Updated: Nov 24, 2020
A previous article by our firm has sorted out and summarized privatization transactions ( click here ). As a companion article, this article will discuss a very important but easily overlooked issue in privatization transactions. The privatization transactions of listed companies usually involve multiple major shareholders or external investors, and the company’s senior management members sometimes participate in it. In such a buyer group-led transaction, the members of the buyer group must negotiate their respective rights after the privatization of the target company during the complex privatization process. This article will focus on the important considerations when negotiating such rights by the buyer group, how to coordinate the delicate relationship between the parties in the privatization process, and the preparation of transaction documents.
Investment in private companies
In a privatization transaction, the members of the buyer group are actually investing in private companies, but they must first go through a series of unique and complicated procedures-that is, privatizing the listed company first. Therefore, it is not difficult to understand that the privatization process itself will become the focus. Among the issues that have attracted much attention include: whether the special committee of the board of directors of the listed company supports the privatization plan, the disclosure of the privatization plan made in accordance with the strict requirements of the Securities Regulatory Commission, and whether there are shareholders who object Privatization and the court are required to evaluate the value of the equity held.
In addition, the buyer group must also consider the issues it faces when investing in private companies, especially the board seat arrangements, voting rights and how to exit. The arrangement of this type of private company often depends on the composition of the buyer's group and the long-term plan of the buyer's group for the company's privatization. There is no single standard template available. However, when considering and negotiating these arrangements, members of the buyer group should pay attention to the following points:
The shareholder agreement is important : First, the members of the buyer group must reach a formal agreement on the arrangements after the completion of the privatization, the shareholder agreement. The importance of the shareholder agreement is that the basic shareholder rights and guarantees under the company law are often far from the expectations of the buyer's group members. Through the shareholder agreement, the parties can agree on specific details to achieve the effect of tailoring. For example, unless otherwise agreed, for shareholders holding 20% of shares in companies registered in Delaware or the Cayman Islands, the local company law does not automatically grant the shareholder a seat on the company’s board of directors and the right to veto important matters. And the right to withdraw. In addition, controlling shareholders usually expect minority shareholders to be subject to equity transfer restrictions that are not specifically provided for in the company law. These can all be agreed through a shareholder agreement. Therefore, the negotiation and preparation of the shareholder agreement is very important, helping to clarify the rights and responsibilities of the parties after the settlement, so as to achieve a win-win situation.
Coordinating potential conflicts within the buyer group : Secondly, in terms of achieving the common goal of privatization, the interests of the members of the buyer group are basically the same, but their respective rights and arrangements after privatization may be quite different. Therefore, members of the buyer group should take precautions and properly handle conflicts of interest that may arise within the buyer group.
Similar to the situation of investing in other private companies, members of the buyer group usually have different investment return expectations and strategies. The joint acquisition of listed companies by members of the buyer group does not mean that their goals after the completion of the privatization are exactly the same. When the buyer group includes participants of different natures such as major shareholders, strategic investors, financial investors, and senior management members, potential conflicts may be unavoidable. Even the same types of investors may have very different investment strategies. For example, some financial investors may want the target company to relist on another stock market as soon as possible after privatization to achieve short-term and fast investment returns, while other financial investors may wish to seize the opportunity for appreciation and seek to re-list in the target company. Before listing, divest some non-performing assets or conduct business restructuring. At the same time, other investors may support the target company's industrial chain integration through a series of mergers and acquisitions to increase the overall valuation, in order to seek the possibility of a dual-track exit through sale or listing in the future.
Therefore, even if the initial goals of the members of the buyer group are the same, they still have to plan ahead in order to plan for it. For example, Chinese concept stock companies listed in the United States often seek to relist in Hong Kong, Shanghai or Shenzhen after completing privatization and delisting from the United States (our previous article discussed the background and prospects of such privatization transactions). However, factors such as market conditions, regulatory obstacles and company performance may hinder the company's immediate re-listing plan. At this time, the opinions of the members of the buyer group are likely to diverge-some investors may accept unsatisfactory terms in order to realize the re-listing as soon as possible, but other investors may be willing to wait for market conditions to improve. Of course, some investors may want to let The company re-adjusted its business strategy before seeking a better exit time.
In order to reduce the deadlock and negative effects caused by these potential conflicts, investors can sign a shareholder agreement to properly handle the arrangements after the completion of privatization. These arrangements include: board seats, veto rights on important matters, deadlock clauses, restrictions on equity transfers, non-compete clauses, drag and follow-up rights, "compulsory withdrawal" clauses, compulsory sales rights, stock buyback and buyout arrangements, etc . Our previous article has introduced the relevant considerations of this type of transaction (see here and here for details ).
The delicate relationship between buyer groups in the privatization process
Based on the following two practical considerations, for most buyer group members, the main terms of the post-closing arrangement should be negotiated before the buyer group and the target company formally negotiate the privatization agreement.
The first point is as mentioned above, that is, the members of the buyer group should sign a tailor-made shareholder agreement to set out their respective rights after closing, rather than relying solely on the basic rights conferred by the company law. Second, the members of the buyer group usually have the largest bargaining chip before signing the final transaction agreement to negotiate the terms of the shareholder agreement. In a privatization transaction of a US listed company, members of the buyer group can still withdraw from the transaction in limited circumstances after signing the transaction agreement, such as their inability to obtain debt financing, but cannot request withdrawal because the parties fail to reach an agreement on the shareholder agreement .
In view of the above considerations in the privatization transaction process, it is better for the members of the buyer group to agree on the arrangements after the closing when signing the final transaction agreement. On the day when the privatization transaction is signed, the parties will have to sign a number of agreements, including: (1) the merger agreement between the buyer's special purpose company and the target company; (2) a capital contribution letter signed by a member of the buyer's group with cash contributions; (3) ) If the transaction consideration involves debt financing, a debt commitment letter issued by the debt financier; (4) A guarantee letter signed by the buyer’s group member, pursuant to which it agrees to guarantee certain responsibilities of the buyer’s special purpose company; and (5) The buyer’s group member agreement to Agreement on the rights and responsibilities within the buyer’s group.
The last agreement mentioned above is usually referred to as the temporary investor agreement or the buyer group agreement. In practice, the parties rarely agree and implement the terms of the entire shareholder agreement when signing a privatization transaction.
In the event that a complete shareholder agreement has not been signed, members of the buyer group may agree on some temporary applicable terms in the buyer group agreement.
There are three characteristics of this kind of provisional terms: first, a number of major arrangements after the privatization transaction is completed will be reflected, and the level of detail of the relevant terms is similar to the list of terms used in general investment; second, the buyer group members will commit to privatization Before the transaction is completed, the entire shareholders' agreement is negotiated; third, if the entire shareholders' agreement cannot be reached before the settlement, the post-closing applicable terms stipulated in the buyer's group agreement shall continue to be valid. To some extent, this is actually a short-form shareholder agreement, so members of the buyer group are usually still obliged to negotiate a complete shareholder agreement.
The applicable terms after closing will usually be in the form of a list as an attachment to the buyer’s group agreement, which usually does not require public disclosure. In addition, the target company’s general meeting of shareholders usually includes an overview of the main terms of the buyer’s group agreement, but generally does not cover the buyer’s group’s rights arrangements after delivery.
The aforementioned transitional arrangements have been widely used in privatization transactions. However, the buyer group should still carefully consider its applicability in specific transactions.
Just as there is no single standard template for a shareholder agreement, there is also no universal single template for the post-closing applicable clauses in the buyer group agreement. Generally speaking, for a buyer group composed of several private equity investors, if the equity distribution is relatively even, the terms need not be too detailed; but if the buyer group members are more diversified in nature, detailed terms are beneficial to all parties . When negotiating provisionally applicable terms, members of the buyer group should proceed from the assumption that the parties cannot reach a consensus on the complete shareholder agreement (no matter how small the risk is), so that they can better consider and decide which are indispensable provisional terms.
In addition, members of the buyer group should also note that there are many differences between the various shareholder agreements. The market practice or customary terms understood by one party may be very different from the understanding of the other party. Therefore, even if the parties have reached a basic agreement on the principle of adopting market practices, there may still be disputes over the specific provisions of the relevant clauses. For example, all parties agree that when any shareholder transfers shares to a third party, other existing shareholders should enjoy the right of first offer (ROFO). However, the ROFO clause itself can have many changes. If each shareholder only agrees to be restricted by ROFO conventions, it may at least cause disagreements on two important clauses: whether the selling shareholders can set their own prices and make it binding on other shareholders Offer? If other shareholders decide to exercise the right of first transfer, do they need to make an offer to the selling shareholders? In addition, if other shareholders are only willing to purchase part of the shares to be transferred, can the seller refuse the partial transfer and sell all the shares to a third party?
In short, if there is any list of potentially binding terms in the buyer’s group agreement, it should be carefully considered as much as possible. It should not be compared with the non-binding term list used at the beginning of the transaction, because the parties to the transaction usually will Delay negotiations on important and controversial details.
In general, the "private" part of the privatization transaction-the arrangement of rights and obligations after the completion of privatization cannot be ignored. These provisions need to be carefully considered before the transaction is completed-whether it is a transitional arrangement or a complete Shareholders’ agreements can be free of worries by taking precautions.
For further information, please contact:
Roumu Li, Partner, Morrison & Foerster