Whether you are a private investor, investment fund or management, the Corporate Solicitors at Myerson have a wealth of experience and understand the challenges that are involved in private equity and are able to help and advise on a structure that suits all parties.
Advising the Investor or Manager
If you are an investor, we understand that you are looking to maximise the return from your investment whilst minimising your risk. Working with your accountant/tax advisor, we can also help to ensure that your investment obtains the best tax reliefs that may be available, including, for example, consideration of Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS).
As the management team, we know that it is a delicate balance between receiving the most finance possible in order to grow the business of your company, whilst minimising your personal exposure under the terms of the investment agreement.
We can also help to advise on amending the capital structure of your company in order to ensure that it is more attractive to equity investment.
Debt versus Equity
Investment into a company will most commonly be by way of debt (i.e. loans) or by way of equity (i.e. shares). The investment may also be a combination of both or potentially a hybrid, for example by issuing a loan note instrument which is convertible into shares or the issue of preferred redeemable shares.
When considering debt finance, it is also necessary to consider security for such debt, including taking a debenture over the assets and undertaking of the company.
This may require entering into inter-creditor arrangements with other exiting creditors of the company, including its bank and management.
Whether a deal will involve debt or equity will depend on many factors, including the financial circumstances of the company, the amount of share capital the existing management are willing to share and the general level of risk of the business of the company.
We can advise on the many options available to ensure that the risk of the investment is fair as between the investors and the management.
Equity Investment Documentation
Depending on the type of investment being made, the following documents will be required:
Investment Agreement – this will set out the main terms of the investment and will include the following provisions:
- Warranties to be given by the management team. If the company is a new business, the warranties will be limited to the expectation of the management for the business going forward and will be reliant on business plans and financial forecasts. If it is a more established business, the warranties will be more extensive and the management team will want to carry out a detailed disclosure exercise;
- Financial Information. The investor will want to ensure that it is regularly kept up to date of financial matters and supplied with regular information relating to the business including management accounts;
- Director/observer. The investor may want to ensure that he has the right to appoint an “investor director” to attend at all board meetings. Alternatively, he may want to appoint an observer who will have the right to attend board meetings, but not participate in the decision making. Such an observer would not have the usual fiduciary and statutory duties of a director and therefore reduce an individual investor’s exposure to the company; and
- Restrictions on management. The investor will want to place restrictions on the management whilst they are shareholders in the company and for a period thereafter to stop them from competing with the business of the company, poaching employees and clients etc.
Articles of Association – the company’s articles of association may need to be amended to provide for the following:
- Share Classes – the rights attaching to the shares may need to be amended or simplified, especially if the company is seeking EIS or SEIS status for the investment;
- Good Leaver/Bad Leaver/Early Leaver provisions – these will ensure that the management are tied into the company and that in the event of their ceasing to be a director or employee, they must transfer their shares at an agreed value;
- Anti-dilution – the investor may want to ensure that if the company is to raise further equity finance in the future, that it’s investment is not diluted;
- Pre-emption rights on transfer and issue of shares – this will allow the parties to have a right of first refusal on the issue of any new shares or the transfer of any shares should a party cease to be a shareholder; and
- Drag along/tag along rights – If there is to be any sale of a majority of the shares in the company (whether this is the investor or management), the majority will have a “drag along right” to force the minority to sell their shares on the same terms as the majority. A “tag along right” is similar but provides that where the majority sell but do not exercise their drag along right, the minority can require the sale of their shares on the same terms as the majority.
Other documents – Depending on the existing business and structure, it may also be worth considering the following documents:
- Service agreements and contracts of employment;
- Loan agreements/loan note instruments;
- Security documentation including debentures, deeds of priority and other inter-creditor arrangements; and
- Assignments and/or licences of intellectual property rights.
