New Risk of Private Equity Fund Withdrawal Liability or Other Liability from Portfolio Company Pension Plans

Following a remand by the First Circuit Court of Appeals, a federal district court recently found that two affiliated private equity funds were jointly and severally liable for the withdrawal liability of a jointly owned portfolio company that previously participated in a multiemployer pension plan.

Terms to Know:

  • ​​Multiemployer pension plans are qualified retirement plans in which more than one employer participates pursuant to a collective bargaining agreement (such plans must meet requirements of ERISA, the Internal Revenue Code and
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The VCOC Exemption and Initial Fund Investments

It is common for private equity funds to have limited partners that are pension plans or other retirement vehicles subject to ERISA (“ERISA benefit plans”).  By having ERISA benefit plan limited partners, the assets of the private equity fund will be considered “plan assets” subject to ERISA, unless the fund is able to avail itself of an exemption.  In the event a fund’s assets are deemed to be plan assets, the fund becomes subject to strict ERISA rules, including those … Read More

Agreements to Negotiate in Good Faith and the Risks in Delaware

handshake_puzzle_300dpi_cmyk_2Private equity funds routinely enter into letters of intent or term sheets respecting the acquisition of portfolio companies.  While most frequently the parties view these preliminary understandings as non-binding, a body of law has developed surrounding whether they create an obligation of the parties to negotiate in good faith to complete the contemplated transaction on the terms described in the preliminary understanding.

Most frequently, these preliminary understandings are silent as to whether there is a duty to negotiate definitive agreements … Read More

New HSR thresholds were recently announced for 2016, and go into effect on February 25

These thresholds generally require HSR (Hart-Scott-Rodino Antitrust Improvements Act) filings for non-exempt transactions where:

  • The size of the transaction exceeds $78.2M (measured by the aggregate value of assets, voting securities and non-corporate interests being acquired); and
  • The size of one of the parties to the transaction has sales or assets over $312.6M and the other party has sales or assets over $15.6M

HSR filing fees will be:

  • $45K for transactions valued above $78.2M but less than $156.3M
  • $125K for transactions
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Side Letter Agreements and Private Equity Funds: Limitations on Undisclosed Preferences

Side letter agreements are a common component of the relationship between registered investment advisers and their largest investors. Side letter agreements often provide expanded rights and preferences to certain investors; concomitantly, other investors have narrower rights. Regulators in the U.S. and UK have raised concerns about undisclosed side letters. So, what are the limitations on the side letters?

The most common terms and conditions found in side letter agreements include:

  • Liquidity preferences or waiver of lock-up rights.
  • Reductions in, or
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Earn-Outs in Private Equity M&A Deals – Tax and Accounting Implications

As discussed in Part 1 and Part 2 of this post, earn-outs can provide various advantages to buyers and sellers depending on the way they are structured. The parties and their counsel should understand the tax and accounting implications.

Tax treatment: Often, the seller will want to ensure that it receives installment sale treatment with respect to earn-out payments to prevent recognizing taxable gain on amounts not received. Sellers should consider in particular whether the taxable gain associated with earn-out … Read More

Structuring the Earn-Out – Maximizing the Benefits in Private Equity M&A Deals

As discussed in Part 1 of this post, there are various advantages and disadvantages to buyers and sellers choosing to use earn-outs in private equity M&A transactions. These features can be enhanced or minimized depending on how the earn-out is structured. The main components of a well-structured earn-out are appropriate financial milestones, length of the earn-out period, obligations during the earn-out period, calculation of the earn-out payment and payment terms. Tax and accounting implications of earn-out payments will be discussed … Read More

Advantages and Disadvantages of Earn-Outs in Private Equity M&A Deals

Earn-outs are a tool used in M&A transactions to bridge gaps between the buyer’s valuation of the target company and the seller’s belief as to what its company is worth.

Earn-outs are particularly valuable when

  1. the target has growth potential but limited operating results on which to base the purchase price,
  2. the target has had a decrease in earnings that may be temporary, or
  3. the seller believes the target will grow beyond its historical operating results and is worth more
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Working Capital Considerations – Dispute Resolution and Indemnity Implications

As discussed in Part 1 of this post, working capital methodology and adjustment mechanisms are often heavily negotiated in private transactions in the core middle market. However, it is just as important that the parties anticipate how to handle disputes over the calculation of closing date working capital.

The customary methodology for resolving working capital disputes is as follows:

  1. the seller has an opportunity (generally 30 days) to review the buyer’s calculation and notify the buyer if it objects,
  2. if
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Calculating Working Capital Adjustments in Private Equity M&A Deals

Private equity funds typically price their investments based on an enterprise valuation of the target (most often using a multiple of the target’s EBITDA). The enterprise value established for the target generally assumes that at closing the target will have a normalized amount of net working capital. If it turns out that the target has less than its normal amount of net working capital at closing, the agreed-upon enterprise value for the target would be too high. If, however, the … Read More