friday, 31 january of 2014

Private equity backed going-private transactions

Private equity backed going-private transactions

Guilherme Leporace and Ana Carolina Pimentel

On September 12, 2013, shareholders of the PC maker Dell Inc. approved the company’s $24.9 billion sale to its founder and chief executive, Michael Dell, and the private equity firm Silver Lake. But taking the company that bears his name private was not an easy task for Mr. Dell. A group of shareholders, led by the active investor Carl C. Icahn, opposed the deal, forcing Mr. Dell and Silver Lake to raise their bid, though only slightly. Fierce controversy over voting rules and appraisal rights also took place before the completion of the transaction.

As Dell’s management buyout suggests, going-private deals are often a rather complex endeavour. Nevertheless, struggling corporations, especially those with undervalued stock, may still be attractive for private equity firms willing to make the effort to purchase and restructure them for a future sale at profit. With more than 400 companies listed and its main stock index, IBOVESPA, 25% lower than it was at its peak in 2008, the Brazilian stock market might offer good opportunities for private equity firms – as well as some challenges.

As most Brazilian corporations still have a concentrated ownership structure, the first step a fund must take in order to carry out a going-private transaction in Brazil is to negotiate a contract with the target’s controlling shareholder or group.

If this contract implies a sale of control for purposes of article 254-A of the Brazilian Corporations Act, the fund must make a tender offer to acquire all the target’s minority shareholders common shares for at least 80% of the price it agreed to pay for the controlling shareholders’ shares1. In the sequence, if there are still outstanding shares, the fund shall then make the tender offer set forth in article 4, § 4 of the Brazilian Corporations Act to acquire all minority shareholders’ shares – although all shares of the same class must be offered the same price, different prices can be offered to shares of different classes. The fund may ask the CVM (the Brazilian SEC), for an authorization to merge both article 254-A and article 4, § 4 tender offers. Actually, even if the fund does not ask, the CVM will likely impose such a merger.

If the contract does not imply a sale of control, an article 254-A tender offer is not required. Not being the controlling shareholder, the fund is not allowed to make the article 4, § 4 tender offer. In this case, the contract should arrange for the controlling shareholder to carry out such going-private tender offer.

The going-private transaction is deemed approved if shareholders holding 2/3 of the outstanding shares either expressly agree with it or accept the article 4, § 4 tender offer. Shares held by “no-show” shareholders are not considered outstanding shares, making the approval easier. Those that do not accept the tender offer remain as minority shareholders. However, once the offer is closed, if less than 5% of the company stock remain outstanding, minority shareholders may be squeezed out, receiving the same price per share paid to the ones that previously accepted the tender offer.

To prevent the risk of continuing to have minority shareholders after going private – a risk private equity funds almost certainly will want to avoid –, it is advisable to set out upfront that the offer will be conditioned on the acceptance of shareholders holding at least 95% of the target’s shares.

The article 4, § 4 tender offer price (or prices) must be “fair” and supported by a valuation report of the company filed with the CVM. Shareholders individually or collectively holding 10% or more of minority shareholders’ shares may request a special minority shareholders meeting to vote on whether to challenge the valuation report and appoint a new appraiser. Such challenge must be justified.

If minority shareholders commission a new valuation report and it assesses a lower or equal value for the company, then the tender offer goes through with its original price. In this case, shareholders that voted for such new valuation must pay for it, which reduces the risk of moral hazard. On the other hand, if the value appointed in the new valuation report is higher than that in the first one, the offeror must either change the price (or prices) of the offer to make it compatible with the new valuation or withdraw the offer.

It is difficult to forecast how long a going-private transaction takes to be completed. In the cases of Amil and Redecard, two leading Brazilian corporations that went private recently, it took about seven to eight months between the disclosure of the intention of going private and the final cancellation of their public company registration with the CVM.

With careful planning and close attention to legal formalities – which is important to try to mitigate hurdles similar to those faced by Mr. Dell in his recent buyout –, going-private transactions could present interesting opportunities for the PE&VC industry, especially in a moment in which the Brazilian stock market is far from its historical peak.


1 If the company is listed in BOVESPA’s Novo Mercado or Nível 2, which are special listing segments, the tender offer must be extended to all minority shareholders and the price to be paid for their shares must be the same paid for the controlling shareholders’ shares.


* Guilherme Leporace and Ana Carolina Pimentel are respectively partner and associate of Lobo & Ibeas Advogados.

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