Although private equity consortium bids often involve long-term co-operation between bidders, the period of co-operation between trade buyers is likely to be limited to the minimum required to acquire the target and divide its businesses. Because of this, a strong legal framework is required for implementing the transaction in the form of a consortium agreement. In a break-up bid, the consortium agreement’s key terms will typically include:
As described above, an efficient decision making process can be key to the success of a bid. The consortium agreement will therefore need to clearly set out the manner in which the bid or acquisition process is to be conducted and the rights of representation on Bidco’s board.
Asset allocation and valuation
Perhaps the two most fundamental issues to resolve are asset allocation and valuation. Often the amount of information available on the target’s business and assets will be limited, particularly where the target board is not cooperating with the due diligence process. The consortium members therefore need to agree a basis for allocating the target’s businesses and assets. For example, if key assets have been identified, these may be expressly allocated to a particular consortium member. A consortium member may then be allocated target businesses in particular countries with a corresponding right to all target assets exclusively or predominantly used by those businesses. A mechanism is also required for dealing with unallocated assets and liabilities and a process for dealing with any disputes.
Similarly, if the information available does not allow for the different businesses and assets to be separately valued, a mechanism for doing so will have to be agreed. Often this will involve a best estimate of relative values of such businesses and assets, upon which the parties’ initial funding obligations are based, followed by an iterative process pursuant to which the consideration paid is adjusted as more information is obtained.
The consortium agreement will typically contain exclusivity provisions which prevent consortium members (including withdrawing investors) from making any offer for the target independently of the consortium. Sometimes the parties may agree to disband the consortium (for instance if there is a fundamental disagreement) and allow each member to proceed with the transaction independently.
Fees and expenses
If a transaction is successful, Bidco or one of its subsidiaries will usually bear the transaction fees and expenses. If the transaction is unsuccessful, a common approach is for abort or break fees received from the target to be used to pay professional fees. To the extent that break fees are not payable, or are insufficient to cover the costs, the costs will be split among the members of the consortium, usually pro rata to their respective equity commitments.
On a break-up bid, in most jurisdictions, competition authorities will look through to the “real deal” (ie which businesses will end up with which consortium partner). If anti-trust issues are likely to arise on a real deal analysis, the parties need to agree the extent to which they are each required to make disposals or give undertakings to avoid a Phase II investigation.
Given that the target businesses are to be separated between the consortium members, consortium members will not want the others to have rights in respect of sensitive commercial information relating to “their” target businesses (and there may also be anti-trust restrictions on the provision of such information). The limiting of access to information can be a complicated process, particularly where target’s head office is allocated to one party but holds sensitive information relating to businesses to be acquired by other parties.
While, in principle, the ability for a consortium member to transfer its participation to members of its group will be acceptable, consortium members will need to ensure that these provisions only enable intra-group transfers and do not inadvertently permit a consortium member to exit or sell-on its investment.
There is commonly a prohibition on dealings by consortium members for so long as they are treated as acting in concert under the Takeover Code. These provisions are vital to ensure that certain obligations under the Takeover Code (such as the Rule 9 mandatory offer obligation) are not triggered inadvertently.
The respective rights of the various classes of shareholder, in particular regarding matters such as voting, rights to dividends and return of capital are also catered for. The detail for these provisions will typically be light to reflect the anticipated short term nature of a break-up consortium.