Private equity investment is increasingly popular in the MENA region, with asset values expanding and investors taking bigger stakes. As a result, exit strategies by which investors realise their return on investment are of increasing interest. Kerri Lefebvre elaborates.
While often structured as a limited partnership, Private Equity (PE) funds or investment vehicles also encompass a wide variety of corporate structures commonly established offshore, particularly in the Cayman Islands, BVI and Bermuda. These include venture capital companies and "investment clubs" set up to finance an acquisition or investment opportunity, both of which are increasingly popular with MENA investors. Here are a couple of examples:
PE structuring options are virtually unlimited, but in general the company will be: (i) "bespoke", with a constitution tailored to reflect the commercial terms agreed by the investors, often involving two or more share classes; (ii) closed-ended, meaning the shares are not redeemable at the option of the investor; and (iii) not regulated in its home jurisdiction. An investment cycle often applies, establishing the time frame during which investors' commitments may be called and/or invested.
As PE investments are high value and long-term, the universe of potential transferees is limited. Moreover, transfers usually are restricted by the constitutional documents and/or shareholders' agreement, so an effective exit strategy is fundamental to PE success. These include a trade sale (of the company or its assets), a secondary buy-out or an IPO.
There are a variety of means by which a sale may be structured, depending upon factors including the number of shareholders and their interests (which may not be aligned). This article highlights a few points to consider.
Key Considerations
On an asset sale, consent requirements will be key. These may flow from sources including the company's constitution, its contractual obligations, the governing corporate statute and regulatory requirements applicable to the relevant asset. For example, a trade sale frequently will be a "reserved matter", requiring supermajority approval by the board and/or shareholders. If the company is leveraged, creditor consent likely will be needed. Where assets are held through a BVI company, subject to the company's memorandum and articles of association, a sale of more than 50 per cent in value of the assets of the company that is outside of the usual course of business must be approved by the board and the shareholders in accordance with applicable statutory provisions. If the assets include shares of a UAE free zone company, the consent of the free zone authority may be required.
Consent requirements may be a factor in a share sale as well. However, where there are multiple shareholders, the more significant hurdle may be bringing them all on board for a sale.
This point is often addressed with drag/tag rights and rights of first refusal or other pre-emptive rights provisions in the shareholders agreement and/or the constitution. Drag/tag rights, in general, require minority holders to join with the majority, and oblige the majority to include the minority, on a sale. When carefully drafted they may be a useful way to avoid frustration of a proposed sale (and protect minority rights to participate). However, a number of factors can complicate their enforcement (for example, complex valuation procedures or the lack of an effective arrangement to force uncooperative shareholders to comply), and the proposed purchaser may resist the uncertainty and time frame involved in the sale process. In addition, if the rights are purely contractual (and not constitutional), a breach may give rise to damages rather than specific performance. If there are no such rights, completion of a share sale may be more complicated.
An alternative may be to effect the acquisition by way of merger. The principle corporate statutes in the offshore jurisdictions provide effective and modern rules for mergers and consolidations or amalgamations, including with one or more foreign companies. The rules establish a threshold for shareholder approval and provide for dissenters' rights, which can facilitate a sale and reduce the scope for contentious proceedings. They also allow considerable flexibility in structuring the merger, including the merger consideration.
Additional statutory tools that may be useful in the context of a sale include court-sanctioned schemes of arrangement and minority squeeze out provisions.
An IPO is often considered as an alternative to a trade sale, as a listing on a recognised stock exchange may provide unparalleled access to international capital. Bermuda, BVI and Cayman Islands companies are extensively used as IPO listing vehicles, with shares traded on exchanges around the world. They offer considerable advantages, being widely known to global investors and compliant with international regulatory and transparency standards. In addition, while these jurisdictions impose fiduciary and other duties on directors and officers, they do not impose a generally applicable regulatory code of corporate governance. As a result, offshore companies are free to adapt their governance regimes to conform to applicable requirements in the listing jurisdiction.
While offering many advantages, an IPO also is a time consuming, costly and demanding exercise. It frequently will involve a pre-IPO restructuring and new or updated governance arrangements (including the appointment of independent directors to the board and formation of appropriate committees), and the high level of due diligence, disclosure and transparency that is required to successfully IPO places extensive demands upon management. The process typically takes at least 8 months to a year to complete, and the listing vehicle will be subject to ongoing regulatory and compliance obligations.
PE investors may not be willing to wait for the benefits of an IPO. In many cases, a combination of exit strategies may be the most effective solution, allowing certain investors to exit more swiftly than others that may be willing to build the business further and hold out for an IPO. In structuring PE arrangements, it's key to consider the end at the beginning and allow sufficient flexibility to adapt to a changing investment environment.
As originally seen in The Oath – May 2015
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
