Types of private equity transactions
What different types of private equity transactions occur in your jurisdiction? What structures are commonly used in private equity investments and acquisitions?
Predominantly, private equity investors aim to acquire majority stakes in German companies. However, given the lack of target companies and the mounting pressure on market to invest, private equity investors are nevertheless more and more willing to acquire minority interests as well.
Leveraged buyout transactions dominate the private equity market in Germany. But we have seen an increasing number of transactions in which private equity acquirers fully fund their investments with equity and get debt financing at a second stage. Lately we have also experienced an increasing number of add-on transactions of portfolio companies held by private equity investors as a consequence of buy and build strategy.
In most transactions, a private equity acquirer is willing to grant the management an equity portion in order to align interests with the management team. This management equity portion is in general, again, leveraged in comparison with the interest of the private equity acquirer.
Beside the acquisition of equity portions, we have also seen investment in other instruments such as profit participation rights or silent partnership interests. The private equity acquirer’s willingness to enter into such investments depends on the particular case and strategy.
Corporate governance rules
What are the implications of corporate governance rules for private equity transactions? Are there any advantages to going private in leveraged buyout or similar transactions? What are the effects of corporate governance rules on companies that, following a private equity transaction, remain or later become public companies?
Private equity investors in Germany typically acquire private companies in leveraged buyout transactions that are organised as either limited liability companies, stock corporations or limited partnerships. The law provides for a framework of governance rules for each form of organisation, including for instance inalienable shareholder rights, necessary bodies or organs of the company, capital maintenance rules and requirements for insolvency filing.
The corporate governance rules imposed by statute are stricter for stock corporations and much more flexible for limited liability companies and limited partnerships. The strictest and most limiting corporate governance rules apply to listed companies, which have to be organised as a stock corporation (AG), a Societas Europaea (SE) or a limited partnership of shares (KGaA): for example, listed companies are required to comply with the codified corporate governance rules set out in the German Corporate Governance Code, last amended in March 2020, and with reporting and disclosure requirements on sensitive information that private equity investors typically do not want to share publicly. The governmental commission presented a new amendment to the German Corporate Governance Code in December 2019, which was adopted in March 2020. Inter alia, the rules for the remuneration of the board of directors and the independence of the advisory board have been strengthened. The board of directors is also urged to call for an extraordinary general meeting in the case of a takeover offer in order to allow the shareholders to discuss the offer and potentially to take necessary corporate measures.
As a result, private equity sponsors typically aim for acquiring or transforming the target company into a limited liability company in order to preserve maximum flexibility. In a limited liability company more specific corporate governance rules are usually set out and agreed in the corporate documents (ie, articles of association, partnership agreement, shareholder agreement, rules of procedure for management, etc) of the target company. These further rules aim to increase control over management and limit its power. The rules that are imposed on management in addition to statutory requirements are mostly driven by the responsibilities of the private equity sponsors to supervise and control the management of the target companies in accordance with their internal portfolio guidelines. Typically, private equity sponsors will only accept the stricter governance rules that apply to the target company after its transformation into an AG for an exit through an initial public offering.
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Getting the Deal through_Private Equity Transaction 2022_Germany
This article was first published in: Private Equity – Transactions, Getting the Deal through, Lexology, Law Business Research, 2022