A management buy-out takes place when the managers and/or executives of a company purchase a controlling interest in a company from existing shareholders.
In most cases, the management will buy out all the outstanding shareholders and then take the company private because it feels it has the expertise to grow the business better if it controls the ownership. Quite often, management will team up with a venture capitalist to acquire the business because it’s a complicated process that requires significant capital.
The Legal Side of a Management Buy Out
There is usually more legal documentation in a management buy out than a sale on the open market, and the management buy out team should appoint legal advisers to guide them through the transaction.
WHAT ARE THE MAIN LEGAL DOCUMENTS INVOLVED IN A MANAGEMENT BUY-OUT?
The Heads of Agreement
This document set the rules of the management buy out for both the buyers and the sellers.
The Sale and Purchase Agreement of the Buy Out
This document sets out whether shares or assets are being sold by the sellers to the management buy out company. There are important differences in these sale formats. Both sides must consider which is best for them.
Subscription Agreement for direct investment by an Institutional Investor (if applicable)
i.e. Venture Capitalists. This sets out the rules regarding new investment in the business.
Property Sale and Leaseback Documentation
If the business includes property, it is sometimes possible to mortgage that property to a financial institution- thus retaining the use but releasing the capital. There may be tax implications involved with this, so professional advice should be sought.
Financial Institutions will want this, e.g. Legal Charges and/or Debentures over the management buy out teams shares and possibly other assets, the assets of the buy out business, as security for the investment of the financial institution.
Articles of Association
Containing such matters as the rights attached to various classes of shares; and the general rules for meetings of Directors.
Members of the management buy out team will normally be expected to enter into new Service Agreements ensuring their continued involvement with the business, possibly with different salary levels.
Such as Share Option Agreements, Employee Share Ownership plans
– This list is provided for information only. It cannot constitute legal advice. Each transaction is different. Please feel free to contact Tony Forster, Commercial Partner (firstname.lastname@example.org ) for detailed advice when required.
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