive that looks to place
hedge funds, PE and any other alternative investment firms into In general, under English law, a shareholder is not liable for the
a regulated framework, in order to monitor and regulate their underlying activities/liabilities of the company to which the
activity). All investors, including PE funds, could be subject shares relate. There are only very specific instances where a PE
to UK national security screening under the National Security sponsor may be held liable for its portfolio company. One such
and Investment Act, which covers investments made by UK example (with reference to the answer to question 10.4 above),
or non-UK investors in targets having a presence in the UK is that a PE sponsor could incur liability under the Bribery Act
through subsidiary sales or activities in the UK. Investments in 2010 by failing to implement adequate procedures for its port-
key sectors will be subject to mandatory notification; for invest- folio company, and potentially under the UK Proceeds of Crime
ments in other sectors, a voluntary filing may be advisable. Act 2002 (the relevant “proceeds” of the crime of the bribery
concerned being the investment proceeds enjoyed by the PE
11.3 Are impact investments subject to any additional sponsor from the investee company).
legal or regulatory requirements?
122 Other Useful Facts
Impact investments are not generally subject to additional legal
or regulatory scrutiny, though may require enhanced approval 12.1 What other factors commonly give rise to concerns
procedures and reporting to investors depending on the frame- for private equity investors in your jurisdiction or should
work agreed with the investors in the particular fund. In addi- such investors otherwise be aware of in considering an
tion, sponsors may choose to comply with certain “best prac- investment in your jurisdiction?
tice” recommendations and certifications (such as obtaining
B-Corp status), which may create ongoing compliance and The certainty and clarity offered by English law and regulation
reporting requirements. means that the UK remains a premier place in the world for
investment by PE sponsors. A degree of uncertainty accom-
11.4 How detailed is the legal due diligence (including panied the UK’s departure from the European Union on 31
compliance) conducted by private equity investors prior January 2020. However, PE investments and exits in the UK
to any acquisitions (e.g., typical timeframes, materiality, continued in line with transaction volumes seen in other juris-
scope, etc.)? dictions over 2021–2023 (with some slowdown over H2 2022
and H1 2023 due to prevailing market and macro-economic
Especially given that when buying assets from other PE spon- conditions) and the UK’s legal divergence from the European
sors they may not benefit from substantive warranty protection as Union has proven gradual.

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Acknowledgments
Philip Butler and David Miles, global finance partners at
Dechert LLP, Daniel Hawthorne, a tax partner at Dechert
LLP, and Thiha Tun, a private funds partner at Dechert LLP,
all contributed to this chapter.

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212 United Kingdom

Mark Evans practises in the area of corporate law, with particular emphasis on PE, fund acquisitions, restructuring, consensual work-outs,
joint ventures, and public M&A. Mr. Evans has been recognised among Legal Week’s Private Equity Rising Stars and for PE transactions in
The Legal 500 UK.

Dechert LLP Tel: +44 20 7184 7384

25 Cannon Street Email: mark.evans@dechert.com
London, EC4M 5UB URL: www.dechert.com
United Kingdom

Sam Whittaker advises PE clients on a range of complex corporate matters. Mr. Whittaker’s practice includes M&A, divestments, co-invest-
ments, joint ventures, management equity arrangements and a variety of portfolio transactions. He regularly advises prominent global PE
firms, sovereign wealth funds, alternative asset managers and investment firms on their international transactions.

Dechert LLP Tel: +44 20 7184 7584

25 Cannon Street Email: sam.whittaker@dechert.com
London, EC4M 5UB URL: www.dechert.com
United Kingdom

Dechert has been at the forefront of advising PE firms for almost 40 years.
With more than 300 PE and private investment clients, we have unique
insights into how the industry has evolved and where it is going next. Our
globally integrated team of more than 350 PE lawyers advises PE, private
credit and other alternative asset managers on flexible solutions at every
phase of the investment life cycle.
www.dechert.com

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 Chapter 23 213

USA

USA
Allie Misner Dr. Markus P.
Wasserman Bolsinger

Dechert LLP Soo-ah Nah Marie Mast

rising interest rates and bank/financial institution uncertainty

12 Overview increasing the cost of borrowing, which in turn is pushing down
valuations and increasing the proportion of equity-to-debt for
1.1 What are the most common types of private equity many new deals. The continued war in Ukraine, supply chain
transactions in your jurisdiction? What is the current
disruptions in certain industries and persistent labor shortages
state of the market for these transactions?
have also had an impact. These factors have been shifting the
market away from the seller-favorable terms that dominated the
U.S. private equity (“PE”) deal activity during the first half of last several years, and that trend is expected to continue in the
2023 continued to slow following the surges during 2021 and the near term.
early part of 2022. While PE firms continue to have significant The regulatory environment continues to become more chal-
levels of dry powder at their disposal, the war in Ukraine, geopolit- lenging for PE transactions. The U.S. Federal Trade Commis-
ical tensions with China, regional banking system collapses, stress sion (“FTC”) and Department of Justice (“DOJ”) have increased
in the commercial office lease market, inflation and rising interest the level of scrutiny applied to acquisitions by PE firms. In
rate levels have created a more challenging environment for M&A addition, recent regulatory reforms involving the Committee
and injected uncertainty into the outlook for the remainder of on Foreign Investment in the United States (“CFIUS”) have
2023. Fundraising activity slowed meaningfully in the first half led to increased timing delays and deal uncertainty for transac-
of 2023, with many investors’ portfolios already overallocated to tions involving non-U.S. investors that might raise U.S. national
the private markets – a direct result of the declines in the value of security issues. In addition, the U.S. government is considering
public stocks. In addition, risk-averse lenders have made access to measures to review outbound investments for potential U.S.
debt financing difficult; and with the slowdown in PE exit activity national security concerns, though the scope and timing for
and a lack of GP distributions, LPs have been left with less capital implementation of such measures remain unclear.
with which to invest in new funds. The foregoing, coupled with a
limited number of high-quality assets available in the market, has
made the current landscape for PE challenging. 1.3 Are you seeing any types of investors other
The frothy, competitive deal environment that characterized than traditional private equity firms executing private
equity-style transactions in your jurisdiction? If so,
the past several years prior to the current slowdown resulted in
please explain which investors, and briefly identify any
a continued focus on portfolio company add-ons and alternative significant points of difference between the deal terms
transactions, such as carve-outs, strategic partnering transactions, offered, or approach taken, by this type of investor and
minority investments, club deals, growth investments, struc- that of traditional private equity firms.
tured equity investments, private investments in public equity
(“PIPEs”) and take-private transactions. We have also seen more
Over the past several years, the concentration of capital in large,
acquisitions of founder-owned private companies than any prior
multi-strategy asset managers has increased, leading to a corre-
year. The changing landscape in 2023 is slowing traditional PE
sponding increase in the number of deals consummated by such
investing and is expected to increase hold periods, but oppor-
managers. We expect this trend to continue, as these funds are
tunities remain for portfolio company add-ons, take-privates,
co-investments and opportunistic transactions, and continuation outperforming in fundraising and may be better positioned to
funds and GP-led secondaries continue to attract attention. Addi- take advantage of opportunities in the current market.
tionally, some funds may be well-positioned to take advantage of Non-traditional PE funds such as sovereign wealth funds,
opportunities in the current market. pension plans and family offices continue to extend investments
beyond minority positions and are increasingly serving as lead
investors in transactions, which has created additional competi-
1.2 What are the most significant factors currently tion for traditional PE funds.
encouraging or inhibiting private equity transactions in
your jurisdiction?
22 Structuring Matters
During 2021 and the early part of 2022, M&A activity was char-
2.1 What are the most common acquisition structures
acterized by extremely competitive auctions, which resulted in adopted for private equity transactions in your
historically high selling multiples, seller-favorable terms and jurisdiction?
intense pressure on certainty and speed to closing. While dry
powder is still near record levels, parties are now faced with a
less attractive environment for deal-making, with high inflation, The most common acquisition structures are mergers, equity

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purchases and asset purchases in the case of private targets, and 2.4 If a private equity investor is taking a minority
one-step and two-step mergers in the case of public targets. position, are there different structuring considerations?
Historically, most PE sponsors have prioritized control invest-
ments; however, in recent years there has been an increased focus
Minority investments create financial and legal issues not often
on alternative investment structures, including structured equity.
encountered in control investments. Unlike control transactions,
where the PE sponsor generally has unilateral control over the
2.2 What are the main drivers for these acquisition portfolio company, minority investors seek to protect their invest-
structures? ment through contractual or security-embedded rights. Minority
protection rights may include negative covenants or veto rights
The primary drivers include tax considerations, stockholder over major business decisions, including material M&A transac-
approval, speed and certainty of closing and liability issues. tions, affiliate transactions, indebtedness above certain thresh-
Mergers offer simple execution, particularly where the target olds, annual budgets and business plans, strategy, senior manage-
has numerous stockholders, but buyers lack privity with the ment hiring/firing and issuances of equity. In addition, PE
target’s stockholders, and the target’s board may expose itself to sponsors will seek customary minority protections such as board
claims by dissatisfied stockholders. Buyers often seek separate and committee representation, information and inspection
agreements with stockholders that include continued support rights, tag-along rights, limitations on drag-along rights of the
during the period between signing and closing, releases, indem- controlling party, registration rights and pre-emptive rights.
nification and restrictive covenants. However, depending on For transactions subject to CFIUS review, non-U.S. PE inves-
the applicable state law, enforceability issues may arise. tors taking a minority position might be required to forego certain
Stock purchases require all target stockholders to be party to rights that they otherwise would seek (e.g., board representation
and support the transaction. These agreements avoid privity and access to non-public information) in order to avoid trig-
and enforcement concerns that arise in a merger but may be gering CFIUS review or to otherwise facilitate obtaining CFIUS
impractical depending on the size and character of the target’s clearance.
stockholder base.
Asset purchases provide favorable tax treatment for acquirors 2.5 In relation to management equity, what is the
because buyers can obtain a step up in tax basis in acquired typical range of equity allocated to the management, and
assets. See section 10. Depending on the negotiated terms, what are the typical vesting and compulsory acquisition
buyers also may leave behind existing liabilities of the target. provisions?
However, asset purchases (especially carve-out transactions)
can be difficult and time-consuming to execute. Third-party Management equity is typically subject to time- and/or perfor-
contract consents may be required, and acquired assets may mance-based vesting. Time-based awards vest in specified
be entangled with seller assets that are outside the scope of increments over several years (typically four to five years (in
the transaction. For certain regulated businesses, permits and the Eastern United States) and sometimes less (in the Western
licenses may need to be transferred or reissued. Buyers need to United States)), subject to the holder’s continued employment.
carefully review the business’ assets and liabilities to ensure that Performance-based awards vest upon achieving performance
all necessary assets are acquired and that liabilities that flow to goals, often based on the PE sponsor achieving a certain IRR or
buyers as a matter of law are not unwittingly inherited. multiple on invested capital upon exit, which in some instances
is subject to minimum return hurdles. Time-based awards typi-
2.3 How is the equity commonly structured in private cally accelerate upon the PE sponsor’s exit. Forfeiture of both
equity transactions in your jurisdiction (including vested and unvested equity in the event of a termination for
institutional, management and carried interests)? cause is common.
Compulsory repurchase provisions (i.e., “put” rights) are not
U.S. PE returns typically arise from returns on equity investments typical, but portfolio companies customarily reserve the right to
and management fees. Equity structuring varies depending on repurchase an employee’s equity in connection with the employ-
the PE sponsor involved, the portfolio company risk profile and ee’s termination at either fair market value or the lesser of fair
the IRR sought. Equity most often consists of preferred and/or market value and the original purchase price, depending on the
common equity interests held by the PE sponsor. Often, some timing and reason for termination.
or each type of equity is offered to existing, or “rollover,” target The proportion of equity allocated to management (as well
investors. Preferred equity can be used to set minimum returns as the allocation among executives) varies by PE fund and
and incentivize common or other junior security holders to drive the capital structure of the portfolio company, but manage-
portfolio company performance. PE funds often offer portfolio ment equity pools for portfolio companies typically range from
company management equity-based incentive compensation in 7.5–15% of equity on a fully diluted basis, with the higher end
the form of stock options, restricted stock, phantom or other of that range being more typical with smaller equity invest-
synthetic equity or profits interests, each of which is subject to ments and equity structures where the PE sponsor holds more
vesting requirements. Carried interest is typically found at the preferred equity.
fund level and does not directly relate to the structuring of the
equity investment at the portfolio company level. 2.6 For what reasons is a management equity holder
The main drivers for these structures are: (i) alignment of usually treated as a good leaver or a bad leaver in your
interests among the PE sponsor and any co-investors, rollover jurisdiction?
investors and management, including targeted equity returns;
(ii) tax efficiency for domestic and international fund investors Management equity holders are typically treated as good leavers
and other portfolio company investors, including management; if their employment is terminated without cause, they resign with
and (iii) incentivizing management. good reason after a specified period of time, their employment
terminates due to death or disability or upon normal retirement.

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Bad leavers are commonly those who are terminated for cause 3.3 Are there any limitations on the effectiveness of
and, in some cases, those who resign without good reason. veto arrangements: (i) at the shareholder level; and (ii) at
the director nominee level? If so, how are these typically
addressed?
32 Governance Matters

3.1 What are the typical governance arrangements Veto rights are typically in the form of contractual rights in favor
for private equity portfolio companies? Are such of specified shareholders or classes of equity contained in an
arrangements required to be made publicly available in organization’s governing documents (i.e., shareholders’ agree-
your jurisdiction? ment, LLC agreement or LP agreement, if applicable), and are
generally enforceable. For corporations, although less common,
PE sponsors generally form new buyer entities (most often negative covenants can also be included in the charter, which
corporations or tax pass-through entities such as limited liability would render any action taken in violation of one of those restric-
companies (“LLCs”) or limited partnerships (“LPs”)) through tions ultra vires. Director-level veto rights are less common, as
which they complete acquisitions and maintain their owner- veto rights exercised by directors will generally be subject to their
ship interest in underlying portfolio companies. Governance overriding fiduciary duty owed to the portfolio company, unless
arrangements are typically articulated at the level in the port- such duties have been validly disclaimed. See question 3.4.
folio company’s ownership structure where management inves-
tors will hold their equity interests post-acquisition. For control 3.4 Are there any duties owed by a private equity
investments, PE sponsors will often control the manager and/ investor to minority shareholders such as management
or the board of the buyer, any parent companies above the buyer shareholders (or vice versa)? If so, how are these
entity, and the portfolio company. typically addressed?
Governance agreements among PE sponsors, co-inves-
tors and management will most commonly be in the form of Whether a PE investor owes duties to minority shareholders
a shareholders’ agreement, LLC agreement or LP agreement, requires careful analysis and will depend upon several factors,
depending on the form of the entity. These agreements ordi- including the legal form of the entity involved and its jurisdic-
narily contain, among other things: (i) transfer restrictions; tion of formation.
(ii) tag-along and drag-along rights; (iii) pre-emptive rights; Several jurisdictions hold that all shareholders in closely held
(iv) rights to elect the manager or board of directors; (v) infor- companies owe fiduciary duties to each other and the company.
mation rights; (vi) special rights with respect to management In other jurisdictions, such as Delaware, only controlling share-
equity, including repurchase rights; and (vii) limits on certain holders owe fiduciary duties. In this context, the ability to exer-
fiduciary and other duties to the extent permitted by state law. cise dominion and control over the corporate conduct in ques-
For larger portfolio companies contemplating exits through tion (even if the controller owns less than 50% of the equity) is
initial public offerings (“IPOs”), registration rights may also be determinative.
sought. Governance arrangements are not generally required Delaware is frequently chosen as the state of organization
to be made publicly available unless the portfolio company is in PE transactions due to its well-developed business law and
a public reporting company. Charters are required to be filed sophisticated judiciary. Under Delaware law, the primary fidu-
with the state of organization but generally do not include mean- ciary duties owed by a controlling shareholder (and the board of
ingful governance provisions. directors) to shareholders are the duties of care and loyalty (along
Beginning in 2024, the Corporate Transparency Act will with ancillary duties, such as those arising under the corporate
require most U.S. companies (subject to certain exceptions) to opportunity doctrine). The duty of care requires directors to
begin reporting to FinCEN certain information about their make informed and deliberate business decisions. The duty of
beneficial owners (defined as any individual who directly or loyalty requires that decisions be made in the best interests of
indirectly exercises substantial control over or owns or controls the company and its shareholders (and not based on personal
at least 25% of the company) and the individual who files the interests or self-dealing).
document forming or registering the company. Companies and Under Delaware law, corporate entities can (and usually do)
their advisors should begin to prepare for the new reporting exculpate breaches of the duty of care; but the duty of loyalty cannot
requirements now in order to avoid any potential delays in entity be waived in corporate organizational documents. However, the
formation and reporting next year. Delaware Court of Chancery recently held that shareholders can
contractually waive the duty of loyalty under certain conditions
3.2 Do private equity investors and/or their director concerning the sophistication of the shareholders and their ability
nominees typically enjoy veto rights over major to negotiate the waiver, the reasonableness and application of the
corporate actions (such as acquisitions and disposals, waiver, and the clarity of the waiver language.
business plans, related party transactions, etc.)? If a By contrast with the corporate statute, the Delaware stat-
private equity investor takes a minority position, what utes for alternative entities like LLCs and LPs allow the parties
veto rights would they typically enjoy? to broadly waive the duty of loyalty. For this reason, among
others, PE sponsors frequently organize their investment vehi-
For control investments, PE sponsors will often control the cles as LLCs or LPs in Delaware and include in the LLC or
portfolio company through their right to appoint the manager or LP agreement an express waiver of fiduciary duties owed to
a majority of the directors. As a result, major corporate actions minority investors. Absent an express waiver, however, courts
are ultimately indirectly controlled by the PE sponsor. If a PE will apply traditional corporate-like fiduciary duties to the board
sponsor takes a minority position, veto rights will generally not and the controller’s conduct. In addition, shareholders’, LLC
be included in underlying governance arrangements unless the and LP agreements often include express acknowledgments
sponsor owns a substantial minority position. See question 2.4. that the PE sponsor actively engages in investing and has no
obligation to share information or opportunities with the port-
folio company. These agreements also typically provide that the

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portfolio company (and not PE sources) serve as the first source companies organized and/or headquartered in the applicable
of indemnification for claims against PE sponsor employees state, and NASDAQ has enacted listing rules regarding board
serving on the portfolio company’s board. diversity and related disclosure.
Potential risks and liabilities exist for PE-sponsored direc-
tors nominated to boards. Directors appointed by PE investors
3.5 Are there any limitations or restrictions on the
contents or enforceability of shareholder agreements should be aware that they owe fiduciary duties in their capacity
(including (i) governing law and jurisdiction, and (ii) as directors (subject to certain exceptions in the case of an LLC
non-compete and non-solicit provisions)? or LP where fiduciary duties of directors are permitted to be,
and have been, expressly disclaimed). Directors of corporations
Shareholders’, LLC and LP agreements are generally governed by cannot delegate their decision-making responsibility to or defer
and must be consistent with the laws of the state of the entity’s to the wishes of a controlling shareholder, including their PE
formation. LLC and LP agreements, which are contracts among sponsor. In addition, conflicts of interest may arise between the
a limited liability company or limited partnership and its members PE firm and the portfolio company. Directors should be aware
or partners, as applicable, provide greater flexibility than share- that they owe a duty of loyalty to the company for the benefit of
holders’ agreements, which are contracts that are typically among all of its shareholders (absent a waiver under the circumstances
a corporation and its shareholders. Although governing law and discussed above) and that conflicts of interest create exposure for
submission to jurisdiction provisions may refer to the law of other breach of duty claims. Furthermore, while the fiduciary duties
states or may apply the law of two or more states through bifurca- to the company remain the same, the ultimate stakeholders may
tion provisions, this approach is unusual and should be avoided, change in certain jurisdictions when a company is insolvent or
as it is unduly complicated and references to state laws outside the in the zone of insolvency – in such situations, directors may also
state of formation may render certain provisions unenforceable. owe fiduciary duties to certain creditors of the portfolio company.
Non-competition and non-solicitation provisions in share-
holders’, LLC and LP agreements generally restrict manage- 3.7 How do directors nominated by private equity
ment and non-PE co-investors, but not PE investors. These investors deal with actual and potential conflicts of
provisions are subject to the same enforceability limitations as interest arising from (i) their relationship with the party
when contained in other agreements. Enforceability will be nominating them, and (ii) positions as directors of other
governed by state law, which varies significantly by jurisdiction portfolio companies?
and continues to evolve, and must be evaluated on a case-by-case
basis. At a minimum, such covenants must protect the legiti- See question 3.4. Under the duty of loyalty, directors must act
mate business interests of the company and be reasonable with in good faith and in a manner reasonably believed to be in the
respect to duration, geographic reach, and scope of restricted best interests of the portfolio company and may not engage in
activities. Unreasonable temporal and/or geographic scope may acts of self-dealing. In addition, directors appointed by PE
render provisions unenforceable or subject to unilateral modifi- firms who are also officers of the PE firm itself owe poten-
cation by courts. Other contractual provisions such as transfer tially conflicting fiduciary duties to PE fund investors. Direc-
restrictions, particularly for corporate entities, may be subject to tors need to be cognizant of these potential conflicts and seek
public policy limitations in certain jurisdictions. the advice of counsel.

3.6 Are there any legal restrictions or other 42 Transaction Terms: General
requirements that a private equity investor should
be aware of in appointing its nominees to boards of
4.1 What are the major issues impacting the timetable
portfolio companies? What are the key potential risks
for transactions in your jurisdiction, including antitrust,
and liabilities for (i) directors nominated by private
foreign direct investment and other regulatory approval
equity investors to portfolio company boards, and (ii)
requirements, disclosure obligations and financing
private equity investors that nominate directors to
issues?
boards of portfolio companies?

The timetable for a transaction generally depends on the due

There are no meaningful legal restrictions applicable to PE
diligence process, negotiation of definitive documentation, and
investors who nominate directors to private company boards,
other than restrictions under applicable antitrust laws. For obtaining debt financing, third-party consents and regulatory
example, the Clayton Act generally prohibits a person from approvals, if applicable.
serving as an officer or director of two competing corporations. Antitrust clearance is the most common regulatory clearance
In 2019, the U.S. Department of Justice (“DOJ”) expressed a faced. Only persons and entities that meet regulatory thresh-
desire to extend the scope of these restrictions on interlocking olds are required to make filings under the Hart-Scott-Rodino
directorships to non-corporate entities and entities that appoint Act (“HSR”). The most significant threshold in determining
directors to competing entities as representatives or “deputies” reportability is the minimum size of transaction threshold
of the same investor. If the Clayton Act is expanded in such a (2023: US$111.4 million). In most transactions, the HSR filing
manner, PE funds may need to reevaluate their existing corpo- is submitted after the parties have signed a definitive purchase
rate governance arrangements with their portfolio companies. agreement. Once both parties have filed, they must observe a
In 2022, DOJ officials said they were “ramping up efforts” statutory waiting period, which typically lasts 30 days (15 days
to identify interlocking director violations and “committed to for certain transactions) and must be observed before the trans-
taking aggressive action” against PE investments in competitors action can close. Parties can expedite review by filing based
that lead to interlocking boards. DOJ enforcement actions in on executed letters of intent or, historically, by requesting early
2022 and 2023 resulted in resignations of board members who termination of the waiting period; however, the FTC and the
were designees of PE firms, including Apollo and Thoma Bravo. DOJ issued a suspension of early terminations in early 2021 that
PE investors should also be aware that some U.S. states have was still in effect at the end of Q2 2023.
been enacting gender diversity requirements for the boards of

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Transactions raising anticompetitive concerns may receive mechanism will likely center around requiring notifications to
a “second request” from the reviewing agency, resulting in a the U.S. government for investments in the applicable sectors
significantly more extended review period. Recently, the FTC of the Chinese economy as a means for the U.S. government to
and DOJ have increased their review of PE-led deals and signaled collect information about such activities. At this time, the U.S.
that PE funds and their roll-up strategies will face greater scru- government is unlikely to impose a “reverse CFIUS” process
tiny. For example, in 2022, the FTC brought two enforcement that requires investors to seek U.S. government approval for
actions against PE firm JAB Consumer Products for its acqui- in-scope outbound investments, though such a requirement
sitions of SAGE Veterinary Partners and Ethos Veterinary could materialize in the future. The U.S. government was
Health. Both firms were competitors of JAB’s portfolio compa- expected to announce relevant measures in early 2023, but that
nies in the same industry. The consent agreements require JAB announcement was pushed back and the timing is now unclear,
to divest competing specialty and emergency pet clinics in local although we anticipate seeing movement in this area in late 2023.
markets. At the same time, the FTC is also requiring JAB to Other contractual or government approvals relating to
obtain prior approval before it can acquire any specialty or emer- specific sectors or industries (e.g., the Jones Act or FCC
gency veterinary clinics in certain areas for over 10 years. approval) may also be necessary or prudent depending on the
The FTC and DOJ have also increased their focus on acqui- nature of the business being acquired or the importance of
sition transactions, releasing two proposed enforcement objec- underlying contracts.
tives in the last few months. On June 27, 2023, the FTC, with
the concurrence of the DOJ, announced proposed rules that,
4.2 Have there been any discernible trends in
once implemented, will significantly increase the amount of transaction terms over recent years?
information that transaction parties will need to include in their
HSR filings. After the proposed new rules are implemented,
it is expected that the estimated average preparation time for For years, competitive auctions have been the preferred method
completing HSR filings will extend well beyond the typical for exits by PE sponsors and other sellers in the United States.
five to 10 business days following the execution of a purchase As a result of these competitive auctions, the scarcity of viable
agreement, potentially delaying closings. Among the proposed targets and the abundant availability of equity financing and
changes affecting private equity firms, limited partners that debt financing prior to 2022, transaction terms shifted strongly
hold a 5% or greater interest in a partnership would be required in favor of sellers, including the limiting of conditionality
to be disclosed in HSR filings (in addition to general partners, and post-closing indemnification obligations. Transactions
who are currently required to be disclosed for partnerships). have commonly been consummated with public-style closing
On July 19, 2023, the DOJ and FTC announced new draft conditions (i.e., representations subject to MAE bring-down),
Merger Guidelines, which are subject to public comment for financing conditions have disappeared, and reverse break
60 days. The draft Merger Guidelines are intended to increase fees are common. The use of representations and warranties
merger enforcement, including enforcement against serial (“R&W”) insurance has been implemented across transactions
or roll-up acquisitions. The draft Merger Guidelines identify of all sizes and is now used equally by PE and strategic buyers.
concerns with “a firm that engages in an anticompetitive pattern Transactions are being structured more frequently as walk-away
or strategy of multiple small acquisitions in the same or related deals, with the R&W insurance carrier being responsible for
business lines” even if no single acquisition would violate the most breaches of representations between the retention (which
antitrust laws. The agencies are concerned that “a cumulative refers to the self-insured deductible) and insured limit under
series of mergers” may substantially lessen competition or tend the policy. It also is becoming more common to include terms
to create a monopoly. regarding CFIUS in transactions involving non-U.S. investors.
In addition, parties to transactions potentially affecting Starting in the second half of 2022, with the market for M&A
national security may seek regulatory clearance from CFIUS. softening and there being an increase in proprietary deals and
Given recent political developments, regulatory changes, and auctions with a lack of interested bidders, there has been a
increased resources available to CFIUS, buyers should expect noticeable shift to more buyer-friendly terms, including lower
enhanced scrutiny by the U.S. government of certain foreign purchase prices, extended exclusivity periods and use of earn-
investments in the United States, particularly in the tech- outs being used to offset upfront cost at closing and to bridge
nology and defense-related industries. Recent CFIUS reforms the valuation gap. Given the increasing cost of debt, rising
that have been implemented pursuant to the Foreign Invest- inflation and the volatility of the market, we expect to see these
ment Risk Review Modernization Act of 2018 (“FIRRMA”) trends continue for the foreseeable future.
have expanded CFIUS’ powers and also now require mandatory
submissions to CFIUS for certain types of transactions that are 52 Transaction Terms: Public Acquisitions
more likely to raise U.S. national security concerns (previously,
CFIUS was typically a voluntary process). Prudent buyers seek 5.1 What particular features and/or challenges apply
CFIUS approval to forestall forced divestiture orders. to private equity investors involved in public-to-private
The Biden Administration as well as the U.S. Congress are transactions (and their financing) and how are these
considering measures to review outbound investments from the commonly dealt with?
United States for national security concerns. These potential
measures are largely driven by concerns related to U.S. capital Public company acquisitions pose a number of challenges for
flowing into sectors of the Chinese economy that support the PE sponsors. The merger proxy or tender offer documents
Chinese government’s “military-civil fusion” regime, which provided to target shareholders will include extensive disclosure
seeks to develop the most technologically advanced military by about the transaction, including the buyer and its financing, and
removing barriers between civilian and defense sectors. As a a detailed background section summarizing the sale process and
result, the measures will likely target investments in Chinese negotiations. These disclosure requirements are enhanced if the
sectors such as artificial intelligence, semiconductors, and Rule 13e-3 “going private” regime applies to the transaction.
quantum computing and/or involving military and dual-use A public company acquisition will require either consum-
technologies. The first phase of an outbound investment review mation of a tender offer combined with a back-end merger or

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target shareholder approval at a special shareholder meeting. retention under the policy (e.g., 50% of a retention equal to 1%
In either case, there will be a significant delay between signing (or less) of enterprise value). Public-style walk-away deals where
and closing that must be reflected in sponsor financing commit- sellers provide no indemnification have become common, and
ments, with a minimum of six weeks for a tender offer (which proposing a walk-away deal may effectively be required for
must remain open for 20 business days) and two to three months buyers in competitive auctions.
for a merger that requires a special meeting. For issues identified during due diligence, buyers may nego-
Absent unusual circumstances, there will be no ability to tiate for special indemnities, with the terms depending on the
seek indemnification or other recourse for breaches of target nature and extent of the exposure and the parties’ relative nego-
representations or covenants, but R&W insurance may be tiating power.
obtained. Public company transactions also present unique Management team members typically do not provide
challenges for the use of creative financing methods such as any special indemnification to buyers in their capacity as
earn-outs, contingent value rights and seller financing. management.

5.2 What deal protections are available to private 6.3 What is the typical scope of other covenants,
equity investors in your jurisdiction in relation to public undertakings and indemnities provided by a private
acquisitions? equity seller and its management team to a buyer?

Generally, the acquisition of a U.S. public company is subject Historically, U.S. PE sellers typically have not agreed to
to the ability of the target’s board to exercise a “fiduciary out” non-competition covenants, and restrictive covenants were
to pursue superior offers from third parties until the deal is limited to employee non-solicitation covenants. Conversely,
approved by the target shareholders or a tender offer is consum- selling management investors and certain co-investors typically
mated. A PE buyer typically negotiates an array of “no shop” agree to non-competition and other restrictive covenants. In
protections that restrict the target from actively soliciting recent years, limited non-competition covenants by PE sellers
competing bids, along with matching and information rights if a have become somewhat more common given the high valu-
third-party bid arises. If a target board exercises its fiduciary out ations paid by buyers. However, these covenants, if present,
are typically very narrow and may be limited to restrictions on
to terminate an agreement and enter into an agreement with an
purchasing enumerated target companies. Restrictive covenants
unsolicited bidder, or changes its recommendation of the deal to
by PE sellers tend to be intensely negotiated, and the terms,
shareholders, break-up fees are customary. Fees typically range
including the length of the restrictions, any exceptions and their
from 3−4%.
applicability to PE fund affiliates, depend on the parties’ nego-
tiating strength and the nature of the PE seller (including fidu-
62 Transaction Terms: Private Acquisitions ciary duties owed to its LPs) and the business being sold.
Counsel should ensure that key members of the target’s manage-
6.1 What consideration structures are typically ment team continue to be bound by existing restrictive covenants.
preferred by private equity investors (i) on the sell-side, The scope of permissible non-competition and other restrictive
and (ii) on the buy-side, in your jurisdiction?
covenants varies significantly from state to state, and, in recent
years, many courts have increased the level of scrutiny that they
U.S. PE buyers typically purchase companies on a cash-free, apply to such covenants. At a minimum, restrictive covenants
debt-free basis. U.S. transactions typically involve a working must not be broader than necessary to protect the legitimate busi-
capital adjustment (as opposed to a locked-box approach) where ness interests of the company and be reasonable with respect to
the parties agree to a target amount that reflects a normalized duration, geographic reach, and scope of restricted activities.
level of working capital for the business (often a trailing six- or Covenants that are overbroad face a risk of being unilaterally
12-month average) and adjust the purchase price post-closing narrowed by a court or, as has become increasingly common over
to reflect any overage or underage of working capital actually the last several years, declared unenforceable in their entirety. See
delivered at closing. Depending on the nature of the business question 11.1 for a discussion of the New York State Legislature‘s
being acquired and the dynamics of the negotiations, the price recent bill banning new employee non-competes and the FTC’s
may also include earn-outs or other contingent payments that proposed rules prohibiting employee non-competes.
provide creative solutions to disagreements over the target’s
valuation. Over the last year, the challenging market condi-
tions and the resulting valuation gaps have paved the way for 6.4 To what extent is representation & warranty
a rise in earn-outs and other deferred consideration in transac- insurance used in your jurisdiction? If so, what are the
typical (i) excesses / policy limits, and (ii) carve-outs /
tion agreements.
exclusions from such insurance policies, and what is the
typical cost of such insurance?
6.2 What is the typical package of warranties /
indemnities offered by (i) a private equity seller, and (ii) PE and other sophisticated sellers routinely request that recourse
the management team to a buyer?
be limited to R&W insurance obtained by buyers.
Policy terms commonly include coverage limits of 5−10% of
With the prevalence of R&W insurance, post-closing indem- target enterprise value, a 0.75–1% retention (stepping down to
nification by sellers, which was once intensely negotiated, has 0.5% after one year), six years of coverage for breaches of funda-
become less important for allocating risk between buyers and mental representations and three years of coverage for breaches
sellers. Historically, sellers would indemnify buyers for breaches of other representations. Exclusions include issues identified
of representations and warranties, breaches of covenants and during due diligence, certain liabilities known to the buyer,
pre-closing tax liabilities, and the parties would carefully nego- benefit plan underfunding and certain environmental liabilities,
tiate a series of limitations and exceptions to the indemnifi- and may also include industry and deal-specific exclusions based
cation. When buyers obtain R&W insurance, sellers typically on areas of concern arising during the underwriting process. In
provide only limited indemnification, if any, for a portion of the

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addition, exclusions have been expanded over the last few years Committed lenders will deliver debt commitment letters to
to include liabilities related to PPP loans. the buyer. Often, PE buyers and their committed lenders will
Despite competition among R&W insurers, consistent with limit sellers’ rights to specifically enforce the debt commitment.
other insurance markets, pricing of R&W insurance policies See question 6.8.
has relaxed slightly, with premiums and broker fees commonly
around 3–4% of the policy limit, and underwriting due dili- 6.8 Are reverse break fees prevalent in private equity
gence fees of US$30,000–US$50,000. In addition, the premium transactions to limit private equity buyers’ exposure? If
is subject to taxation under state law. so, what terms are typical?

6.5 What limitations will typically apply to the liability In the current market, closings are rarely, if ever, conditioned on
of a private equity seller and management team under the availability of a buyer’s financing. In certain circumstances,
warranties, covenants, indemnities and undertakings? PE buyers may accept the risk that they could be forced to close
the transaction by funding the full purchase price with equity.
For transactions with indemnification, representations and However, buyers seeking to limit such exposure typically nego-
warranties typically survive for 12−24 months post-closing, tiate for a reverse break fee, which allows termination of the
with 12 months being most common, although certain speci- transaction in exchange for payment of a pre-determined fee if
fied representations may survive longer. For example, tax, certain conditions are satisfied. Depending on the terms, reverse
break fees may also be triggered under other circumstances, such
employee benefit and fundamental representations often survive
as a failure to obtain HSR approval. Reverse break fees can vary
for several years or until expiration of the applicable statute of
from 3−10% of the target’s enterprise value, with the typical fee
limitations. Fundamental representations typically include due
in the range of 5–7% of enterprise value, and may be tiered based
organization, enforceability, ownership/capitalization, subsid-
on different triggering events. Where triggered, reverse break
iaries and brokers and may also include affiliate transactions.
fees typically serve as a seller’s sole and exclusive remedy against
For walk-away R&W insurance transactions, representations a buyer. Given that PE buyers typically have no assets prior to
and warranties typically do not survive the closing. equity funding at closing, sellers commonly require PE sponsors
For transactions without R&W insurance, indemnification to provide limited guarantees of reverse break fees.
caps typically range from 5−20% of the purchase price, whereas
a significantly lower cap (e.g., 0.5% or an amount to cover the
retention) is typically negotiated when the buyer is obtaining
72 Transaction Terms: IPOs
R&W insurance but the parties have not agreed to a full walk-
away deal. Liability for breaches of fundamental representa- 7.1 What particular features and/or challenges should
a private equity seller be aware of in considering an IPO
tions, breaches of covenants and fraud is often uncapped or
exit?
capped at the purchase price. Although dollar-one thresholds
are sometimes used, sellers will often only be responsible for
damages above a deductible amount. Exits through IPOs will often be at higher multiples and more
readily apparent market prices than exits through third-party
sale transactions. However, exits through IPOs come with
6.6 Do (i) private equity sellers provide security (e.g., the cost and compliance burden of the federal disclosure rules
escrow accounts) for any warranties / liabilities, and and are subject to volatile market conditions. In 2022 through
(ii) private equity buyers insist on any security for
the first half of 2023, PE exits via IPO have been almost non-
warranties / liabilities (including any obtained from the
management team)?
existent. Going public through an acquisition by a special
purpose acquisition company (“SPAC”) (i.e., a de-SPAC trans-
action) has decreased in popularity recently, given heightened
With the prevalence of R&W insurance across the market, regulatory scrutiny, the performance of recent de-SPAC transac-
escrows and holdbacks to cover indemnification for representa- tions, increased litigation, decreased public company valuations
tion breaches are less common. However, for transactions with and general uncertainty in the public markets.
R&W insurance that are not walk-away deals, sellers generally Unlike third-party sales, PE sponsors continue to own signif-
place 50% of the retention under the R&W insurance policy in icant amounts of portfolio companies’ equity following an IPO
escrow. Escrows for post-closing purchase price adjustments or de-SPAC transaction. As a result, PE sponsors’ ownership
remain common, as do special escrows to address issues identi- interests and rights and the nature of any affiliate transactions
fied during due diligence. with portfolio companies will be subject to public disclosure and
scrutiny. PE sponsor management and monitoring agreements
6.7 How do private equity buyers typically provide commonly terminate in connection with IPOs.
comfort as to the availability of (i) debt finance, and (ii) Seeking to retain control over their post-IPO stake and ulti-
equity finance? What rights of enforcement do sellers mate exit, PE sponsors often obtain registration rights and adopt
typically obtain in the absence of compliance by the favorable bylaw and charter provisions, including board nomi-
buyer (e.g., equity underwrite of debt funding, right to nation rights, permitted stockholder action by written consent
specific performance of obligations under an equity and rights to call special stockholder meetings. Because many
commitment letter, damages, etc.)? U.S. public companies elect board members by plurality vote,
PE sponsors often retain the right to nominate specific numbers
U.S. PE buyers typically fund acquisitions through a combina- of directors standing for re-election following the IPO. Absent
tion of equity and third-party debt financing. The PE sponsor submission of nominees by third-party stockholders through
will deliver an equity commitment letter to the buyer under proxy contests, which tend to ebb and flow but are generally
which it agrees to fund a specified amount of equity at closing, unusual in the United States, PE sponsors can ensure election
and the seller will generally be named a third-party benefi- of their nominees. As these favorable PE rights are unusual in
ciary. In a club deal, each PE sponsor may deliver its own equity U.S. public companies, the rights often expire when the spon-
commitment letter. sor’s ownership falls below specified thresholds.

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Unlike private companies, most U.S. public companies are loan market and the high-yield bond market have been heavily
subject to governance requirements under stock exchange rules impacted by these market conditions and have seen a signifi-
such as independent director requirements. cant decrease in deal activity. On the other hand, while still
at a lower activity level than previous years, the private credit
market led by direct lenders has remained relatively active
7.2 What customary lock-ups would be imposed on
compared to the syndicated loan and high-yield bond markets.
private equity sellers on an IPO exit?
Direct lenders continue to be the key players in PE transactions
due to their competitive advantage over traditional regulated
The underwriters in an IPO typically require PE sellers to enter banks, including an ability to take on higher leverage, uncon-
into lock-up agreements that prohibit sales, pledges, hedges, etc. strained by bank regulations, and provide faster deal execution
of shares for 180 days following the IPO. After the expiration and certainty of terms with no “market flex” risk. More direct
of the lock-up period, PE sponsors will continue to be subject lenders are now also equipped to fund large-cap PE transactions
to legal limitations on the sale of unregistered shares, including whereas, in the past, direct lenders typically only participated
limitations on the timing, volume and manner of sale, and in in smaller middle market deals. As market participants look
club deals they may remain subject to coordination obligations for more efficient and creative ways to get deals done in a chal-
with other sponsors. lenging economy, PE sponsors have also been utilizing seller
notes and preferred equity financing to fund their acquisitions.
7.3 Do private equity sellers generally pursue a dual-
track exit process? If so, (i) how late in the process are 8.2 Are there any relevant legal requirements or
private equity sellers continuing to run the dual-track, restrictions impacting the nature or structure of the debt
and (ii) were more dual-track deals ultimately realised financing (or any particular type of debt financing) of
through a sale or IPO? private equity transactions?

Depending on market conditions, PE sponsors may simultane- Traditional banks continue to be governed by capital require-
ously pursue exit transactions through IPOs and private auction ment guidelines and regulations affecting highly leveraged
sales. Dual-track transactions can help maximize the price loans, including the Dodd-Frank Act. Some of these regulations
obtained by sellers (through higher IPO multiples or increased were loosened in recent years in an effort to infuse capital and
pricing pressure on buyers), lead to more favorable transaction support the market during the COVID-19 pandemic. It remains
terms and provide sellers with greater execution certainty. The to be seen whether similar guidelines and/or regulations will be
path pursued will depend on the particular circumstances of the imposed on direct lenders, as their role in the debt-financing
process, but ultimate exits through private auction sales remain market continues to increase, and whether a new, more restric-
the most common, particularly as decreased public company tive regulatory scheme will be introduced or implemented with
valuations and an almost paralyzed IPO market have made IPOs respect to traditional banks in light of the recent regional bank
(including de-SPAC transactions) significantly less attractive. failures and bail-outs (including Silicon Valley Bank and others).
Dual-track strategies have historically depended on the size of
the portfolio company and attendant market conditions. Dual- 8.3 What recent trends have there been in the debt-
track approaches are less likely for small- to mid-size portfolio financing market in your jurisdiction?
companies, where equity values may be insufficient to warrant
an IPO. In addition, such companies are less likely to have suffi-
As fewer PE deals have been carried out, the PE financing
cient resources to concurrently prepare for both an IPO and
market has also remained relatively slow throughout 2022 and
third-party exit. As volatility in IPO markets increases, PE firms
the first half of 2023. In addition, due to higher pricing, most
generally focus more on sales through private auctions, where
portfolio companies have refrained from refinancing their
closing certainty and predictable exit multiples are more likely. existing debt facilities, which has also contributed to the low
level of activity in the PE financing market.
82 Financing However, private credit funds have continued to actively raise
capital, accumulating more “dry powder” to be deployed in the
8.1 Please outline the most common sources of debt PE market, and direct lenders have continued to play an active
finance used to fund private equity transactions in your role in PE financing transactions. In addition, the debt-financing
jurisdiction and provide an overview of the current state market has seen a high volume of add-on acquisitions, as portfolio
of the finance market in your jurisdiction for such debt companies are still able to tap into existing revolver or delayed
(including the syndicated loan market, private credit draw term loan facilities to fund those acquisitions, as well as
market and the high-yield bond market).
“amend and extend” transactions as portfolio companies seek
to extend the maturity of existing debt instead of refinancing it.
The most common sources of debt financing used to fund PE In addition, nearing the cessation of LIBOR on June 30, 2023,
transactions are loans and high-yield bonds. Loans can be the debt-financing market saw a high volume of amendments to
provided by traditional, regulated banks or direct lenders, such existing debt facilities to convert LIBOR loans into SOFR loans.
as alternative asset managers and BDCs, and may be syndicated
among a large group of lenders or provided by a single lender or 92 Alternative Liquidity Solutions
a smaller group of lenders through a club deal. Middle market
PE sponsors typically look to the loan market to fund their PE 9.1 How prevalent is the use of continuation fund
transactions, and larger PE sponsors typically look to both the vehicles or GP-led secondary transactions as a deal type
loan and high-yield bond markets to fund their large-cap deals. in your jurisdiction?
Due to a number of macroeconomic and geopolitical chal-
lenges, including interest rate hikes and inflation, PE deal As a result of declines in exit activity, there has been significant
activity remains significantly down from 2021. The syndicated growth in the use of continuation funds and GP-led secondaries

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since 2020. With a scarcity of available investments and inter- partnerships), profits interests can provide meaningful tax effi-
ested buyers, GPs use continuation funds to retain investments ciencies for management. Profits interests are granted for no
from a previous fund that the firm is not yet ready to sell, either consideration, entitle holders to participate only in company
because the asset is underperforming or, conversely, because it appreciation (not capital) and provide holders with the possi-
is performing well. Rolling these investments over to a new bility of reduced tax rates on long-term capital gains, but they do
fund allows PE firms to release their LPs from commitments have certain complexities not present in alternative structures.
while also giving those who are interested in continuing the Other types of economically similar arrangements (non-ISO
investment the opportunity to roll over into the new structure stock options, restricted stock units and phantom equity) do not
alongside new investors. Global secondary transaction volume generally allow for this same capital gain treatment.
increased from $60 billion in 2020 to around $134 billion in Profits interests are not available for corporations. In certain
2021 and $111 billion in 2022. We expect this trend to continue cases, the use of restricted stock that is subject to future vesting
during 2023, as exit activity remains slow. (together with the filing of an 83(b) election) can enable a holder
– under the current tax regime – to benefit from reduced tax
9.2 Are there any particular legal requirements or rates on long-term capital gains.
restrictions impacting their use?
10.3 What are the key tax considerations for
Conflicts of interest are a major focal point for GPs when estab- management teams that are selling and/or rolling over
lishing a continuation fund because the PE sponsor is on both sides part of their investment into a new acquisition structure?
of the transaction. These conflicts can be managed by obtaining
the requisite LP consents and keeping LPs informed and involved Management investors selling their investment focus on quali-
in the process. The PE sponsor needs to be able to articulate a fying for preferential tax rates or tax deferrals on income.
compelling reason for establishing the fund and engaging in the Management investors rolling part of their investment seek to
transaction as well as justify the selling price as reasonable. This
roll in a tax-deferred manner, which may be available depending
requires the GP to balance the obvious need to be profitable with
on the nature of the transaction and management’s invest-
the GPs fiduciary duties to its investors. Disclosure, communica-
ment. In some cases (such as phantom or restricted stock unit
tion and transparency are of the utmost importance. The Institu-
plans), tax deferral is not achievable or may introduce signifi-
tional Limited Partners Association has provided guidance on best
cant complexity.
practices for successful continuation fund transactions and recom-
mends that a fund’s investment advisory committee be involved as
early as possible. PE sponsors also seek independent valuations 10.4 Have there been any significant changes in tax
of assets and formal fairness opinions from separate independent legislation or the practices of tax authorities (including
auditors as a way to alleviate any pricing concerns and demonstrate in relation to tax rulings or clearances) impacting private
fairness to the sponsor’s LPs. Fund organizational documents equity investors, management teams or private equity
are also more commonly establishing requirements that should transactions and are any anticipated?
be met for creation of continuation funds so that fewer questions
regarding the business purpose of such a transaction arise. There have been a number of significant changes in recent
years. There have been changes to the tax audit process, and
102 Tax Matters tax reform enacted in 2017 resulted in many material changes to
the U.S. income tax system that continue to remain in effect. A
10.1 What are the key tax considerations for private series of legislative and non-legislative tax changes were made
equity investors and transactions in your jurisdiction? to the tax laws related to deductions for interest expense, use of
Are off-shore structures common? carrybacks, deductions for the expense of certain types of prop-
erty, and payroll taxes in response to the COVID-19 pandemic.
For non-U.S. investors, considerations include structuring the In some cases, those rules were temporary in nature and their
fund and investments in a manner that prevents investors from continuing impact should therefore be reviewed on a case-by-
having direct exposure to U.S. net income taxes (and filing obli- case basis.
gations) and minimizes U.S. tax on dispositions or other events More recently, a new corporate alternative minimum tax was
(e.g., withholding taxes). Holding companies (“blockers”) are enacted, imposing a 15% minimum tax on the adjusted financial
often used and, in some cases, domestic statutory exceptions or statement income of large corporations (generally, applying to
tax treaties may shield non-U.S. investors from direct exposure corporations with an average annual financial statement income of
to U.S. taxes. more than $1 billion) for taxable years beginning after December
For U.S. investors, considerations include minimizing a “double 31, 2022, and a new 1% corporate excise tax was enacted that
tax” on the income or gains and, in the case of non-corporate U.S. applies to stock repurchases by publicly traded companies after
investors, qualifying for reduced tax rates or exemptions on certain December 31, 2022. In addition, significant additional funding
dividend and long-term gains. of the U.S. Internal Revenue Service has been included in recent
There is also a focus in transactions on maximizing tax basis government budget proposals, including for increased enforce-
in assets and deductibility of costs, expenses and interest on ment for complex partnerships and large corporations.
borrowings, as well as state and local income tax planning. Careful consideration and attention should be given to devel-
opments in this area. Future tax legislation and other initia-
10.2 What are the key tax-efficient arrangements that tives could result in additional meaningful changes to the U.S.
are typically considered by management teams in private income tax system.
equity acquisitions (such as growth shares, incentive
shares, deferred / vesting arrangements)?

Tax-efficient arrangements depend on portfolio company

tax classification. For partnerships (including LLCs taxed as

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applies retroactively and requires the affirmative rescission of

112 Legal and Regulatory Matters existing non-competition agreements that violate the rule. The
comment period with respect to the proposed rule is now closed
11.1 Have there been any significant legal and/or and the FTC has yet to announce whether it intends to proceed
regulatory developments over recent years impacting
with issuing the rule as originally drafted. Following its issu-
private equity investors or transactions and are any
anticipated?
ance, the rule is likely to be subject to numerous legal challenges.
In addition, legislation by states restricting non-competes has
also been on the rise. Most recently, the New York State Legis-
The Tax Cuts and Jobs Act was enacted in 2017, there were lature passed a bill banning virtually all new employee non-com-
legislative and other tax initiatives related to the COVID-19 petes. The bill was passed on June 7, 2023 by the New York State
pandemic, and more recent tax legislation went into effect after Senate, and on June 20, 2023 by the New York State Assembly.
December 31, 2022. See section 10. As of this writing, the New York state legislature is considering
The Chair of the FTC and the Assistant Attorney General for whether any changes should be made to the bill before it is sent
DOJ’s Antitrust Division have recently expressed concerns that to the Governor for review. Note that, by contrast with Califor-
certain types of PE transactions, including roll-up transactions, nia’s state-wide ban on non-competes and the FTC’s proposed
may harm consumers, workers, and marginalized communities. nationwide ban, the New York law as currently drafted does not
Antitrust officials have also identified PE acquisitions in the contain any exceptions for sellers of businesses.
health care industry as particularly troublesome, as PE firms may The U.S. government is considering implementing an
be “focused on short-term gains and aggressive cost-cutting” outbound investment review mechanism that will likely focus
that “can lead to disastrous patient outcomes and, depending on on investments made from the United States in certain sectors of
the facts, may create competition concerns.” These concerns the Chinese economy. Measures currently under consideration
may lead to extended investigations, stronger consent agree- would require notification by U.S. persons investing in targeted
ments, or blocked deals. Stronger consent agreements include sectors; however, the initial measures are unlikely to require
requiring PE firms to obtain prior approval before acquiring pre-clearance by the U.S. government for covered investments.
additional entities in the same market for 10 years. The specific requirements and timing of the outbound invest-
The California Consumer Privacy Act of 2018, as amended ment reviews will be of great interest for U.S. investors over the
by the California Privacy Rights Act (“CCPA”), went into effect coming months. See question 4.1.
on January 1, 2023. The law now protects personal informa- In June 2023, the FTC announced proposed rules that would
tion of California residents that is collected both in the busi- significantly increase the amount of information that parties to
ness-to-business and employment contexts. Numerous other acquisition transactions need to include in their HSR filings.
state-specific privacy laws also take effect in 2023, including If implemented, these proposed rules would likely to increase
in Colorado, Connecticut and Virginia, with laws in additional the amount of time parties spend preparing for, and the FTC’s
states to go into effect next year. There continues to be a flurry review of, HSR filings. As a result, the proposed new rules
of state-level activity in the privacy space in the absence of a could increase the interim period between signing and closing
federal privacy or data breach notification law in the U.S. At the for applicable transactions. See question 4.1.
federal level, the FTC continues to be laser-focused on compa- In July 2023, the DOJ and FTC announced draft new Merger
nies’ data collection and sharing practices, with a particular focus Guidelines, which are intended to increase merger enforcement
on health information, biometric information and risks related of entities that engage in patterns or series of acquisitions that
to the use of AI. The Securities and Exchange Commission may be anticompetitive. See question 4.1.
also remains active in the cyber space, proposing onerous data
breach and cyber risk management requirements, including a
proposed rule that would require registrants to provide periodic 11.2 Are private equity investors or particular
disclosures about policies and procedures for managing cyber- transactions subject to enhanced regulatory scrutiny in
your jurisdiction (e.g., on national security grounds)?
security risks and cybersecurity incident reporting. The surge
of activity at both the federal and state levels comes against the
backdrop of an increase in ransom/cyber extortion and vendor/ There is enhanced scrutiny by CFIUS of transactions involving
supply chain incidents. This has created a complex environ- non-U.S. investors and U.S. businesses that operate in indus-
ment for PE buyers who need to gauge privacy risks associated tries, or otherwise deal with technologies or personal data, that
with the data-driven companies they seek to acquire and with are deemed to be sensitive from a national security perspec-
targets who are looking to present robust privacy and cyberse- tive. Transactions involving Chinese investors, in particular,
curity compliance programs. continue to be subject to intense scrutiny by CFIUS. In addi-
In January 2023, the FTC issued a Notice of Proposed tion, FIRRMA expanded CFIUS’s jurisdiction to enable review
Rulemaking that would effectively prohibit the use of employee not only of investments in which non-U.S. investors might be
non-competition covenants in all but very limited circum- acquiring control over U.S. businesses (which have always been
stances. Specifically, if enacted (and not struck down by legal subject to CFIUS review), but also certain investments in which
challenge), the rule would make it unlawful for an employer to non-U.S. persons would gain certain rights involving appoint-
enter into, or attempt to enter into, a non-compete agreement ment of directors, access to material non-public technical infor-
with any “worker,” including any employee or independent mation, or other substantive decision-making board appoint-
contractor. The rule would also prohibit use of other types of ment rights even in the absence of control. Investments by
contractual provisions, such as customer non-solicitation cove- non-U.S. entities that are partially or wholly owned by non-U.S.
nants, that have the effect of prohibiting a worker from seeking governments also are subject to heightened scrutiny and might
or accepting employment with an employer following the termi- trigger mandatory filing requirements. There are exceptions,
nation of employment. The proposed rule does not distinguish however, for certain PE investments made through partnerships
among types of employees and contains only a limited exception in which the general partner is a U.S. entity or is domiciled in
for individual sellers of a business who are “substantial” owners, an “excepted state” (which currently includes Australia, Canada,
members or partners in the business. The rule as drafted also and the United Kingdom).

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 Dechert LLP 223

In addition, the FTC and DOJ have increased their review of including the Foreign Corrupt Practices Act (“FCPA”). The
PE transactions. See question 11.1. risk profile depends on, among other things, whether the target
conducts foreign business and, if so, whether any of the business
is conducted (i) in high-risk regions (e.g., China, India, Venezuela,
11.3 Are impact investments subject to any additional
legal or regulatory requirements? Russia and other former Soviet countries and the Middle East),
(ii) with foreign government customers, or (iii) in industries with
increased risk for violations (e.g., defense, aerospace, energy and
Impact investing and impact funds are on the rise. Impact investing healthcare). Diligence will be conducted based on the risk profile
involves allocating funds to assets that generate positive societal and possible violations identified need to be thoroughly evaluated
or environmental impact combined with financial returns. These and potentially self-reported to the relevant enforcement author-
investments, which can be made in both emerging and developed ities. In particular, the imposition of numerous sanctions and
markets, attempt to solve unheeded societal and environmental export controls against Russia in 2022 and 2023 has led to intense
challenges (rather than merely avoid harm, as with socially respon-
scrutiny of a target’s operations in, or connection to, Russia, to
sible investing). While the particulars differ, impact investment
identify potential violations or impacts on revenue derived from
firms are generally still profit-seeking entities, requiring at least a
Russia, among other issues.
return on invested capital and some additional disclosures related
The DOJ may impose successor liability and sanctions on PE
to its non-financial metrics. This type of investing differs from
buyers for a target’s pre-closing FCPA violations. PE buyers
ESG, because impact is a strategy concerned with the types of
typically obtain broad contractual representations from sellers
investments a manager targets while ESG is focused on how indi-
regarding anti-bribery and anti-corruption matters and often
vidual companies interact with the world.
insist on compliance enhancements to be implemented as a
Whether a manager of an impact investment firm is subject
condition of investment.
to a different fiduciary standard when making an impact invest-
ment depends on what type of firm makes the investment.
For example, a qualified pension plan trustee could not use 11.6 Are there any circumstances in which: (i) a private
pension funds for “impact investments” if there was evidence equity investor may be held liable for the liabilities of
that such an investment would not have a positive return, and the underlying portfolio companies (including due to
if the trustee pursued this investment against the evidence, the breach of applicable laws by the portfolio companies);
and (ii) one portfolio company may be held liable for the
trustee would be abdicating his fiduciary responsibility to seek
liabilities of another portfolio company?
the maximum financial return for the plan’s beneficiaries. In
contrast, a charity manager could consider a particular invest-
ment’s special relationship with the institution’s charitable Fundamentally, under U.S. law, businesses operated as legally
purposes. If an investment sacrifices financial return to further recognized entities are separate and distinct from owners.
a non-financial purpose, the non-financial objectives and the Consequently, PE sponsors generally will not be liable for acts of
non-financial factors considered must directly relate to the char- portfolio companies. However, there are several theories under
itable purposes of the organization making the investment and which “corporate” form will be disregarded. These include:
disclosure should be made regarding the same. Large asset (i) Contractual liability arising to the extent the PE sponsor
managers who are creating impact investing funds will want to has agreed to guarantee or support the portfolio company.
ensure that the particular investments pursued align with the (ii) Common law liability relating to: (a) veil piercing, alter ego
stated mission and impact objectives marketed to LPs and that and similar theories; (b) agency and breach of fiduciary duty;
their investment committee is informed throughout the dili- and (c) insolvency-related theories. Most often, this occurs
gence and deal selection process. when the corporate form has been misused to accomplish
certain wrongful purposes or a court looks to achieve a
certain equitable result under egregious circumstances.
11.4 How detailed is the legal due diligence (including
(iii) Statutory control group liability relating to securities,
compliance) conducted by private equity investors prior
to any acquisitions (e.g., typical timeframes, materiality, employee benefit and labor laws, the FCPA and consoli-
scope, etc.)? dated group rules under tax laws.
The two most common areas of concern relate to potential
liabilities under U.S. environmental laws and employee benefit
The scope, timing and depth of legal due diligence conducted by
laws. The Comprehensive Environmental Response, Compen-
PE sponsors in connection with acquisitions depends on, among
sation and Liability Act (“CERCLA”) can impose strict liability
other things, the transaction size, the availability of public infor-
on owners and/or operators of a facility with respect to releases
mation, the nature and complexity of the target’s business and
of hazardous substances at the facility owned or operated by
the overall transaction timeline. Sponsors may conduct certain
the portfolio company. However, unless PE sponsors exercise
diligence in-house, but outside counsel typically handles the
actual and pervasive control of a portfolio company’s facility by
bulk of legal diligence. Specialized advisers may be retained
involving themselves in the portfolio company’s daily operations
to conduct diligence in areas that require particular expertise.
at the facility or its environmental activities, they should not be
PE sponsors have been increasing their focus on due diligence
exposed to liability as an operator of such facility. Parents also
regarding ESG and data security.
should not have indirect or derivative liability for the portfolio
company’s liability under CERCLA, unless there is a basis for
11.5 Has anti-bribery or anti-corruption legislation veil piercing.
impacted private equity investment and/or investors’ Under the Employee Retirement Income Security Act
approach to private equity transactions (e.g., diligence, (“ERISA”), if an entity sponsors a qualified defined benefit
contractual protection, etc.)? pension plan or participates in a multiemployer defined benefit
pension plan (typically as part of a collective bargaining agree-
PE buyers and counsel will evaluate the target’s risk profile ment with a union), that entity and all other entities in the same
with respect to anti-bribery and anti-corruption legislation, “controlled group” are jointly and severally liable for the entity’s
pension obligations (such as funding and withdrawal liability

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224 USA

obligations). A “controlled group” generally consists of a group transactions are generally able to negotiate and agree upon a
of trades or businesses under common control, which gener- wide variety of transaction terms in acquisition documents that
ally requires at least 80% direct or indirect common ownership satisfy their underlying goals.
(measured by vote or value as to all classes of an entity’s equity) Transaction parties should expect increased regulation in the
between or among the entities involved. Historically, PE funds United States. In particular, new regulations should be expected
have not been considered to be engaged in a “trade or busi- in the arenas of cybersecurity and protection of personal data
ness” (and thus would not be part of the same controlled group (both at the federal and state level) that will affect both how dili-
as their respective portfolio companies), but in light of recent gence is conducted and how portfolio companies operate. See
case law developments, there is now some uncertainty whether question 11.1. Tax continues to be a key value driver in PE trans-
such treatment can be assured. Recent case law has applied a actions, with IRRs and potential risks depending on tax consid-
facts-intensive “investment plus” analysis to hold that a PE fund erations. See section 10.
sponsor that had active involvement and broad authority in the Increased attention must be paid to potential CFIUS concerns,
management of a portfolio company was engaged in a “trade particularly given recent reforms and the political climate.
or business” for purposes of testing controlled group status. Non-U.S. PE investors should be aware that investing in a U.S.
Consequently, if a court were to find that a PE fund sponsor was business might trigger mandatory filing requirements. Even if a
engaged in a “trade or business” based on the reasoning applied filing is not mandatory, it nonetheless may be advisable to submit
in the referenced case law and if such PE fund sponsor also had a voluntary filing in order to avoid deal uncertainty, as CFIUS
sufficient common ownership with a portfolio company group has the ability to open a review even after closing has occurred
such that the PE fund sponsor was found to be a member of and could even require divestment. CFIUS considerations will
the same controlled group as that portfolio company group, the remain a key issue for PE sponsors in 2023. See section 11.
PE fund sponsor could be jointly and severally liable for the PE investors also need to be aware of the FTC’s and individual
defined benefit pension liabilities of that portfolio company states’ increased focus on employee non-competition covenants
group. Moreover, it could logically follow that the court could when negotiating employment arrangements with management.
then find that other portfolio company groups owned by the They should ensure that any such covenants are drafted narrowly
same PE fund sponsor could also be jointly and severally liable so that they protect the legitimate business interests of the
for the defined benefit pension liabilities of the first portfolio company and are reasonable with respect to duration, geographic
company group if the 80% common ownership thresholds were reach and scope of restricted activities. See section 11.
satisfied. PE fund sponsors should carefully consider how to
structure their investments in portfolio companies with quali- Acknowledgments
fied defined benefit pension obligations and consult with knowl-
edgeable legal counsel to attempt to minimize the controlled The authors would like to thank Joshua Milgrim, a tax partner
group liability exposure presented by the foregoing principles. at Dechert LLP, James Fishkin, an antitrust partner at Dechert
LLP, Abbi Cohen, a corporate and securities partner at Dechert
LLP who focuses her practice on environmental matters, Ian
122 Other Useful Facts Downes, a labor and employment partner at Dechert LLP,
Darshak Dholokia, an international trade partner at Dechert
12.1 What other factors commonly give rise to concerns LLP, Hilary Bonaccorsi, a data privacy and cybersecurity
for private equity investors in your jurisdiction or should
associate at Dechert LLP, Sarah Burke, an employee bene-
such investors otherwise be aware of in considering an
investment in your jurisdiction?
fits and executive compensation associate at Dechert LLP, and
Daniel Rubin, a professional support lawyer at Dechert LLP,
for their contributions to this chapter.
Contract law in the United States embraces the freedom to
contract. Absent public policy limits, PE sponsors in U.S.

Private Equity 2023

 Dechert LLP 225

Allie Misner Wasserman focuses her practice on corporate and securities matters. Ms. Wasserman represents PE sponsors and their
portfolio companies as well as strategic buyers and sellers in M&A transactions across a wide range of industry sectors. Her clients include
Court Square Capital Partners, One Equity Partners and Morgan Stanley Capital Partners. Ms. Wasserman was recently recognized for her
transactional expertise by The Deal in its Top Rising Stars: Class of 2021 list.

Dechert LLP Tel: +1 215 994 2449

Cira Centre, 2929 Arch Street Email: allie.wasserman@dechert.com
Philadelphia, PA 19104–2808 URL: www.dechert.com
USA

Dr. Markus P. Bolsinger, LL.M., co-head of Dechert’s PE practice, structures and negotiates complex transactions – domestic and transat-
lantic M&A, leveraged buyouts, recapitalizations and going-private transactions – and advises on general corporate and corporate govern-
ance matters. Dr. Bolsinger’s experience extends across industries, including healthcare, technology, industrial, agribusiness, consumer, food
and beverage, and restaurant sectors. His clients include leading PE firms, such as ArchiMed, First Atlantic Capital, ICV Partners, J.H. Whitney
& Co., Morgan Stanley Capital Partners and Ridgemont Equity Partners. In addition to his core M&A and PE experience, Dr. Bolsinger has
extensive expertise in transactional risk insurance.
He has been listed as a recommended lawyer by the U.S., EMEA and Germany editions of The Legal 500, a legal directory based on the opin-
ions of clients and peers. Recognized for M&A and PE buyouts, Dr. Bolsinger has been cited as being a “business-oriented advisor and highly
effective manager of complex processes”. Since 2010, Dr. Bolsinger has been recognized and received a pro bono service award every year.

Dechert LLP Tel: +1 212 698 3628 / +49 89 2121 6309

Three Bryant Park, 1095 Avenue of the Americas Email: markus.bolsinger@dechert.com
New York, NY 10036-6797, USA / URL: www.dechert.com
Skygarden, Erika-Mann-Straße 5
Munich 80636, Germany

Soo-ah Nah is a partner in Dechert’s global finance practice with a focus on leveraged finance. Ms. Nah represents PE sponsors and their
portfolio companies, as well as other public and private companies across industries and institutional lenders, on acquisition financings and
various other types of financing transactions. She also provides general corporate and financial advice to her clients. Ms. Nah was recently
included in Kayo Conference Series’ Top 22 in 22 women leaders in leveraged finance. She is also recognized for her work in commercial
lending by The Legal 500 (US).

Dechert LLP Tel: +1 212 698 3550

Three Bryant Park, 1095 Avenue of the Americas Email: sooah.nah@dechert.com
New York, NY 10036-6797 URL: www.dechert.com
USA

Marie Mast focuses her practice on corporate and securities matters, with a particular emphasis on M&A, capital markets and general
corporate matters.
Ms. Mast advises PE firms and strategic companies on transactions across a wide range of industries, including healthcare, food and
beverage, education and life sciences.

Dechert LLP Tel: +1 212 994 2172

Cira Centre, 2929 Arch Street Email: marie.mast@dechert.com
Philadelphia, PA 19104–2808 URL: www.dechert.com
USA

Dechert has been at the forefront of advising PE firms for almost 40 years.
With more than 300 PE and private investment clients, we have unique
insights into how the industry has evolved and where it is going next. Our
globally integrated team of more than 350 PE lawyers advises PE, private
credit and other alternative asset managers on flexible solutions at every
phase of the investment life cycle.
www.dechert.com

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