Tag: Private Equity


Mergers and Acquisitions—2016

Andrew R. Brownstein is a partner in the corporate group at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum.

2015 was a record year for M&A. Global M&A volume hit an all-time high of over $5 trillion, surpassing the previous record of $4.6 trillion set in 2007. U.S. M&A made up nearly 50% of the total. The “mega-deal” made a big comeback, with a record 69 deals over $10 billion, and 10 deals over $50 billion, including two of the largest on record: Pfizer’s $160 billion agreement to acquire Allergan and Anheuser-Busch InBev’s $117 billion bid for SABMiller. Cross-border M&A reached $1.56 trillion in 2015, the second highest volume ever.

A number of factors provided directors and officers with confidence to pursue large, and frequently transformative, merger transactions in 2015. The economic outlook had become more stable, particularly in the United States. Many companies had trimmed costs in the years following the financial crisis, but still faced challenges generating organic revenue growth. M&A offered a powerful lever for value creation through synergies. In a number of cases, the price of a buyer’s stock rose on announcement of an acquisition, as investors rewarded transactions with strong commercial logic, bucking historical trends. Equity prices in 2015 were strong, if flat, providing companies with valuable acquisition currency. For at least the first half of the year, strong appetite from debt investors (particularly for quality credits) and low interest rates enabled acquirors to obtain financing on attractive terms.

READ MORE »

Designated Lender Counsel in Private Equity Loans

Jason M. Halper is a partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Halper and Rob McKenna.

Recent media reports have expressed alarm at the use of “designated lender counsel” in private equity-sponsored leveraged loan transactions. [1] The phrase refers to the practice of a private equity firm instructing the investment bank arranging its syndicated loan as to which law firm the private equity firm would like the investment bank to use as the bank’s counsel. According to the press reports, the practice (also known as “sponsor designated counsel”) has become prevalent in the syndicated loan market. The question raised in the press is whether this practice creates a material conflict of interest, because the law firm representing the investment bank arguably generates fees based on the strength of its relationship with the private equity firm across the table. If it does, the next question is whether that conflict could be argued to adversely affect the lending arrangement, with potential negative consequences for investors in the loan.

READ MORE »

Private Equity Portfolio Company Fees

Ludovic Phalippou is an Associate Professor of Finance at Saïd Business School, University of Oxford. This post is based on an article authored by Professor Phalippou; Christian Rauch, Barclays Career Development Fellow in Entrepreneurial Finance at Saïd Business School, University of Oxford; and Marc Umber, Assistant Professor of Corporate Finance at Frankfurt School of Finance & Management.

When private equity firms sponsor a takeover, they may charge fees to the target company while some of the firm’s partners sit on the company’s board of directors. In the wake of the global financial crisis, such potential for conflicts of interest became a public policy focus. On July 21st 2015, thirteen state and city treasurers wrote to the SEC to ask for private equity firms to reveal all of the fees that they charge investors. The SEC announced on October 7th 2015, that it “will continue taking action against advisers that do not adequately disclose their fees and expenses” following a settlement by Blackstone for $39 million over accelerated monitoring fees.

READ MORE »

Putting RBC Capital In Context

John C. Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School. This post is part of the Delaware law series; links to other posts in the series are available here.

In a recent decision, the Delaware Supreme Court upheld Chancery Court decisions requiring RBC Capital—a unit of the Royal Bank of Canada—to pay $76 million to Rural/Metro shareholders based on RBC Capital’s advisory work for Rural/Metro in its 2011 sale to Warburg Pincus. RBC Capital sought a buy-side financing role for Warburg Pincus, a private equity firm, while giving Rural/Metro sell-side advice, and sought to leverage its role in the Rural/Metro deal for work in an unrelated deal without disclosing that fact to Rural/Metro’s board. As a result, under the Revlon standard the Court applied to the case, RBC Capital “aided and abetted breaches of fiduciary duty by former directors of Rural/Metro Corporation,” said the Court, even as it sought to limit the holding by stating that “a board is not required to perform searching and ongoing due diligence on its retained advisors … to ensure that the advisors are not acting in contravention of the company’s interests….”

READ MORE »

Merion Capital: Merger Price as a Factor in Appraisal Action

William P. Mills is a partner in the New York Office of Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader publication by Mr. Mills, Martin L. Seidel,  Gregory A. MarkelJoshua Apfelroth, and Brittany Schulman. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In a recent decision in an appraisal action, the Delaware Chancery Court reaffirmed the Court’s reluctance to substitute its own calculation of the “fair value” of a target company’s stock for the purchase price derived through arms-length negotiations, provided it resulted from a thorough, effective and disinterested sales process. The October 21, 2015 decision, Merion Capital LP and Merion Capital II LP v. BMC Software, Inc., not only provides a comprehensive review of the fundamentals of appraisal actions, but also serves as a cautionary tale for merger arbitrageurs and other stockholders looking to seek appraisal remedies.

READ MORE »

On Secondary Buyouts

François Degeorge is Professor of Finance at the University of Lugano This post is based on an article authored by Professor Degeorge; Jens Martin, Assistant Professor of Finance at the University of Amsterdam; and Ludovic Phalippou, Associate Professor of Finance at Saïd Business School, Oxford University.

Twenty years ago, private equity (PE) firms seeking to exit sold their portfolio companies to another company in the same industry or organized an IPO. Nowadays, 40 percent of PE exits occur through secondary buyouts (SBOs), transactions in which a PE firm sells a portfolio company to another PE firm. The rise of SBOs has elicited concerns among PE investors (the limited partners with stakes in private equity funds): Does the rise of SBOs mean that PE firms have run out of investment ideas? Do SBOs create or destroy value for investors? Our paper, On Secondary Buyouts, forthcoming in the Journal of Financial Economics, provides answers to these questions.

READ MORE »

Taking REITs Private

Adam O. Emmerich is a partner in the corporate department at Wachtell, Lipton, Rosen & Katz, focusing primarily on mergers and acquisitions, corporate governance and securities law matters. Robin Panovka is a partner at Wachtell Lipton and co-heads the Real Estate and REIT M&A Groups. This post is based on a Wachtell Lipton publication authored by Messrs. Emmerich and Panovka, Jodi J. Schwartz, Michael J. Segal, William Savitt, and Matthew R. MacDonald

With many REITs now trading at meaningful discounts to their net asset value, we are already seeing signs of an increase in REIT buyouts. Many of the drivers of the $100 billion-plus of public-to-private REIT M&A transactions that preceded the financial crisis are apparent again, including higher valuations in the private real estate markets than in the public REIT markets, highly liquid private markets that facilitate wholesale-to-retail executions, debt that is still both cheap and plentiful for certain transactions, large pools of low-cost private equity seeking deals (and willing to accept low cap rates), and a sizeable pipeline of REITs and REIT executives who are seeking a graceful exit. More recent trends such as the increasing interest of sovereign wealth funds and other sources of international capital in the U.S. real estate sector may also drive future REIT privatizations.

READ MORE »

Scrutiny of Private Equity Firms

Veronica Rendón Callahan is a partner at Arnold & Porter LLP and co-chair of the firm’s Securities Enforcement and Litigation practice. This post is a based on an Arnold & Porter memorandum.

On June 29, 2015, the U.S. Securities and Exchange Commission charged Kohlberg Kravis Roberts & Co. with misallocating more than $17 million in broken deal expenses to its flagship private equity funds in breach of its fiduciary duty as an SEC-registered investment adviser. KKR agreed to pay nearly $30 million to settle the charges. This action represents a continuing and robust focus by the SEC on fee and expense allocation practices and disclosure by private equity fund advisers, many of which are relatively newly registered with the SEC following passage of the Dodd-Frank Act. It serves as a reminder of the need for private equity firms and other advisers to private investment funds to consider bolstering their compliance and disclosure policies and procedures related to the allocation of fees and expenses.
READ MORE »

Proposed Regulations May Affect Fee Waivers

David I. Shapiro is a is a tax partner resident at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication authored by Mr. Shapiro, Michelle GoldBrian Kniesly, and Christopher Roman.

The Department of the Treasury and the IRS have issued proposed regulations regarding “disguised payments for services” under Section 707(a)(2)(A) of the Internal Revenue Code. The proposed regulations appear to be primarily focused on management fee waivers (and similar arrangements), but could also affect certain aspects of the tax treatment of carried interest.

Management fee waivers are a planning technique seen mostly in the private equity fund industry, where a fund manager waives a share of its management fee in exchange for a share of future profits (that is separate from any carried interest otherwise payable), often in amounts that are intended to replicate the foregone management fees. Management fee waivers are generally intended to achieve certain benefits, including deferring the receipt of taxable income by the fund sponsor, allowing the fund sponsor to meet its capital commitment to a fund on a non-cash basis, and providing for potentially more favorable tax rates applicable to individuals (i.e., if the underlying share of profits is comprised of long-term capital gain). Management fee waivers have been utilized in different forms, over many years, including arrangements which effectively amount to a package of a higher carried interest and a lower management fee, as well as arrangements which are structured as annual elective waivers. Different arrangements vary in the manner and priority in which waived amounts are paid out of future partnership profit.

READ MORE »

Volcker Rule: Agencies Release New Guidance

Whitney A. Chatterjee is partner at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication authored by Ms. Chatterjee, C. Andrew Gerlach, Eric M. Diamond, and Ken Li; the complete publication, including Appendix, is available here.

[June 12, 2015], the staffs of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and the Commodity Futures Trading Commission (collectively, the “Agencies”) provided two important additions to their existing list of Frequently Asked Questions (“FAQs”) addressing the implementation of section 13 of the Bank Holding Company Act of 1956, as amended (the “BHC Act”), commonly known as the “Volcker Rule.”

The Volcker Rule imposes broad prohibitions on proprietary trading and investing in and sponsoring private equity funds, hedge funds and certain other investment vehicles (“covered funds”) by “banking entities” and their affiliates. The Volcker Rule, as implemented by the final rule issued by the Agencies (the “Final Rule”), provides exclusions from the definition of covered fund for certain foreign public funds and joint ventures.

READ MORE »