Acquisition and exit

Acquisitions of controlling stakes

Are there any legal requirements that may impact the ability of a private equity firm to acquire control of a public or private company?

The acquisition of a controlling interest in a private company is not subject to any specific requirements other than as stated in question 18. In contrast, the acquisition of a controlling interest in a listed company is subject to the Takeover Act, which requires notification of the acquisition to the Takeover Commission without delay and triggers a mandatory takeover bid for the remaining shares that must be launched within 20 trading days and is subject to, among other things, minimum pricing requirements, as follows:

  • the consideration must not be lower than the highest price agreed or paid in the 12-month period before the announcement of the takeover bid; and
  • the consideration must at least equal the average quoted share price (weighted according to trading volumes) in the six-month period before the day on which the intention to launch the takeover bid is announced).

The Takeover Act captures direct controlling interests (ie, where more than 30 per cent of the voting rights in a listed target company are directly held by a bidder) and indirect controlling interests (ie, where more than 30 per cent of the voting rights in a listed target company are held by the bidder through another listed company in which the bidder holds more than 30 per cent of the voting rights or a unlisted company (or other entity) over which the bidder can exercise control). There is, however, an exception: where the interest acquired by the bidder cannot confer control on the bidder (eg, because another shareholder has as many or more voting rights, because of the usual representation at shareholders’ meetings the interest acquired does not confer a majority of voting rights or the voting rights are limited to 30 per cent by operation of the articles of the target company) or the bidder already had control, the bidder is only required to notify the Takeover Commission without delay and in any event within 20 trading days, but there is no obligation to launch a mandatory bid. Target companies may lower the 30 per cent threshold through a provision in their articles of association and several companies have done so in response to takeover bids.

In addition, an acquisition of a direct or indirect interest conferring more than 26 per cent but not more than 30 per cent of the voting rights of a listed company must be notified to the Takeover Commission without delay and in any event within 20 trading days; the voting rights exceeding 26 per cent are suspended (unless another shareholder has as many or more voting rights, the voting rights of the bidder are limited to 26 per cent by operation of the articles of the target company or the bidder already had such voting rights), but there is no obligation to launch a mandatory bid for the remaining shares.

Exit strategies

What are the key limitations on the ability of a private equity firm to sell its stake in a portfolio company or conduct an IPO of a portfolio company? In connection with a sale of a portfolio company, how do private equity firms typically address any post-closing recourse for the benefit of a strategic or private equity acquirer?

A private equity firm will generally seek to retain flexibility in its ability to sell its stake in a portfolio company, which may include having the right to request an initial public offering (IPO) or a trade sale after a minimum holding period (usually not exceeding five years) and the right to drag along other shareholders in the event of a sale by the private equity firm of all or a significant portion of its shares. Both exit rights and drag-along rights are usually subject to certain restrictions (eg, a pre-emption or a tag-along right or a minimum return requirement on the drag-along right), which may affect the private equity firm’s ability to sell.

Private equity sellers are usually not prepared to accept substantial continuing liability to purchasers. As a consequence, they do not give business warranties and indemnities and instead just provide warranties on title and capacity. As mentioned in question 7, a purchaser must therefore often rely on its own due diligence and warranties from management, and accept limited recourse (eg, to a purchase price holdback, an escrow amount or the amount insured under warranty and indemnity insurance). The cost of warranty and indemnity insurance is usually part of the purchase price negotiations.

On an IPO, the portfolio company will have to satisfy the listing requirements of the relevant stock exchange. In addition, registration rights agreed in the shareholders’ agreement may limit the percentage the private equity firm can sell into the IPO and lock-up restrictions agreed in the shareholders agreement or at the time of the IPO may limit the private equity firm’s ability to sell any shares retained following the IPO (see also question 16).

Portfolio company IPOs

What governance rights and other shareholders’ rights and restrictions typically survive an IPO? What types of lock-up restrictions typically apply in connection with an IPO? What are common methods for private equity sponsors to dispose of their stock in a portfolio company following its IPO?

An IPO does not invalidate rights or restrictions agreed between the shareholders. However, the underwriting banks will often push the private equity firm to give up any preferred rights prior to an IPO. Also, depending on how much the existing shareholders are diluted as a result of the IPO, they will often not have the required majority to enforce such rights and restrictions following the IPO.

In an IPO, the underwriter will usually expect part of the shares retained by the existing shareholders following the IPO to be locked up for a certain period to avoid downward pressure on the share price. Such lock-up obligations may already be included in the original shareholders’ agreement, but this is rather the exception. It is more common to discuss lock-up obligations (in particular, in which proportion it applies to each shareholder that retains shares and the duration of the lock-up period) at the time of the IPO.

Target companies and industries

What types of companies or industries have typically been the targets of going-private transactions? Has there been any change in industry focus in recent years? Do industry-specific regulatory schemes limit the potential targets of private equity firms?

There have only been a handful of completed going-private transactions in recent years, which makes it difficult to identify typical target industries. The difference of a going -a private transaction compared to other transactions from a private equity firm’s perspective is additional complexity and transaction costs because of the minimum pricing requirements under the Takeover Act (see question 14) and minority shareholder resistance, in particular where there is a significant free float.

Transactions involving a change of control of targets in regulated industries (see question 18) may be subject to advance notice or approval requirements, or both, which may affect timing. This applies equally to going-private transactions and other transactions.