Leveraged Buyouts

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Joseph W. Bartlett , Peter L. Korn, Jr., David J. Mittelstadt, Cathy L. Reese, Michael A. Rueda

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“A comprehensive overview of the leveraged buyout (LBO) process& I strongly recommend this resource for M&A, securities, and corporate collections.”
Ramon Curva, Senior Information Specialist, Cravath, Swaine & Moore LLP, Legal Information Alert

Whether you represent buyers, sellers or lenders, Leveraged Buyouts provides practical, in-depth answers to all of your questions as well as model documents for every contingency. This comprehensive guide explains each variety of leveraged transaction in detail—its rationale, the advantages and drawbacks of the available financing and tax structures, corporate governance and regulatory issues, and the many legal issues that arise along the way.

Coverage includes everything from the simplest transactions to trophy deals, including: buyout nomenclature; merger agreements; loan agreements; fairness opinions; registration rights; tax consequences; fraudulent conveyance laws; material adverse change; corporate governance; and state and federal regulations.

Leveraged Buyouts also provides sophisticated examples of the documents needed for private equity investors to acquire a public Delaware corporation—from Equity Commitment Letters to a Senior Subordinated Note Indenture, and more.

Whether you are trying to structure mezzanine financing, minimize taxable events for your client, or negotiate a break-up fee, Leveraged Buyouts has solutions that will save you time and help you draft the best possible documents for your transaction.

#00688; looseleaf, two volumes, 1,770 pages; published in 2007, updated as needed; no additional charge for updates during your subscription. Looseleaf print subscribers receive supplements. The online edition is updated automatically. ISBN: 978-1-58852-144-6

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  • Brand: Law Journal Press
  • Product Type: Books
  • Edition: 0
  • Page Count: 1770
  • ISBN: 978-1-58852-144-6
  • Pub#/SKU#: 688
  • Volume(s): 2

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  • Joseph W. Bartlett

Joseph W. Bartlett is special counsel in theCorporate, Securities and Financial Institutions practice at McCarter &English LLP. A recognized pioneer of the national private equity and venturecapital bar, Mr. Bartlett contributed to the original models for private equityand fund of fund partnerships. His experience extends to alternativeinvestments, venture capital, emerging companies, corporate restructurings,private equity and buyouts. Mr. Bartlett’s practice includes serving as counselto asset managers, including those of major public and private equity funds,with a focus on technology companies, and he has also served as trustee of aseries of public mutual funds and chair of a public REIT. His venture fund workbegan with the first Greylock fund, and he has drafted documents for several ofthe largest and most successful LBO funds.

Mr. Bartlett has served as Presidentof the Boston Bar Association and as General Counsel and Undersecretary of theU.S. Department of Commerce. He has authored numerous treatises, including Leveraged Buyouts, Compensation Structures for Venture Backed Companies, Equity Finance, Fundamentals of Venture Capital, and Venture Capital: Law, Business Strategies and Investment Planning.He is also founder and chairman of VC Experts, for which he is an activecontributing editor. Mr. Bartlett is a frequent speaker on industry issues andlectures as a faculty member at Cornell’s Johnson School of Business.

Also by Joseph W. Bartlett :
Advanced Private Equity Term Sheets and Series A Documents

Author Image
  • Peter L. Korn, Jr.
Peter L. Korn, Jr. is a Partner in the New York office of Sonnenschein Nath & Rosenthal LLP and a member of its Corporate Practice Group. His practice emphasizes venture capital and private equity matters, mergers and acquisitions, and general corporate counseling for emerging growth companies. A graduate of Georgetown University and Duke University School of Law, he was previously a Principal at Fish & Richardson P.C.

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  • David J. Mittelstadt
David J. Mittelstadt is Of Counsel to Fish & Richardson P.C. He is a member of the firm’s Corporate and Securities group, with tax practice emphasizing corporate transactional planning in the areas of acquisitions, dispositions, and joint ventures in domestic and cross-border contexts. He also has additional experience in advising on structured finance transactions. He has previous experience as Counsel for Shearman & Sterling (2001-2003), Vice President-Tax Counsel for The Thomson Corporation; Thomson U.S. Holdings, Inc. (1993-2001), and as Tax Associate for Jones, Day, Reavis & Pogue (1991-1993), Fulbright & Jaworski (1988-1991), Hale and Dorr (1986-1988), and Bingham, Dana & Gould (1983-1986). A graduate of the University of Cambridge in 1981, Mr. Mittelstadt received his J.D. in 1983 cum laude from University of Chicago Law School, where he was a member of the Order of the Coif.

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  • Cathy L. Reese
Cathy L. Reese is a Principal in the Delaware office of Fish & Richardson and heads the firms Corporate and Chancery Litigation practice. She is an established trial attorney with extensive experience in corporate and complex commercial litigation, as well as corporate counseling and corporate opinions. She is ranked as one of the leading litigators in Delaware by Chambers USA: Americas Leading Business Lawyers and has also been selected by Delawares legal community and a Blue Ribbon Committee of retired Delaware judges as one of the top 10 corporate litigators in Delaware. She often is called upon by law firms based in other states or countries to provide opinions on Delaware law issues. She received her B.S. from Columbia University in 1982 magna cum laude and her J.D. from George Washington University Law School in 1989 with honors.

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  • Michael A. Rueda
Michael A. Rueda is an associate at Kelley Drye & Warren, LLP, and a member of the firm’s Corporate group. He received his J.D. in 2006 cum laude from Suffolk University Law School in Boston, MA, where he was a member of the Transnational Law Review. Mr. Rueda earned a B.S. in Management and International Business from the University of Connecticut. He is admitted to practice in both New York and Connecticut.

Introduction to Leveraged Buyouts

§ 1.01 Introduction
§ 1.02 Buyout Nomenclature
§ 1.03 Special Features of Buyouts
[1] Transitions
[2] Conglomerate/Deconglomerate
[3] Management Enhancement: “The Pilot Crashes Before I Do”
[4] Bypass the Unsecureds
[5] Going Private
[6] Value-Added Investing

Sample LBO Deal Documentation

§ 2.01 Sample LBO Deal Documentation
[1] Events Leading Up to the LBO
[2] Financing
§ 2.02 Model Letter of Intent
§ 2.03 Note on No Shop/No Solicit
§ 2.04 Term Sheet as a Binding Agreement

The Agreement and Plan of Merger

§ 3.01 Model Agreement and Plan of Merger
§ 3.02 Material Adverse Change
[1] Introduction
[2] What Is A MAC?
[3] Court Interpretations Of MAC Clauses
[4] Are Investment Transactions Different?
[5]  The MAC Checklist
[5] Conclusion
§ 3.03 Representations and Warranties
§ 3.04 Break-Up Fees
[1] How Break-Up Fees Work
[2] Sample Break-Up Fee Provisions
§ 3.05 Earn-Outs
[1] Earn-Outs Defined
[2] Benefits and Detriments of Earn-Outs
[3] Appropriate Transactions for Earn-Outs
[4] Proper Structuring and Implementing of Earn-Outs
[5] Tax and Accounting Treatment
[6] Conclusion
§ 3.06 Note on Indemnification

Initial Investment Bank Agreements

§ 4.01 Model Equity Commitment Letter
§ 4.02 Model Loan Commitment Letter
§ 4.03 Model Investment Bank Fairness Opinion
§ 4.04 Note on Fairness Opinions
[1] How Bulletproof are They?
[2] Fairness Opinions in Emergencies
§ 4.05 Agency/Financial Adviser Agreement
§ 4.05A Model Participation Agreement
§ 4.06 Mandatory Registration of Finders
§ 4.07 Model Forward Underwriting Commitment Letter
§ 4.08 Model [Senior Secured]  Term Loan Agreement
§ 4.08A Model Senior Secured Floating Rate Note
§ 4.09 Model Asset-Based Revolving Credit Agreement
§ 4.10 Secured Promissory Note

Model Senior Indenture Agreement

§ 5.01 Model Senior Indenture Agreement
§ 5.02 Model Second-Priority Senior Secured Fixed Rate Notes

Model Senior Subordinated Note Indenture

§ 6.01 Model Senior Subordinated Note Indenture

CHAPTER 7 Model Note Purchase Agreement
§ 7.01 Model Note Purchase Agreement
§ 7.02 Subordinated Convertible Promissory Note
§ 7.03 Bridge Note Subordinated Convertible Promissory Note (Non-Recourse)

CHAPTER 8 Lender Agreements
§ 8.01 Model Term Loan Security and Intercreditor Agreement
§ 8.02 Model Asset-Based Revolver Pledge And Security Agreement
§ 8.02A Model Intercreditor Agreement
§ 8.03 Model Lien Subordination and Intercreditor Agreement
[1] Second Priority Senior Secured Floating Rate Notes
§ 8.04 Model Patent Security Agreement
[1] Trademark Security Agreement
§ 8.05 Model Credit Agreement
§ 8.06 Model Forbearance Agreement
§ 8.07 Model Form of Guaranty

Model Rights Agreements and Resolutions

§ 9.01 Model Registration Rights Agreement
§ 9.02 What are Registration Rights?
[1] Introduction
[2] Categories of Registration Rights
[3] The Principles Underlying Registration Rights
§ 9.03 Rule 415 Shelf Registrations
§ 9.04 Expenses
§ 9.05 Indemnification
§ 9.06 Model Stockholder Agreement
§ 9.07 Model Guarantor Resolutions
§ 9.08 Model Resolutions of the Board of Target, Inc.

Tax Issues

§ 10.01 Subchapter C: An Overview
§ 10.02 Part I: Distributions by Corporations
[1] Effect on Recipients
[2] Effect on the Distributing Corporation
[3] Definitions and Miscellaneous
§ 10.03 Part II: Corporate Liquidations
[1] Effects on Recipients
[2] Effects on Distributing Corporation
[3] Collapsible Corporations
[4] Special Rule
§ 10.04 Part III: Corporate Organizations and Reorganizations
[1] Effects on Shareholders and Security Holders
[2] Effects on Corporations
[3] Special Rule; Definitions
§ 10.05 Parts IV and V: Insolvency Reorganizations and Carryovers
§ 10.06 Part VI: Stock or Indebtedness
§ 10.07 Section 368(a) Reorganizations
[1] A-Type Reorganization
[2] B-Type Reorganization
[3] C-Type Reorganization
[4] Summary Comparison of A, B, and C-Type Reorganizations
[5] D, E, F, and G-Type Reorganizations
§ 10.08 Certain Issues Particular to Triangular Mergers
§ 10.09 Section 355 Reorganizations: Spin Offs, Split Offs, and Split Ups
[1] Statutory Requirements
[2] Active Conduct of a Trade or Business
[3] Device
[4] Nonstatutory Requirements
[5] Curtailed Utility in LBOs
§ 10.10 Section 351 as a Surrogate for Section 368
[1] The “Receptacle” or “Mixing Bowl” Approach
[2] National Starch/Unilever
§ 10.11 Recapitalizations
§ 10.12 Taxable Stock Purchase
§ 10.13 Taxable Asset Purchase
[1] Pre-1987 Law
[2] Repeal of General Utilities
§ 10.14 Attempts to Step Up Basis and Avoid Double Taxation
[1] Use of S Corporations
[2] Newco, as a Partnership
§ 10.15 Section 338(h)(10) Election
§ 10.16 Retention of the Target as an Investment Company
§ 10.17 Allocation of Purchase Price
[1] Affiliated Groups
§ 10.18 Net Operating Losses
[1] Carryovers Under Section 381
[2] New Section 382 Limitations
[3] Alternative Minimum Tax Effect on NOLs
[4] Prechange Transactions
§ 10.19 Debt Versus Equity
[1] Significance of the Distinction
[2] Some History
§ 10.20 Original Issue Discount
[1] OID and Preferred Stock
§ 10.21 Deduction of Reorganization Expenses
§ 10.22 Debt Discharge, COD Income, and Debt for Equity
[1] New Rules Extending Period of OID Inclusion on Debt Re-Acquisition

Lenders’ Issues

§ 11.01 Introduction
§ 11.02 Fraudulent Conveyance
[1] Conveyance Act
[2] Transfer Act
[3] Section 548 of the Bankruptcy Code
[4] Intentional Fraudulent Conveyances
[5] Constructive Fraud
[6] Fraudulent Conveyance Concepts as Applied to LBOs
[7] Principal Elements of Fraudulent Conveyance Analysis
[8] Choice of Law: Statute of Limitations
[9] Remedies
[10] Subsequent Creditors
[11] Gleneagles Litigation
[12] Prophylactic Measures
[13] Clawback of Fraudulent Transfers from Investors— “Good Faith” Defense
§ 11.03 Preferences
[1] Preferences Under State Law
§ 11.04 Equitable Subordination
§ 11.05 Usury
§ 11.06 Substantive Consolidation
§ 11.07 Guarantees
[1] Upstream, Downstream, and Cross-Stream Guarantees
[2] “Insider” Guarantees
§ 11.08 Loan Agreements
[1] Affirmative and Negative Covenants
[2] Intercreditor Agreements
[3] Timely Payment
[4] Prepayment Provisions
[5] Negative Pledge
[6] Reports
§ 11.09 Event Risks
§ 11.10 Lender Liability
[1] Lender Liability under CERCLA
[2] Epilogue
§ 11.11 Trust Indenture Act
§ 11.12 Contractual Subordination
§ 11.13 Events of Default
§ 11.14 Bulk Sales
§ 11.15 Margin Rules
§ 11.16 Supervisory Definition of Highly Leveraged Transactions
§ 11.17 Capitalized Leases
[1] UCC Issues
§ 11.18 Prepackaged Bankruptcies
§ 11.19 The “Single Satisfaction” Rule With Respect to Bankruptcy Claims
[1] Delta Air Lines: Two Claims Are Better Than One
[2] Ivanhoe and NEGT: Two Obligors Are Better Than One
[3] Multi-Debtor Bankruptcies: When Two Claims Are Against Two Debtors
[4] The Bottom Line
§ 11.20 Third-Party Plan Releases Require Wide Support by All Creditor Classes

Corporate Governance and Regulatory Issues

§ 12.01 Restructuring and Reorganization Under State General Corporation Laws
[1] Statutory Formalities
[2] Extraordinary Dividends and Stock Redemptions
[3] Short Form Mergers
[4] Appraisal Rights
[5] Sale of “Substantially All the Assets”
§ 12.02 Fiduciary Duties of Controlling Persons
[1] The Incorporated Partnership Theory
[2] The Balancing Approach: Business Purpose Versus Reasonable Expectation
[3] Duty to Negotiate with Controlling Party
§ 12.03 Special Problems Posed by Dilutive Financings: Herein of “Burnouts” or “Cramdowns”
§ 12.04 The “Squeeze Out Merger” Solution to Down Round Blockage
§ 12.05 Equitable Constraints in Corporate Reorganizations
§ 12.06 The Business Judgment Rule, the “Entire Fairness” Standard and “Enhanced Scrutiny”
[1] Poison Pills
§ 12.07 The Revlon Rule; Duty to Auction
§ 12.08 Alternatives to Auctions: The Market Check
§ 12.09 Lockup Options, No-Shop Clauses and Break-Up or Topping Fees
[1] Lockups
[2] No-Shop Clauses
[3] Break-Up or Topping Fees
§ 12.10 Fairness Opinions
[1] Fairness Opinions in Emergencies
§ 12.11 Special Committee of Disinterested Directors
§ 12.12 Hidden Conflicts
[1] Majority of the Minority
[2] Creditors as Members of the Oppressed Minority
[3] Directors’ Duty of Care to the Minority
§ 12.13 Federal and State Laws Designed to Regulate LBOs
[1] The Worker Adjustment and Retraining Notification Act of 1988
[2] Note on Hart-Scott-Rodino
[3] Control Share Statutes
[4] Exon-Florio Amendment
[4A] Public Announcements of Merger Negotiations
[4B] Public Announcements to Target Shareholders: Defensive Language
[5] Committee on Foreign Investment in the United States (CFIUS): Complying With the Voluntary Review Process
[6] Anti-Fraud Rules
§ 12.14 Successor Liability
§ 12.15 Risk of Target and its Use of Open Source Software

Going Private

§ 13.01 Introduction
§ 13.02 Reasons for Going Private
[1] In General
[2] Going Private Methods
§ 13.03 Schedule 13E-3
[1] Who Must File a Schedule 13E-3
[2] Schedule 13E-3 Disclosure and Fairness Opinions
[3] Rule 13e-3 Exemptions
[4] SEC Review
[5] Sample Schedule 13E-3
[6] Sample Exhibit List
§ 13.04 Fiduciary Duties of the Board
§ 13.05 Going Dark
[1] Background on the Registration Process
[2] Mechanics of Going Dark
§ 13.06 Taking a Public Company Private
[1] Sample Offer to Purchase
[2] Sample Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees
[3] Sample Information Statement Relating to Merger
[4] Sample Opinion of Target's Financial Advisor
[5] Sample Agreement and Plan of Merger
§ 13.07 Taking a Private Company Public
[1] Sample Opinion of Target's Counsel
[2] Sample Revolving Credit Agreement