When a company is sold, often the management team is left to its own devices. Surely, the buyer and seller have their own counsel looking out for their interests. But what about the management team?
Our Management Team Buyout Group can assist management members, from one individual to dozens, in connection with change-of-control transactions, including:
- When a family or entrepreneur business is sold to a private equity sponsor or strategic purchaser.
- When a private equity sponsor sells to another private equity sponsor or group of sponsors or strategic purchasers.
- When a firm goes public.
We also assist individual senior executives in connection with their exits from high-level positions, whether at a privately held, private equity-backed, or public business to another. We are a cross-disciplinary group with the mergers and acquisitions, private equity, securities, executive compensation, tax, estate planning and employment experience required to navigate these concerns for various management team members in a cost-effective, efficient manner. We have worked with some of the world’s leading private equity firms and understand the transaction and market dynamics, enabling us to create custom solutions for our management team clients. Often, PE sponsors will even pay our fees.
considerations for management teams in buyouts
Economic Terms
Sometimes management teams are receiving cash or equity incentive bonuses from a proposed transaction and are requested to “roll over” or contribute all or a portion of this amount into the “Newco.” We can often structure these transactions in a tax-advantageous manner. Often these executives will have the opportunity to invest “alongside” the new investors on a “pari passu” basis.
Other Investment and Employment Terms
Generally, executives will be required to sign a shareholders, LP or limited liability company agreement outlining the terms of their ongoing investment in Newco. Sometimes these agreements include tag-along rights, put and call rights, transfer restrictions, and anti-dilution protections.
Executives may be asked to sign a new employment agreement or work-for-hire agreement, including non-competes, non-solicitations and, possibly, a new vesting schedule on existing equity. Newco may establish a new incentive equity pool to retain and attract management members.
Tax Issues
Tax issues are heavily dependent on the existing tax classification of a company (e.g., C-Corp, S-Corp, partnership) and can have important implications for management team members. We often work with management teams to optimize tax structures and incentives.
management economics
Employment Agreements
The private equity sponsor may want to tighten existing non-compete provisions and related restrictive covenants. Note that management members who are selling shareholders will typically be required to also agree to certain restrictive covenants as part of the transaction agreement. The law is constantly evolving in this area.
Management will want to make sure that salary and bonus provisions are adjusted if, for example, they have fallen below market. Severance protection also will likely be negotiated, including the definition of “Cause” and “Good Reason” for determining when severance will be triggered.
Rollover Equity
The private equity sponsor will expect that key senior management members roll over transaction proceeds (equity and transaction bonus) that are material both in terms of absolute dollar amounts and percentage of total transaction proceeds. Management will want to ensure that its rollover equity is treated in the same manner as the sponsor’s invested equity to the greatest extent possible, and that the rollover is accomplished in the most tax-efficient method.
Incentive Equity
A private equity sponsor will establish a new incentive equity program. Key economic issues will include the size of the incentive equity pool, the split between time-based vesting and performance-based vesting (as well as the length of time and performance hurdles that must be satisfied for vesting to occur), and what happens to the equity upon various termination of employment scenarios.
going private
In addition to the issues raised above, a going private transaction has a few additional wrinkles:
- The board and officers must carefully consider the fiduciary duties they owe to their existing owners.
- Securities law disclosures will bring added scrutiny to any compensation earned or to be paid to management at closing.
- Exception from golden parachute excise tax application will not be applicable, so attention must be paid to minimizing excise taxes that might otherwise be due.
