DealLawyers.com Blog

November 6, 2007

Negotiating Management’s Deal Before – or After – the LBO is Done?

In the wake of last week’s webcast – “Compensation Arrangements for Private Equity Deals” – we received a question about the considerations of negotiating management’s deal before – or after – the LBO dealed is finalized. There are interesting cross currents ranging from fiduciary duty appearances to deal certainty to ability to disclose fully what the interested party interests are compared to the generic “we plan to make arrangements” disclosure.

Jeremy Goldstein of Wachtell Lipton notes: There may be advantages to waiting to negotiate management’s deal until after an MBO is finalized as follows:

1. Directors may wish to keep management as neutral as they can in the sale process so that they don’t “pick a horse” during the pre-signing due diligence process.

2. If management develops a closer relationship with certain bidders, the relationship could advantage those bidders by skewing the diligence process in their favor. Third, as a simple matter of process, some may view negotiating management’s deal before having agreement on price and other key terms as an issue of “putting the cart before the horse.”

3. If pre-signing discussions between management and a PE group go too far, the SEC may treat the deal as a “going private” transaction in which heightened disclosure obligations and liability exposure of Rule 13e-3 will apply. This may complicate the proxy process and make shareholder litigation more difficult to resolve. That being said, how to appropriately pursue a private equity transaction is an art, not a science, and the informed exercise of judgment by the directors is inescapable.

And Stan Keller of Edwards Angell Palmer & Dodge notes these other considerations:

1. The financial buyers often want to be assured of management continuity and having this certainty can maximize deal value.

2. From the perspective of management, they have maximum leverage before a deal is finalized and, indeed, if they are in a position to influence whether a deal should happen (not which deal), their comfort can facilitate that decision.

3. Shareholders may be best served when management’s deal is set in a way that can be disclosed so shareholders can evaluate the fairness and attractiveness of the deal with knowledge of management’s interest (this can also be accomplished by locking in the terms before the proxy statement/tender document goes out). This also can enhance the opportunity for a market check because a potential bidder knows what is the complete deal terms it needs to work with. Ideally, the way to accomplish most of the foregoing objectives is to move in parallel in an orchestrated way, so that deal pricing and choice of buyer is not affected but management and the selected buyer can move quickly before finalization of the agreement to establish their deal.