Continuation vehicles for fund-to-fund transactions are increasingly popular, as well as specialist tech-focused, real estate and infrastructure funds, growth funds and longer-term funds. View all posts by Sophia, Deal structuring, PE general, Private equity. W&I insurance is commonly used (and thereby the need for traditional escrows has very much diminished). bolt-ons (where COVID-19 deal risks are often lower); corporate carve-outs (as companies seek to sell underperforming or non-core assets); minority and co-investment strategies; and. A private equity investor may even invest in the same business for a second time, purchasing from a subsequent owner and taking advantage of pre-existing knowledge of a business and sector, and potentially utilising capital from a subsequently raised fund. Topco is commonly an offshore vehicle but UK tax resident. This action is based on EU Regulation 2019/452 on establishing a framework for the screening of foreign direct investments into the Union adopted by the EU in 2019, which entered into force on 11 October 2020. Save in the case of distressed assets, these sales are almost invariably structured as share sales (although this may be preceded by a pre-sale reorganisation or hive-down if only part of the target is being disposed of at that time). For further information, see: Traffic Orders Procedure (Coronavirus), Transfer pricing and private equity transactions, Indirect taxesgambling and insurance premium tax (IPT), Reorganisations, restructuring and insolvency, Doing business in key global jurisdictions, UK taxation of foreign permanent establishments. Aside from Brexit, the tightening of foreign direct investment regimes in the United Kingdom and abroad will likely result in more foreign investments being subject to review. topco midco bidco structure. The main tax structuring considerations on a typical buyout include the following: A share sale will be exempt from value added tax (VAT), but will give rise to stamp duty payable by the purchaser (at 0.5% of the amount of the consideration). Le verbe confirmer est de type transitif direct. The initial report from that review proposed either aligning the rates of tax on income and capital or a rethink of the tax treatment of shares held by employees and managers. A tax indemnity can often also be obtained from the insurer. In general, acquisition structures for private equity transactions are tax driven. However, increasingly, minority investment and co-investment strategies are coming to the fore. The fund is typically a limited partnership, which helps it being treated as transparent for tax purposes by investors and carryholders. A flexible reinvestment strategy can be offered to management, so that they can either cash out and reinvest to bank' any accrued capital gains at current rates or secure tax-deferred treatment to roll over' any accrued gain until a future exit. Consequentially, the Company, now renamed Cadent Gas Limited, and Quadgas Midco became part of a standalone structure external to National Grid's consolidated group. All shares are acquired at market value, as the transaction would otherwise be taxable for both the employer and the manager. Investor information rights will be driven by the private equity firm's own reporting lines (eg, the need to pass on certain information to the underlying investors and compliance with the Walker Guidelines). New legislation, due to enter into effect on 1 January 2021, on operators that undertake security-sensitive activities' (ie, activities which are important to Sweden's national security), may have major implications for anyone contemplating selling or investing in such businesses. Portfolio companies can also work with the general partner to explore bolt-on strategies, to take advantage of an appetite to deploy capital in this way. A regime which requires a business enterprise to calculate its taxable profits arising from transactions with related persons by reference to an arm's length result. Since the Swedish tax system generally taxes capital income at a substantially lower level than salary income, it is important that any profit made from the management incentive programme be taxed as capital income. Nordic bonds are generally made with incurrence covenants and very flexible terms. A simplified numerical example of the impact of the new rules on the structure in the diagram (previous page) is to assume that UK Bidco pays 5% interest on its loan, and that Topco and Midco pay 10% interest on the shareholder debt (half of which is accepted as being on arm's length terms). We have also seen an uptick in distressed restructurings and distressed M&A, but not yet to the extent that might have been expected in part due to lenders being supportive of businesses that have realistic prospects of recovery. ESG Harms And Supply Chain Due Diligence Is The UK Falling Behind? Mondaq uses cookies on this website. Such acquirer thresholds are regularly met by private equity firms, as typically the combined turnover of all the firm's portfolio companies will need to be considered. Consistent with overseas trends, another special purpose company ("TopCo") is sometimes interposed between the sponsors and HoldCo. For portfolio companies, it is mainly about timing the cycle with the investor, which may require a more flexible approach to exit and more liquidity options. the maintenance of adequate insurance policies for the group; and compliance with group-wide policies (eg, anti-bribery and corruption, environment, health and safety and data protection policies). Auction processes are often preferred by the seller. This applies as from financial year 2019 and allows for a maximum deduction corresponding to 30% of taxable EBITDA. Private equity firms in the United Kingdom are regulated by the Financial Conduct Authority (FCA) and are subject to specific requirements, including prudential, organisational and conduct of business rules. However, dividends paid to non-Swedish shareholders are generally subject to 30% withholding tax. Sponsors typically use small proportions of equity finance to subscribe for This is to ensure seniority of the Bank Debt and priority repayment in case of exit or liquidation. The real board' will normally be set up in the BidCo, with the boards of the underlying group companies staffed by smaller management boards (ie, the chief executive officer (CEO) and/or chief financial officer of the group). ESG Harms And Supply Chain Due Diligence Is The UK Falling Behind? The regulatory conditions will depend on the industry in which the portfolio company operates. It will also be interesting to see how distressed portfolio company work may change following the introduction of the Corporate Insolvency and Governance Act 2020 specifically, whether there will be a wide adoption of the free-standing moratorium and the new restructuring plan mechanism. The warranty package is usually relatively well developed, as transactions are normally covered by warranty and indemnity insurance. Given the centrality of management to the private equity investor's investment decision, the private equity investor will seek comfort in the form of post-termination restrictions (eg, non-compete and non-solicitation). More generally, on any M&A transaction (public or private), the parties will be subject to confidentiality restrictions set out in a confidentiality agreement (also known as a non-disclosure agreement (NDA)). Topco: The chain of newly incorporated companies will ultimately be owned by the private equity investors and the management team, which will hold shares at the Topco level. Generally speaking, there are very few requirements in Sweden; and where there are requirements (eg, in the financial sector), the conditions are generally fairly straightforward and not arbitrary. Further, as in many jurisdictions, antitrust legislation and anti-money laundering legislation may affect how targets are selected and how business is conducted in certain circumstances. Bidders are usually encouraged to take out a buy-side policy, so that the warrantors can either cap their liability at the level of the self-insured excess or even give warranties on a non-recourse basis. An investor will usually seek advice on a deal-by-deal basis on how to structure its adviser engagements so as to minimise irrecoverable VAT cost (and, if relevant, maximise corporation tax relief) on transaction costs. If managers have made a significant investment or hold a substantial stake, they may also negotiate some form of veto rights, focused on maintaining the key economic terms and equality of treatment of equivalent instruments through the investment. Holdco is an abbreviation for "holding company," which is a firm that exercises control over other investments, such as stocks, bonds, other firms, and anything that has value. Good leaver status will normally lead to the manager receiving market value for the shares (should the lead investor decide to acquire them). Management must acquire their sweet equity shares for consideration at least equal to their tax (unrestricted) market value; otherwise the differential is treated as employment income (taxed on acquisition). Does HMRC need to be notified of a section 431 of the Income Tax (Earnings and Pensions) Act 2003 election? Where a private equity investor acquires a majority stake, it can expect a whole host of provisions in the equity documentation with management, aimed at protecting the private equity investment and allowing control over exit. A manager shareholder who leaves on the grounds of retirement, long-term illness, death or termination of employment by the employer without cause is generally considered a good leaver. the winding down of the holding structure post-exit. At this time (referred to in UK law as IP completion day), transitional arrangements ended and significant changes began to take effect across the UKs legal regime. Under English law, there is a distinction between representations and warranties. Tax and accounting diligence is normally very detailed. This Opco may also be a group of companies. Midco 1 receives debt finance from the fund, management and any co-investor in the form of loan notes. Private debt providers (eg, private equity firms with their own credit arms) have come to the fore recently, to some extent replacing traditional bank lenders. kentucky election results by county 2022. perryville little league; another word for housekeeping items in business; another way to say motivated seller It was the first European market in which private equity and buyouts took root and the features that enabled it to do so are even stronger today: The strength of English law and the English legal system is another factor. Given the general approach to warranties and indemnities (as discussed in question 4.1), there will be limited exposure for the private equity seller on an M&A exit. To print this article, all you need is to be registered or login on Mondaq.com. However, on a buyout of a private company (as is the case for any other private M&A), there is no requirement or restriction in relation to the seller's disclosure of information to bidders, save that under English law, it is not possible for a seller to carve out liability (eg, in the warranty limitations provisions) for fraud or fraudulent concealment. Interest expenses paid to affiliated companies may also be subject to additional specific anti-avoidance rules. topco midco bidco structure. There are also tax considerations to be taken into account. Private equity sellers prefer the certainty that comes with a locked box mechanism in terms of the price to be received and the timing of receipt. Other than the process yet to be established for transactions involving security-sensitive activities (see question 2.2), there are no specific legal or regulatory consideration to bear in mind. The equity invested in this vehicle will invest in the equity of the companies it owns and ultimately own 100% of equity in the Target company. Change), You are commenting using your Twitter account. Limit UK withholding tax on loan note interest: The quoted Eurobond exemption' from withholding tax will apply if the loan notes are listed on a recognised stock exchange' (eg, the International Stock Exchange in the Channel Islands). examples of innuendo in literature; The Swedish private equity market is, and has for many years been, very strong and is one of the most active in Europe (based on its share of national gross domestic product), in particular as it relates to small and medium-sized targets. about your specific circumstances. Loungers UK Limited, the main operating subsidiary of the Group. This is typically structured as a day rate, calculated by reference to profits generated in the locked box period or by reference to a fixed yield on the upfront consideration). Regardless of the types of instruments held, the shareholder debt will always rank behind the bank debt, and almost invariably ahead of the ordinary and preference/preferred ordinary shares. Tax efficient returns on strip and sweet instruments: Usually, capital treatment is desired for shares, but income treatment is accepted for interest returns on shareholder debt (see questions 3.4 and 6.2). Warranty and indemnity (W&I) insurance is the norm, so sellers tend to have a stapled insurance solution prepared, which also means that the warranties provided in the transaction documents are usually fully covered by the insurance. (LogOut/ the target is regarded as less desirable and an auction process therefor is less likely to yield a higher price than that offered by the pre-empting bidder; and. We also saw an uptick in public-to-private transactions prior to the COVID-19 crisis erupting. This will require the buyer to feel confident about the amount of time it will need to satisfy any conditions precedent (eg, antitrust and other regulatory filings). There are some restrictions and disadvantages in having loan notes and interest deductibility, and therefore there is an increasing popularity of preference shares. Specialist advice should be sought However, this can be achieved only the year after the acquisition of TargetCo. Free trials are only available to individuals based in the UK. Any equity investments in Topco are pushed down into Midco 1 by way of subscription. Sweden does not apply withholding tax on interest. La solution ce puzzle est constitu de 10 lettres et commence par la lettre C, Les solutions pour CONFIRMER UN PROPOS de mots flchs et mots croiss. Company status Active Company type Private limited Company Incorporated on 18 November 2014. The W&I insurance broker and legal adviser (possibly also accountants). Both buy and sell side will typically have legal advisers, and often corporate finance advisers, to guide them through the process and assess the fairness of the terms of the transaction. International private equity groups have been able to insert so-called portability language' into loan documentation in recent deals. In the past, it was uncommon for leaver provisions to apply to the strip. La visite exploratoire dans le cadre du volet stratgique francophone des travailleurs qualifis l'tranger est organise en collaboration avec le Conseil de dveloppement conomique des municipalits bilingues du Manitoba (CDEM). Bank debt provided by Nordic banks will generally have more conservative terms than those seen on the international market, including maintenance covenants. topco midco bidco structure. The most important rule provides that interest expenses paid to affiliated companies are not deductible for tax purposes, unless the beneficial owner of the interest income is resident within the European Economic Area or a tax treaty jurisdiction, or a jurisdiction that applies a nominal corporate income tax rate of at least 10%. As a consequence of the foregoing, however, the price-to-earnings ratio in private equity transactions in Sweden is relatively high and there is plenty of competition for good assets. The incoming private equity investor in a secondary buyout is likely to take more comfort from the amount of the continuing management rollover or reinvestment. The scope and duration of such restrictions must be reasonable to be enforceable. If a Bank debt is used as part of the acquisition structure, this will likely be loaned from Bidco. We need this to enable us to match you with other users from the same organisation. acting as a representative of the private equity investor; and. guide to the subject matter. 1 EU-DOCS\31604538.1 THIS AGREEMENT is made as a Deed on _____ 2021 BETWEEN: (1) CIDRON AIDA LIMITED, a private limited company incorporated in Jersey (registered number 133396), whose registered office is at 26 Esplanade, St Helier, Jersey JE2 3QA (the "Company"); (2) CIDRON AIDA 2 LIMITED, a private limited company incorporated in Jersey (registered A HoldCo / OpCo structure is simply one where we have a series of operating companies - often either diverse in the countries they operate in or with each OpCo being dedicated to one major corporate project - and a HoldCo that owns (holds) the equity of these operating companies. Competition merger control regimes are present in most jurisdictions and usually there are turnover and/or market share jurisdictional thresholds that must be met for a merger filing to be required. Where the private equity investor is taking a minority position, veto rights may be more streamlined, focusing on economic protection and fundamental strategic matters. W&I insurance can, and frequently does, plug the gap between buyers (wanting a fuller set of business warranties given on an absolute basis) and sellers (insisting on blanket awareness and/or a very small cap on liability). It may also receive, and pay for, management services from the manager. The new legislation, which is intended to meet the requirements of EU Regulation 2019/452 on establishing a framework for the screening of foreign direct investments into the European Union, aims to provide a framework for identifying transactions and issues which involve security-sensitive activities, and will oblige relevant sellers and operators involved to consult with an authority in order to have the proposed transaction scrutinised and cleared. Further disadvantages of non-deductible loan notes include the need to manage withholding tax and the need for some recipients to pay taxes on the interest receipts. Corporate buyers tend to be more demanding than private equity firms over deal protection (eg, warranty coverage, tax indemnities and post-completion adjustments), which can result in more negotiation over terms. Post the completion of NG's sale of a 61 per cent equity interest in the Company on 31 March 2017, the entity began business under a new brand, Cadent Gas Limited, on 1 May 2017. Short Introduction Of Up To Date COVID-19 Measures In Sweden, Opening-up of China's Financial Sector: A Focus on Investment Management and Fintech, Navigating the Cross-Border Highway: A Roadmap for Canada-U.S. Estate Planning and Administration, Upcoming Webinar: Opening-up of China's Financial Sector: A Focus on Investment Management an (), Mondaq Ltd 1994 - 2023. Specialist advice should be sought As such, both early-stage companies and more mature companies can often find suitors for a potential sale, making the Swedish market very attractive to entrepreneurs. The UK government can also intervene regardless of thresholds if the transaction involves a current/former defence contractor that holds confidential, defence-related information. Each of these is discussed in turn below. We cannot ignore the fact that many investments will suffer in the current climate, and that careful consideration will need to be given in distressed situations where further funding may be required, working closely with the general partner to explore the options available and potentially refocusing business plans and strategy. The paper, thus, will examine the Special Purpose Vehicles (SPVs - TopCo, MidCo, BidCo) created specifically for the acquisition process as well as the debt products which are lent to those intermediate companies and are secured against the target's assets. about your specific circumstances. As the private equity asset class has matured, sales from one private equity owner to another have become commonplace. In addition, and more generally, structuring acquisitions must also cater for the future that is, actions and issues that may arise during the holding period of the portfolio company. Clearly, a consideration of the target's Brexit risk has been on the agenda in recent years and feeds in to the legal, financial and commercial due diligence exercise; and more recently, buyers have been looking carefully at the impact of the COVID-19 pandemic and how well the target has realigned itself for the future. If both BidCo and TargetCo are Swedish limited companies, any deductible interest expenses or other expenses in BidCo may be offset against profits in TargetCo through group contributions. Private equity buyers also generally prefer the certainty of a locked box, unless there is significant uncertainty that would be better dealt with through completion accounts. As an alternative to preference shares, preferred ordinary shares are sometimes issued to the private equity investor and management. The B3 CFR reflects the high leverage that Moody's expects Akita to exhibit following EQT's acquisition of Azelis. 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