Private equity firms call on an external legal team when needed due to their small size. In this issue, the authors analyzed private equity fundraising and M&A activity during a year of unprecedented health crises and social upheaval. A major source of national private equity regulation comes from the Securities and Exchange Commission (SEC). The SEC is the U.S. governing body for securities transactions of all kinds. Private equity transactions are the responsibility of the SEC. Historically, most private equity sponsors have prioritized controlling investments, but the current market has placed more emphasis on alternative investment vehicles, including structured shares. Advice Private Funds provides lawyers and their compliance officers with a comprehensive guide to advising private funds and their advisors. This easy-to-read guide provides practical advice on a wide range of topics facing fund managers. It deals with manager compensation and exit strategies, including the sale or public offering by an investment advisor.
The chapters focus on tax-efficient structuring of funds under U.S. federal securities laws. Tax-efficient arrangements depend on the tax classification of holding companies. For partnerships (including LLCs taxed as partnerships), profit-sharing can provide management with significant tax efficiency. Profit-sharing is provided without consideration and entitles them to participate only in the growth of the business (not the capital) and allows holders to obtain reduced tax rates on long-term capital gains under the current tax system (but have some complexities that are not present in less tax-efficient alternatives). Other types of economically similar arrangements (non-ISO stock options, restricted share units and phantom shares) generally do not allow for the same treatment of capital gains. The Dodd-Frank Wall Street Reform and Consumer Protection Act restricts banks and the circumstances in which they can participate in venture capital. Due to the Dodd-Frank Act, banks cannot use their own reserves for private equity investments. In general, the restrictions completely prohibit banks from making venture capital investments. In addition to restrictions on banks, the Dodd-Frank Act requires private equity fund managers to register with the SEC. 2.3 How is equity typically structured in private equity transactions in your jurisdiction (including institutional, management and carry interests)? Risk capital and venture capital law is the area of law relating to the financing of private investments and the financing of seed capital. Through private equity and venture capital financing, entrepreneurs find the financial capital they need to do business.
The industry is subject to different levels of regulation depending on the type of investment. Private equity/venture capital law governs how these investments are made. Minority stakes cause financial and legal problems that are not common with controlling investments. Unlike control transactions, where the risk capital promoter usually exercises unilateral control over the holding company, minority investors seek to protect their investment through contractual rights or rights embedded in collateral. Rights often include negative covenants or veto rights over key business decisions, including significant M&A transactions, affiliate transactions, debt above certain thresholds, annual budgets and business plans, strategy, executive hiring/firing, and share issuance. In addition, private equity promoters will seek the usual minority shareholder protection, such as board and committee representation, information and inspection rights, registration fees and subscription fees. In today`s market, closures rarely, if ever, depend on the availability of buyer financing. In certain circumstances, private equity buyers may accept the risk that they will be forced to close the transaction by financing the full purchase price with equity. However, buyers who want to limit this risk usually negotiate a reverse termination fee, which allows the transaction to be terminated against payment of a predetermined commission if certain conditions are met. Depending on the conditions, reverse break fees may also be triggered in other circumstances, for example if HSR approval is not obtained. Typical reverse break fees range from around 4% to 10% of the target company`s equity value, with an average of around 6% to 7%, and can be scaled based on various triggering events.
When triggered, reverse breach fees are generally the seller`s sole and exclusive remedy against a buyer. Since private equity buyers typically have no assets prior to equity financing at closing, sellers typically require private equity promoters to provide limited guarantees for reverse break fees. Lawyers can expect to spend a lot of time explaining the laws to their clients. Regulations require complex disclosures. Private equity and venture capital lawyers are involved in the process of helping their clients meet their legal obligations. Litigation is less common for private equity and venture capital lawyers than for other legal specialties. While disputes can arise, it is more common for local lawyers to spend their time preparing documents and filings than to engage in contentious litigation. Nevertheless, negotiation skills are still important as local lawyers work with other parties to prepare and close deals.
U.S. private equity buyers typically finance acquisitions through a combination of equity and third-party debt financing.