Taking control with a Management Buy Out
A Management Buy Out (via a Newco) is where a group led by people in the Company’s management team buy out a majority (or all) of the shares from existing shareholders in order to take control of the company.
This transaction was initially presented to us as a share buyback over several years by the departing shareholders, Christina and David (who each held 40% of the shares in the Company). David was a director and employee of the Company and Christina an employee.
The senior management team of a business, Elliot and Fiona, wanted to buy out the retiring majority shareholders. Elliot and Fiona were also directors and each held 10% of the shares in the Company.
Each tranche of the management buy back would dilute Christina and David’s shares in order to increase Elliot and Fiona’s interest in the Company.
Management Buy Out via a NewCo
After further discussions of the intentions of the parties, GL Law presented the idea of a newly incorporated company (Newco) to purchase the entire shareholdings with Christina and David receiving cash consideration (half on completion and the balance deferred) and Elliot and Fiona receiving shares in Newco.
The management team via Newco were not receiving external funds to finance the deal but instead loaned the money from the Company.
This allowed the management team to have control of the Company from completion, rather than an increasing amount of shares in the Company. Otherwise had they gone down the share buy back route, it was dependent on the Company having sufficient profits at the relevant time and they would not have obtained control until year 2.
GL acted for the Sellers in this deal. The key transaction document was a Share Purchase Agreement which included restrictive covenants on Christina and David not being allowed to compete with the Company.
Specialist legal advice
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