Management Buyouts

A Management Buyout (MBO) occurs when the management team at an existing business buys all or part of that business from its owner. This is often the logical succession for a company which is not the subject of an approach by a trade competitor or other third party. With a Management Buy In (MBI), the management team is assembled and brought in from outside the existing business. 

Whilst relatively straightforward in concept, an MBO can be time-consuming for the management team who are not only having to get to grips with the complex financial and legal requirements of a business purchase but are also required to continue to run the business day-to-day.

The early appointment of experienced legal advisors to the MBO team can help considerably with the up-front planning, structure and co-ordination of the deal as well as assisting the management team negotiating with the seller or vendor's incumbent advisors.

An MBO usually involves many more parties than simply the seller and MBO team. A new company (Newco) may be formed for the purpose of the acquisition; a merchant bank or venture capitalist (VC) may be providing the equity funding; and perhaps another bank or financier providing working capital, a term loan or mezzanine finance. The conflicting interests of each of the parties, therefore, need to be balanced and met in order for the deal to progress.

Indeed, the first conflicting interest is that of the potential breach by the MBO team of the contractual and fiduciary duties they owe to the company employing them. Legal advice should be sought at the start of the MBO process in order to avoid potential allegations of breach of contract or duty, possibly leading to dismissal, injunctions or damages claims, particularly should the negotiations break down. Legal advice should also be sought regarding the Companies Act's requirement for the disclosure of director's interests in company contracts, asset purchases or shares.

The drafting of the Offer Letter, sometimes called the Shut-Out Agreement, setting out the principal terms of the offer and reflecting what has been agreed, whilst not usually legally binding regarding the purchase, does need legal advice in order to ensure that the management team is protected. It should include consent to disclose confidential information, an exclusivity period where the vendor agrees not to discuss the sale with any other purchaser and an agreement relating to the apportionment of the costs of the transaction.

The legal advisors will be heavily involved in the drafting of the extensive documentation required for the MBO. Documents include:

• The Sale and Purchase Agreement;
• The Articles of Association of the Newco (usually more detailed than normal);
• Shareholders' Agreement between the MBO team members, outside investors and possibly the seller itself;
• Subscription Agreement where financiers are making a direct investment;
• Charges or Security documentation over assets of the Newco;
• Senior Management Service Agreements; and
• Minutes of Board meetings.

As is usual in any Sale and Purchase Agreement, the seller will be requested to give certain warranties and tax indemnities to the purchaser. In an MBO, though, the seller will usually argue that these are unnecessary because the team making the purchase comprises individuals who have already been running the business. The seller will, however, be expected to supply tax indemnities and other warranties regarding obligations that may arise which would not have been dealt with at management level but at the seller's head office or group level.  The purchaser’s equity or debt financiers may also insist on a greater level of warranty protection than the seller may feel is appropriate. The nature of the MBO team’s knowledge of the target’s affairs and the extent of the warranties will therefore often become a hotly contested issue for negotiation.

The VC’s or banks may look to the MBO team to furnish them with warranties and indemnities  (in addition to those given by the vendor to the Newco). An equity investor will also usually seek enhanced control over the shares in the Newco and will often require rights of veto in respect of certain key management decisions. Senior members of the MBO team may be required to sign up to restrictive covenants in order to protect the value of a VC’s investment going forward.

As in all transactions, the structure of the deal can be influenced by the tax positions of the various parties and the legal teams need to work in close association with the tax advisors in the MBO to ensure that an optimal tax minimisation solution is found.

JMW Solicitors has extensive knowledge of MBOs having provided legal advice to management buyout teams, sellers or vendors, VCs and funders. The Corporate team at JMW Solicitors is further able to draw upon the combined skills of the firm's partners in other fields such as Employment Law, Intellectual Property Law and Commercial Property Law in order to provide any of the parties to an MBO with comprehensive, commercially practical, added-value legal advice.

For further information please contact us on 0845 872 6666 or complete an enquiry form - we will respond promptly.