Talk of a ‘Fourth Industrial Revolution’
In the last few years, there has been considerable growth in the use of technology within the manufacturing sector, leading to talk of a ‘fourth industrial revolution’. Increased use of automated software and robotics can be an aid to manufacturers in predicting surges and decreases in demand, enabling more well-informed decision making over scaling of production. Brexit has equally triggered a greater drive towards domestically manufactured products, with the UK economy looking to become less reliant on imported goods.
For many UK manufacturers, this is potentially a good time to consider investment options to raise capital to fund expenditure within their business and increase growth, particularly for plants, machinery, or technology. Interest rates remain at historic lows, tied in with projected future corporation tax increases and recently announced tax incentives (not least the super-deduction capital allowance for plant and machinery investments), mean that this may be a good time for manufacturers to invest.
There are many different forms that an investment in the manufacturing sector could take, including:
Debt Financing
Debt financing involves raising capital as a debt, usually in the form of a loan. This may be a loan from friends and family in a start-up, from a third party or, more often, a bank. It could also take other forms, such as a corporate bond issued by the company or possibly a convertible loan note instrument allowing the lenders to convert their loans into equity shares at a later stage, subject to specific conditions. Manufacturers could also consider any government or local authority grants available and government-backed loan schemes created as a result of Covid-19.
Debt financing can be particularly beneficial as it does not result in a dilution of the shares held by current shareholders. Debt can provide quick access to cash, enabling a company to either raise capital to purchase plant and machinery, automation software or robotics, or to relieve immediate cash-flow concerns. The terms of any debt financing should be carefully considered, such as repayment terms, interest rates and security. A lender will often require security in the form of a legal charge over certain assets such as property or plant and machinery or a debenture over all the company’s assets. Additional personal guarantees from named shareholders or directors may also be required.
Equity Financing
Equity financing involves the issue of shares by a company to investors in return for capital investment. The investors, therefore, become part (usually minority) owners in the company, diluting the stake in the company held by the existing shareholders. The type of investor may vary dependent upon the development cycle of a company and its specific needs. This could range from friends and family investors in a start-up, angel investors, or venture capitalist investment, to private equity investment in more established companies. Equity investment can result in the investors bringing additional expertise and know-how to the company and potentially bringing further opportunities through known contacts. This must be balanced against the dilution of the existing shareholders and subsequent reduction of their control of the company.
Any sophisticated or institutional investor is likely to require appropriate constitutional arrangements to be put in place at the time they make their investment to regulate the operation of the company. This is likely to take the form of an investment agreement, which is a form of shareholders agreement specifically tailored to an investment scenario. The terms of an investment agreement require careful consideration and would typically include provisions relating to:
- decision making and control, in particular, a requirement for investor consent before certain agreed actions can be carried out/implemented;
- rights to appoint a director or a board observer;
- information sharing obligations;
- dividend policies;
- provisions relating to the issue of new shares, including ‘anti-dilution provisions’ (preventing the investor’s stake from being diluted by granting them a right to purchase more shares on a future share issue);
- restrictive covenants that apply to the founders;
- provisions relating to the transfer of shares (referred to as ‘pre-emption rights’); and
- They may also contain enhanced voting rights (sometimes referred to as swamping), giving the investor a right to pass or prevent a resolution on the occurrence of certain events.
The terms of any equity investment should be carefully considered from both a legal and tax perspective before terms are agreed upon.
Management buyout
For certain manufacturers that both require capital to grow and with shareholders (often founders) or long-term investors seeking to exit the company, it may be appropriate to consider a management buyout or an ‘MBO’. In a management buyout, a company’s existing management team acquire all, or a large part of a company, via a purchase of the shares in the business held by the existing shareholders. Management buyouts are often funded by management team funds, a third-party lender, or a private equity fund (or a combination of all three). The lender or private equity fund might typically (but not always) be issued shares in return for their investment. The benefit of an MBO is that the management team take over ownership of the company, often with a view to grow or diversify the business. In a manufacturing context, this often entails capital investment in plant and machinery, software, robotics or AI. The structure adopted to conduct a management buyout should be carefully considered from both a legal and tax perspective before terms for any management buyout are agreed.
Flotation
For those manufacturers of sufficient size and ambitious growth plans, floating on a public stock exchange, such as AIM, can be an effective way of raising funds for future growth. Floating on AIM will not be appropriate for all businesses seeking investment. Any company considering this option would need to take legal and financial advice in order to be best prepared for the process and ensure all regulatory requirements are met.
Here to Help
Myerson provides comprehensive and specialist advice to the manufacturing sector. If you would like legal advice or support on any investment options for your business, then contact our Manufacturing Solicitors on 0161 941 400 or email the Manufacturing team.