Advisory Board

  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Peter Clarke
  • Barry Diller
  • IAC/InterActiveCorp
  • Fu Chengyu
  • China National Petrochemical Corporation (Sinopec Group)
  • Richard J. Gnodde
  • Goldman Sachs International
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V.
  • Jiang Jianqing
  • Industrial and Commercial Bank of China, Ltd. (ICBC)
  • Handel Lee
  • King & Wood Mallesons
  • Richard Li
  • PCCW Limited
  • Pacific Century Group
  • Liew Mun Leong
  • CapitaLand Limited
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • Bank of America Merrill Lynch
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek Holdings
  • Shao Ning
  • State-owned Assets Supervision and Administration Commission of the State Council of China (SASAC)
  • John W. Snow
  • Cerberus Capital Management, L.P.
  • Former U.S. Secretary of Treasury
  • Bharat Vasani
  • Tata Group
  • Wang Junfeng
  • King & Wood Mallesons
  • Wang Kejin
  • China Banking Regulatory Commission (CBRC)
  • Wei Jiafu
  • China Ocean Shipping Group Company (COSCO)
  • Yang Chao
  • China Life Insurance Co. Ltd.
  • Zhu Min
  • International Monetary Fund

Legal Roundtable

  • Dimitry Afanasiev
  • Egorov Puginsky Afanasiev and Partners (Moscow)
  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Johan Aalto
  • Hannes Snellman Attorneys Ltd (Finland)
  • Nigel P. G. Boardman
  • Slaughter and May (London)
  • Willem J.L. Calkoen
  • NautaDutilh N.V. (Rotterdam)
  • Peter Callens
  • Loyens & Loeff (Brussels)
  • Bertrand Cardi
  • Darrois Villey Maillot & Brochier (Paris)
  • Santiago Carregal
  • Marval, O’Farrell & Mairal (Buenos Aires)
  • Martín Carrizosa
  • Philippi Prietocarrizosa & Uría (Bogotá)
  • Carlos G. Cordero G.
  • Aleman, Cordero, Galindo & Lee (Panama)
  • Ewen Crouch
  • Allens (Sydney)
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Rachel Eng
  • WongPartnership (Singapore)
  • Sergio Erede
  • BonelliErede (Milan)
  • Kenichi Fujinawa
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Manuel Galicia Romero
  • Galicia Abogados (Mexico City)
  • Danny Gilbert
  • Gilbert + Tobin (Sydney)
  • Vladimíra Glatzová
  • Glatzová & Co. (Prague)
  • Juan Miguel Goenechea
  • Uría Menéndez (Madrid)
  • Andrey A. Goltsblat
  • Goltsblat BLP (Moscow)
  • Juan Francisco Gutiérrez I.
  • Philippi Prietocarrizosa & Uría (Santiago)
  • Fang He
  • Jun He Law Offices (Beijing)
  • Christian Herbst
  • Schönherr (Vienna)
  • Lodewijk Hijmans van den Bergh
  • Royal Ahold (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • Nishimura & Asahi (Tokyo)
  • Christof Jäckle
  • Hengeler Mueller (Frankfurt)
  • Michael Mervyn Katz
  • Edward Nathan Sonnenbergs (Johannesburg)
  • Handel Lee
  • King & Wood Mallesons (Beijing)
  • Martin Lipton
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Alain Maillot
  • Darrois Villey Maillot Brochier (Paris)
  • Antônio Corrêa Meyer
  • Machado, Meyer, Sendacz e Opice (São Paulo)
  • Sergio Michelsen Jaramillo
  • Brigard & Urrutia (Bogotá)
  • Zia Mody
  • AZB & Partners (Mumbai)
  • Christopher Murray
  • Osler (Toronto)
  • Francisco Antunes Maciel Müssnich
  • Barbosa, Müssnich & Aragão (Rio de Janeiro)
  • I. Berl Nadler
  • Davies Ward Phillips & Vineberg LLP (Toronto)
  • Umberto Nicodano
  • BonelliErede (Milan)
  • Brian O'Gorman
  • Arthur Cox (Dublin)
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Sang-Yeol Park
  • Park & Partners (Seoul)
  • José Antonio Payet Puccio
  • Payet Rey Cauvi (Lima)
  • Kees Peijster
  • COFRA Holding AG (Zug)
  • Juan Martín Perrotto
  • Uría & Menéndez (Madrid/Beijing)
  • Philip Podzebenko
  • Herbert Smith Freehills (Sydney)
  • Geert Potjewijd
  • De Brauw Blackstone Westbroek (Amsterdam/Beijing)
  • Qi Adam Li
  • Jun He Law Offices (Shanghai)
  • Biörn Riese
  • Mannheimer Swartling (Stockholm)
  • Mark Rigotti
  • Herbert Smith Freehills (Sydney)
  • Rafael Robles Miaja
  • Robles Miaja (Mexico City)
  • Alberto Saravalle
  • BonelliErede (Milan)
  • Maximilian Schiessl
  • Hengeler Mueller (Düsseldorf)
  • Cyril S. Shroff
  • Cyril Amarchand Mangaldas (Mumbai)
  • Shardul S. Shroff
  • Shardul Amarchand Mangaldas & Co.(New Delhi)
  • Klaus Søgaard
  • Gorrissen Federspiel (Denmark)
  • Ezekiel Solomon
  • Allens (Sydney)
  • Emanuel P. Strehle
  • Hengeler Mueller (Munich)
  • David E. Tadmor
  • Tadmor & Co. (Tel Aviv)
  • Kevin J. Thomson
  • Barrick Gold Corporation (Toronto)
  • Yu Wakae
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Wang Junfeng
  • King & Wood Mallesons (Beijing)
  • Tomasz Wardynski
  • Wardynski & Partners (Warsaw)
  • Rolf Watter
  • Bär & Karrer AG (Zürich)
  • Xiao Wei
  • Jun He Law Offices (Beijing)
  • Xu Ping
  • King & Wood Mallesons (Beijing)
  • Shuji Yanase
  • OK Corporation (Tokyo)
  • Alvin Yeo
  • WongPartnership LLP (Singapore)

Founding Directors

  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz
  • Nigel P.G. Boardman
  • Slaughter and May
  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz
  • Peter Williamson
  • Cambridge Judge Business School
  • Franny Yao
  • Ernst & Young

Financing

GERMAN UPDATE – Private Equity Reacting Flexibly

Editors’ Note: Dr. Christof Jäckle and Dr. Emanuel Strehle are members of XBMA’s Legal Roundtable and Partners at Hengeler Mueller—a leading German firm in the M&A and corporate arena. This article is co-authored by Hengeler Mueller partners Dr. Emanuel P. Strehle and Dr. Hans-Jörg Ziegenhain.

Highlights:

  • The private equity business it has recovered to a constant level.  In 2012, private equity transactions related to Germany reached a total volume of approx. EUR 5.8B. Other than in the United States, volumes and conditions have not returned to their levels of before 2007, but there is development in this direction.
  • Following 2007, leverage decreased significantly and most recently settled between 50% and a maximum of 70%. At present, a return to pre-2007 leverage ratios is not to be expected in the short term, also in view of the increasing capital requirements for banks. Leveraging transactions by a combination of bank financing and (in some cases, structurally junior) bond financing via the capital market is clearly on the rise.
  • The current uncertainties in the debt and [capital/equity] markets and the resulting requirement of being able to react to changes on short notice are often reflected in flexible sales schemes or exit strategies
  • Multiple-track processes are currently standard practice, especially in larger transactions, and are also used outside the private equity business by industrial companies in carving-out  or selling sub-groups.
  • Deals are increasingly structured to include management participation in the profit or losses

Main Article:

Multi-track transactions, club deals and direct investments by pension funds: currently wide-spread development in transactions.

Börsen-Zeitung, 15 June 2013

Although the private equity business in Germany has yet to reach pre-Lehman Brothers volumes again, it has recovered to a constant level. In 2012, private equity transactions related to Germany reached a total volume of approx. EUR 5.8 billion according to the industry association BVK. Other than in the United States, volumes and conditions have not returned to their levels of before 2007, but there is development in this direction. The trend has been confirmed within the first five months of the current year, when CVC funds bought Ista in the first billion-volume deal.

It’s all about the right mix

If one takes a closer look at the M&A transactions with a private equity component, however, it becomes evident that there are major differences as compared to the years until 2007.

Leverage. Until 2007, the share of non-equity financing (leverage) was as high as 90%. In the years that followed, this share decreased significantly and most recently settled between 50% and a maximum of 70%. The decline is not surprising, given the consequences that the financial crisis had also for the banking system. At present, a return to pre-2007 ratios is not to be expected in the short term, also in view of the increasing capital requirements for banks. Against this background – and also in view of the trend towards corporate bonds – leveraging transactions by a combination of bank financing and (in some cases, structurally junior) bond financing via the capital market is clearly on the rise. A current example is the bond financing in connection with the Ista transaction.

Multiple-track transactions. The current uncertainties in the debt and [capital/equity] markets and the resulting requirement of being able to react to changes on short notice are often reflected in flexible sales schemes or exit strategies. This is especially the case where the sell side also involves a private equity firm (secondary or tertiary transactions).

Including recapitalisation

The sale of Kabel BW by EQT to Liberty in 2011, which served as a role model for other transactions, is a prominent example. In parallel to the auction process, the former owners – funds advised by EQT –prepared for an IPO as well as for a refinancing through the placement of a bond on the capital market. By simultaneously preparing multiple alternatives for a partial or complete exit from the investment, they intended to achieve the highest degree of transaction security that was possible in those uncertain times. In the end, the deal comprised a sale to a strategic bidder (Liberty) and the placement of a bond in the period between signing and closing of the transaction, allowing for part of the proceeds to be distributed prior to the closing date by way of recapitalisation.

Multiple-track processes are currently standard practice, especially in larger transactions, and are also used outside the private equity business by industrial companies in carving-out  or selling sub-groups (such as the spin-off of Osram from Siemens or ThyssenKrupp’s sale of its stainless steel business in 2012). Due to their high complexity, multiple-track transactions make very high demands.

Management rollover. One of the material success factors of private equity is the participation of the management and of key employees in the company with the aim of synchronizing their interests and the Company’s interests to the highest degree possible. In most cases, the participation is structured in such a way that if the company’s development is normal or negative, management participates less, and if the targets are overachieved, management participates more.

New challenges arise due to the increase in transactions in which private equity funds are involved both on the seller’s and on the purchaser’s side. Upon initial participation in the target company, management is often in an inferior economic position due to the limited funds it can invest and frequently needs financial support (such as a loan) to fund the participation. Accordingly, their position when it came to negotiating the conditions of the management participation programme has been weak.

The past years, however, have shown that the balance of power can shift quickly, at the latest after the first successful exit in which management participated to a large degree in the resulting profit. If the sold company is again acquired by a private equity company, the latter is then dealing with a party that is considerably more self-confident when negotiating th next management participation in the target company. Management then – at least partly – sees itself more as a co-investor. From a legal perspective, the transfer of the existing participation to the transferee is a particular challenge, if the parties seek to avoid unnecessary back and forth payments.

Club deals. In particular in transactions involving infrastructure entities (airports, power grids, gas grids etc.), the number of club deals, i.e., transactions involving a consortium of bidders, has lately increased. Current examples are the acquisition of Open Grid Europe by a consortium consisting of Macquarie, Adia, Meag and BCIMC as well as the acquisition of Net4Gas by Allianz Capital Partners and Borealis Infrastructure (a subsidiary of the Canadian Omers pension fund).

But also in traditional private equity transactions, bidders have teamed up on numerous occasions, for example the mid cap funds Bregal and Quadriga for the acquisition of LR Health, or Aea Investors and the Teachers Private Capital pension fund for the acquisition of Dematic.

Besides risk sharing considerations and the increase of the potential transaction volume, regulatory requirements play a role. The acquisition of a majority holding, for example, would regularly not be permitted for pension funds, or would not be desirable, for example for insurance companies or banks, for consolidation or capitalisation aspects.

Club deals do not show any special characteristics on the sell side, as the parties involved normally pool their assets to form an acquisition vehicle; at most, the procedure for obtaining the necessary antitrust clearance may become more complicated due to the larger number of parties involved. On the bidder side, however, the transaction will definitely be more complex, as, in addition to the acquisition documentation, a consortium agreement is needed. In such agreement, in addition to provisions governing capitalisation, the rules on corporate governance and a later exit must be stipulated. In this context, problems may arise in particular where different investment horizons are involved.

Direct investments. The trend towards mega funds and the significant management fees associated therewith have led some investors to consider engaging in the private equity business themselves. This is especially true for the major Canadian pension funds, which play a trendsetting role in this regard (e.g. Ontario Teachers, Canada Pension Plan or Omers) and which have established their own private equity departments or subsidiaries. These pension funds usually refrain from taking the lead in the acquisition of companies, mainly due to regulatory constraints, but direct investments are on the upswing.

A firm position

These are direct participations in the (topmost) holding company through which the target company is acquired. In the past, the typical clients of private equity funds were pension funds that invested in them and thus participated in the fund’s total return only. Direct investments allow for a more targeted risk allocation when investing, and also give the private equity company greater flexibility in structuring its fees.

It becomes clear that private equity continues to hold a firm position in the German M&A market. In the long-run, only those equity investors will remain successful that are able to react flexibly and quickly to changes in the markets will remain successful. And, the market leaves room for dynamics.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

BRAZILIAN UPDATE – Debenture financing for infrastructure projects, R&D and innovation – Reduced income tax

Editor’s Note:  This update comes from Francisco Antunes Maciel Müssnich (founding partner) from Barbosa, Müssnich & Aragão Advogados.  Francisco Müssnich is a member of XBMA’s Legal Roundtable, and a leading expert on Brazilian corporate and M&A matters.  This paper was jointly authored by the firm’s Capital Markets and Tax teams.

Highlights: 

  • New legislation reduces the income tax applicable to income from debentures issued by special purpose companies (SPCs) incorporated to carry out infrastructure investment projects or projects for intensive economic production in research, development and innovation that are deemed “priorities” by the federal government.
  • Legal entities domiciled in Brazil are subject to a 15% tax rate on income earned from Infrastructure Debentures that are issued by December 15, 2015 and meet other conditions.
  • With these initiatives, the equity market should become an important source of funding for infrastructure projects, giving not only entrepreneurs but also private investors a greater role in developing Brazil’s needed infrastructure.

MAIN ARTICLE

In June of last year, Federal Law 12,431 introduced new rules on debentures to encourage the private sector to help finance longer term infrastructure projects.

One of the important changes made by the new legislation was to reduce the income tax applicable to income from debentures issued by special purpose companies (SPCs) incorporated to carry out infrastructure investment projects or projects for intensive economic production in research, development and innovation that are considered to be “priorities” by the federal government (“Infrastructure Debentures”).

Under Law 12,431/2011, the income tax rate for income from Infrastructure Debentures received by individuals resident in Brazil is zero, effectively making it tax-free, while income from Infrastructure Debentures earned by legal entities domiciled in Brazil is subject to income tax at a rate of only 15%, withheld at source.

In order to benefit from these favourable tax rates, the Infrastructure Debentures must be issued by SPCs created to implement “projects for investment in infrastructure or for intensive economic production in research, development and innovation considered to be priorities under regulations issued by the federal government.” In addition, the Infrastructure Debentures must be issued by December 15, 2015, and meet all of the following conditions:

i) the debentures must pay interest at a rate fixed in advance and linked to a price index or reference rate. Post-fixed interest rates are prohibited;

ii) they must have an average weighted term to maturity of more than four years;

iii) they cannot be repurchased by the issuer within the first two years following the issued date, and early redemption and prepayment are prohibited;

iv) the purchaser must not have assumed a commitment to resell the debentures;

v) if interest will be paid periodically under the debentures, the interval between payments must be at least 180 days; and

vi) there must be proof that the debenture was traded on regulated securities markets.

Decree 7603, which was published on November 10, 2011, defines the type of project that will be considered a “priority” by the Brazilian government. According to the Decree, a project will be a “priority” project if it is directed to construction, expansion, maintenance, restoration, adaptation or modernization of facilities in the following sectors:

i)             logistics and transportation,

ii)           urban mobility,

iii)          energy,

iv)         telecommunications and broadcasting,

v)           basic santitation, and

vi)         irrigation.

The priority list is not exhaustive, and in some cases projects in other sectors can be treated as priority.

The Ministries responsible for the various sectors will issue rules setting out the requirements for approval of priority projects, and the mechanisms for overseeing implementation of approved projects.

Each project must be submitted to the appropriate Ministry, together with the supporting documentation listed in the Decree and any other documents the responsible Ministry may require. The various Ministries have discretionary powers to determine if a submitted project meets the requirements to be considered a priority. Projects are approved individually, by publication of the Ministry’s decision in the official gazette.

Decree 7603/2011 provides that any SPC may manage a priority project, as long as it is incorporated specifically for that purpose. Infrastructure Debentures issued by SPCs can be distributed publicly if the SPC obtains issuer registration from the Brazilian Securities Commission, the CVM, although the registration requirement can be waived if the debentures will be placed under a “restricted efforts” offering.

SPCs that fail to implement approved projects are subject to a fine of 20% of the total value of the debenture issue. In order to facilitate inspection and control of SPCs’ compliance with their legal obligations, SPCs are required to:

(i) provide a list of the legal entities that hold interests in the SPC to the responsible Ministry, and keep the list up-to-date;

(ii) in the case of public offerings of Infrastructure Debentures, ensure that the offering documents highlight the number and date of the Ministry’s approval of the priority project, and the commitment to allocate the funds obtained through the offering to the approved priority project; and

(iii) keep all documentation related to the use of the funds available for inspection, for at least five years after the maturity date of the Infrastructure Debentures.

Lastly, the CVM is required to maintain a list of Infrastructure Debentures offerings on its website, showing the amount of each debenture issue and the related priority project.

In addition to the Infrastructure Debentures, Brazil has created other mechanisms to stimulate private investment in large infrastructure projects over the next years, such FIP-IEs, which are private equity infrastructure funds, and the special type of investment fund provided for under Law 12,431/2011, which is designed to acquire Infrastructure Debentures.

With these initiatives, the equity market should become an important source of funding for infrastructure projects, giving not only entrepreneurs but also private investors a greater role in developing Brazil’s infrastructure, and consequently reducing the demands on public resources.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

XBMA – Quarterly Review for Q1 2011

Editor’s Note: This is an example of the type of post and content the XBMA Forum seeks to showcase.

The attached slides summarize trends in cross-border M&A and strategic investment activity throughout the first quarter of 2011.

 

Highlights:

  • Global M&A volume for Q1 2011 was US$671.8 billion, up 29.5% as compared to Q1 2010.
  • Cross-border transactions have rebounded substantially from 2009: 38% of Q1 2011 global M&A was cross-border — up slightly from 37% in 2010 and up significantly from the low of 26.8% in 2009.
  • Canada and Australia’s shares of global M&A each more than double their respective shares of world GDP, perhaps reflecting the large number of deals involving natural resources.
  • Distressed deals have exceeded US$75 billion per annum since 2009.
  • Energy M&A remains the most active among cross-border transactions – reflecting the ongoing pressure to acquire natural resources to fuel emerging economies and the churn created by political instability in the Middle East and by the widespread adoption of technological improvements in the natural gas industry – with Materials and Financials cross-border M&A in the second tier.

XBMA Quarterly Review for Q1 2011

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