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Management Buy-outs and Management Buy-ins
A management buy-out (MBO) occurs when the management team at an existing business buys all or part of that business from its owner. A slightly different version of an MBO is a management buy-in (MBI), which occurs when the management team is assembled and brought in from outside the existing business. Our solicitors can provide assistance with all legal aspects of an MBO or MBI.
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At JMW, we will work alongside you to make sure your deal goes through correctly, with all legal matters taken care of with minimal hassle.
If you are looking to complete an MBO or an MBI, our experienced corporate solicitors will:
- Prepare relevant documentation, including the Share Purchase Agreement
- Negotiate warranties and terms
- Undertake due diligence
- Draft restrictive covenants
- Advise on any conflicts of interests
- Work in close association with the tax advisors
While relatively straightforward in concept, an MBO or MBI can be time-consuming for a management team. Not only do you have to get to grips with the complex financial and legal requirements of a business purchase, you are also required to continue with the day-to-day running of the business.
The early appointment of experienced legal advisors to the MBO or MBI team can help considerably with the up-front planning, structure and co-ordination of the deal, as well as assist the management team in negotiating with the seller or vendor's incumbent advisors.
An MBO or MBI usually involves many more parties than simply the seller and MBO or MBI 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 or MBI 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 - which sets out the principal terms of the offer and reflects what has been agreed is 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 an 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
- 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, however, 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 VCs 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's corporate team has extensive knowledge of MBOs and MBIs, having provided legal advice to many different groups, including:
- Management buy-out teams
- Venture capitalists
- Private equity firms
- Other funders
This means that we can help your MBO or MBI progress smoothly, completing the deal as quickly and efficiently as possible.
The corporate team at JMW 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 or MBI with comprehensive and practical legal advice.