McDermott Will & Emery has released the latest Focus on Private Equity, which provides insight on issues surrounding private equity transactions and the investment life cycle across industries. Articles in this issue include:

What Private Equity Funds Should Know about ERISA
Managers of private equity funds who are responsible for investing the assets of a fund that holds plan assets are likely to be considered a fiduciary under the Employee Retirement Income Security Act of 1974, as amended (ERISA). ERISA imposes numerous duties on fiduciaries, and those who fail to meet ERISA’s standards may be personally liable to restore plan losses, disgorge profits made through the use of plan assets, and pay additional statutory penalties imposed by the Department of Labor. The fiduciary may also face criminal penalties if found guilty of wilful failure. It is therefore vitally important that fiduciaries are fully aware of all their duties under ERISA.
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Fiduciary Risks Involved in Transferring Assets from a Seller’s 401(k) Plan to the Buyer’s Plan
In transactions where the buyer agrees to cause its 401(k) plan to accept a transfer of assets from the seller’s 401(k) plan, and the seller’s plan contains employer stock as an investment, the buyer needs to be aware of fiduciary concerns that may arise under the Employee Retirement Income Security Act of 1974 (ERISA), as amended. A recent decision means buyer 401(k) plan sponsors and plan fiduciaries must now engage in a process that separates fiduciary from non-fiduciary acts and carefully follows established procedures for implementing any required divestitures of former employer stock.
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McDermott Will & Emery has released the October 2014 issue of Focus on Private Equity, which provides insight on issues surrounding private equity transactions and the investment life cycle across industries. Articles in this issue include:

The Use of Alternative Credit in Europe
As a result of the reduced availability of conventional credit from lending institutions in the wake of the financial crisis of 2008, Europe has been eager to develop an alternative credit market to unlock the demand for money from small and medium sized enterprises (SMEs).
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Buying and Selling a Craft Brewery in the United States
The craft beer business has never been hotter, with market share now approaching 8 per cent by volume in the United States and margins that have attracted the attention of private equity and venture capital investors, and even large brewers.
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International investors with corporate transactions in Germany are often surprised to learn that significant costs can be incurred by a German notary as part of a normal corporate transaction.  The involvement of a German notary is in many cases required by law, and the corresponding costs for such notary are set by the German federal statutory cost order (Gerichts- und Notarkostengesetz – GNotKG) with certain caps, however, amounting up to EUR 53,170.  A recent change in the German federal statutory cost order for notaries has increased these costs.

In practice, structures can be modified to save notarial fees without any material deviations of the transaction documents.  For instance, international transaction documents are drafted often as bilingual documents. Under the changes in the new statutory cost order, the value of bilingual documents has increased by 30 percent.  It is worth considering if such translated documents should necessarily become a part of the notarial deed at all or if they may be attached as a non-binding convenience translation to save costs.  In addition, a choice of law clause, which leads to another 30 percent increase in the value of the transaction and unexpectedly higher notary costs, may be (and sometimes even has to be) avoided.

The notarial deed may also incorporate legal issues that increase costs but that do not have to be notarized at all.  Provided that this does not affect the completeness of the notarial deed, certain provisions that would trigger further notary costs (for example, a choice of law clause) can be separated from the notarial deed.  In addition, other legal facts that have to be notarized may be incorporated in one deed instead of two separate ones, thus saving costs as the German federal statutory cost order reduces the overall costs in a percentage basis the higher they are.  Certain transactions such as sales and transfers, or pledges of shares in a GmbH, can also be notarized by a Swiss notary, whose costs can be substantially lower than a German notary´s costs.

In sum, (international) investors should carefully consider ways to avoid increasing notarial fees when entering into corporate transactions in Germany.

International companies with operations in France, or those that conduct regular business with French commercial partners, should be aware that their longtime French commercial partners could be entitled to claim compensation for the termination of the contractual relationship well beyond the scope of the original contractual provisions.

However, recent decisions of the French Supreme Court suggest that judges increasingly take into consideration the existence of economic difficulties as acceptable justification for the termination.

The French Commercial Code provides that the total or partial termination of any kind of longstanding commercial relationship may be qualified as abusive if insufficient notice of termination is given to the contractual partner.  This law, considered as a mandatory public policy statute, applies to all existing commercial relationships.  As a result, a company that terminates a contractual relationship with a French commercial partner must not only consider the contractual notice period, but must also take into account the notion of “reasonable” notice and the criteria developed by the French courts to be able to fully gauge any potential future claims for compensation against it.

In deciding what the appropriate duration of a “reasonable” notice is and the resulting adequate compensation for the terminated party, French case law provides a rule of thumb: three months is usually acceptable when the commercial relationship between the two companies lasted between two and three years; six months in cases in which the contractual relationship between the commercial parties was longer; and even longer notice periods exceeding 12 months can be accepted under French case law when the terminated party was financially dependent on its terminated partner.  Courts then assess the amount of damages based on the loss of profit that the terminated party should have made during the missing months of the “reasonable” notice period.

How can foreign companies mitigate this risk?  To mitigate the risk of a contractual termination being considered as abusive by French courts, companies should try to manage the expectations of their commercial partners and inform them of any potential complete or partial termination of their commercial relationship in writing, well before the contemplated date of termination.  By providing its commercial partner with such information in advance, it will serve to weaken any potential claims for compensation brought by the French commercial partner that was terminated.

If the termination results from the closure of a site, the timing for providing such information is, however, limited by French employment law, which requires a consultation of employee representatives before the decision to close facilities may be made.  Accordingly, it is highly advisable for an international company to consult with legal counsel to ascertain the best approach for handling such a situation.

Nevertheless, the French Supreme Court seems to be increasingly aware that companies face economic circumstances beyond their control, which make terminating the commercial relationship imperative.  As a result, under the recent case law of the French Supreme Court, a termination subsequent to a substantial decrease in the volume of orders may not be considered as abusive if the terminating party is able to provide sufficient evidence of a diminished commercial activity and if the external reasons bring about such a decrease in the volume of orders.

Accordingly, if the termination of the commercial relationship results from the closure of a site, which itself is due to economic difficulties, the international company should make clear in the notice it sends to its commercial partner, that the termination was not a deliberate choice but was necessary due to external economic conditions.

McDermott Will & Emery has released the Winter 2015 issue of Inside M&A, which focuses on current issues surrounding mergers and acquisitions.  Articles in this issue include:

Recent U.S. Cases Highlight Liability Risks to Executives in Mining, Heavy Industrial Transactions
Historically, corporate executives rarely faced personal or criminal liability resulting from mining or environmental accidents in the United States. Several criminal cases stemming from two recent disasters, however, indicate that the tide may be turning. These disasters, the repercussions of which have been playing out recently in the U.S. criminal courts, should put private equity and strategic investors in the mining and heavy industrials space on alert. Thorough due diligence into a target’s past operations and compliance record is more important than ever before.
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Options for Buying a UK Company with Multiple Selling Shareholders
In the United Kingdom, the issues and considerations involved in the acquisition of a private company with multiple selling shareholders can be complex. Some of the issues that arise in such acquisitions are similar to those that are considered with publicly traded companies, but would not typically be encountered in the acquisition of a private company with few shareholders.
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Merger Control in Africa
Many African countries have enacted competition law legislation in order to improve market conditions and attract investors. These regimes differ from one country to another, depending on the country’s history, culture, economic development, and whether its legal system is based on common law or civil law. While most African competition regimes contain rules addressing anticompetitive practices (such as collusive practices, abuse of dominance and unfair state aid), the legislation does not always provide for a merger control regime.
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McDermott Will & Emery has released the October 2014 issue of Focus on Private Equity, which provides insight on issues surrounding private equity transactions and the investment life cycle across industries. Articles in this issue include:

Proposed EU Merger Review of Non-Controlling Minority Shareholding Acquisitions: Challenges and Opportunities for Private Equity
A recently proposed plan to reform EU Merger Regulation could expand the scope of transactions subject to prior notification. For the first time, minority shareholding acquisitions that do not lead to a change in control could be subject to prior notification to the European Commission. The proposed expansion of the Merger Regulation’s jurisdiction could significantly impact businesses.
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IPO Market Offers Attractive Exit Alternative for Sponsor-backed Companies
The strong IPO market offers private equity sponsors an attractive alternative to the sale of a portfolio company. However, the IPO process is complex, and must be structured properly at the outset. This article discusses some of the most significant structural considerations sponsors must consider in order to be in the position to obtain the maximum benefit from an IPO.
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McDermott Will & Emery has released the Fall 2014 issue of Inside M&A, which focuses on current issues surrounding mergers and acquisitions.  Articles in this issue include:

Managing Compliance Risks in M&A Transactions
Compliance risk management plays an increasingly important role in mergers and acquisitions transactions.  Appropriate compliance due diligence helps to establish the true value of the target company because successor liability for non-compliance of the target company can jeopardize the whole transaction.  Post-closing compliance initiatives help to reduce the compliance risks significantly.
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You’ve Acquired a New Qualified Retirement Plan?  Time for a Compliance Check
In connection with a merger or acquisition, an acquiring company may end up assuming sponsorship of a tax-qualified retirement plan that covers employees of the acquired company.  This article provides a brief summary of some key issues that a company should focus on to ensure that the numerous administrative and fiduciary requirements involved in maintaining a qualified retirement plan will continue to be met on an ongoing basis if the plan will continue to be maintained following the acquisition.
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A Personal Interest in Compliance
All individuals involved in a proposed sale transaction have a personal stake in full federal, state and local legal compliance because of expanding doctrines of personal liability and successorship liability, notwithstanding transaction documents that purport to disclaim assumption of seller’s liabilities.
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As those in the search fund community are aware, finding the right investors for a fund is critical to its success.  Equity sources bring more than their capital to the table; the best investors serve as experienced advisers and trusted mentors to search funders as they navigate the acquisition phase and beyond.  As the search fund model has proliferated both within and beyond the United States, today’s search funders may have more potential stops on their “roadshows” than their predecessors.

In seeking their ideal mix of initial investors, several of our recent search fund clients have ventured north of the border to raise a portion of their equity.  For search funds, which are typically structured as U.S. limited liability companies (LLC) with heavily standardized investment documents, taking on Canadian investors in a U.S. search fund has raised some interesting legal and practical issues.  Below are a few gating items for the search funder to consider in deciding whether to open the fund up to investors in Canada and elsewhere:

  • What percentage of your investor base will be from Canada?  The greater your percentage, the more likely it is that the search funder will want to structure the fund to cater to its Canadian investors.
  • What type of tax treatment do your Canadian investors expect?  Search funds generally utilize an LLC as the capitalized entity, which is treated as a partnership for U.S. tax purposes.  However, for Canadian tax purposes, U.S. LLCs are treated as corporations, which are subject to an entity-level tax.  This is a discrepancy that can significantly affect a Canadian investor’s economics.  The search funder may want to explore with his or her attorney whether an alternative structure, such as a limited partnership, is a viable option.
  • Do your investors have a tax presence in the United States, or will this be their only U.S. investment?  Because partnerships are essentially pass-through entities to their partners for tax purposes, investors in a partnership are inherently U.S. taxpayers.  For this reason, many non-U.S. investors prefer to invest in U.S. corporations, whereby the profits and losses of the entity are not passed through to its members.  If this is a particular sensitivity to the search fund’s Canadian investors, then the search funder may consider implementing a structure which will not result in the investor being a U.S. taxpayer.

In evaluating these alternatives, search funders should always be cognizant of how their U.S. investors may be impacted.  The above suggestions are not intended to be one-size-fits-all solutions.  As a practical matter, implementing a non-standard fund structure may affect the fund’s marketability to traditional sources of search fund financing.

Part of a search funder’s ongoing challenge is determining how best to serve its investors.  Experienced counsel can be a valuable resource in tailoring a fund to best accommodate both the search fund and its investors.  If some of those investors are Canadian, then the search funder should be aware of the issues that might affect such financiers’ investment decisions.

Learn how corporate counsel should (and are) adopting new tools and technologies resulting in significant efficiencies in legal project management. Byron Kalogerou, a Corporate partner in McDermott’s Boston office and co-chair of the Legal Project Management Task Force of the M&A Committee of the Business Law Section of the American Bar Association, explains why the “old way” no longer works and how legal project management is being utilized for M&A transactions. 

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