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Private Acquisitions SGS 10 notes
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Notes for PA SGS 10.
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Drag along provision Tag along provision Good leaver/bad leaver Restric6ve covenants and gardenleave
Where will the Ar6cles of associa6on of Ar6cles of associa6on of Ar6cles of Newco 1 but may instead be Service agreement between
provisions be Newco 1 or in the investment newco 1 and some6mes in included in the investment in managers and Newco 1.
included in the MBO agreement. investment agreement. agreement Also in the investment
documenta6on? agreement.
What is the purpose Designed to operate at 6me of Tag along provisions are Good/bad leaver provisions are RC and GL provisions are
of the provision, exit. designed to operate at designed to incen6vise the designed to protect the business
what does it do and Purpose is to allow the 6me of exit. management team to stay involved and goodwill of Newco 1 by
when is it designed majority shareholder(s) to Purpose is to allow the with the MBO for a minimum period of aZemp6ng to prevent members
to operate? force the minority minority shareholders to 6me (or perhaps, rather, to dis- of the management team who
shareholder(s) to sell their sell their shares to the incen6vise them from leaving the MBO leave the company from joining
shares should there be an offer purchaser if an offer is before a minimum period of 6me has or star6ng a compe6ng business
for the company that the received for the majority lapsed). and from using know-how and
majority want to accept. shareholding (i.e not to In essence – only if a manager leaves confiden6al informa6on which
Purchasers usually want 100% them too – want to tag for what is considered to be a ‘good they have acquired from working
of shares so important for along with the others!). reason’ will he receive the full market at the company. These provisions
majority to know they can If you are ac6ng for the value for his shares in Newco 1. are important because the
force the minority to exit. management, the In all other circumstances, they may common law = offers liZle
provisions should ensure receive only the original (nominal) protec6on in these areas!
that the minority shares value of his shares or possibly even less.
are sold on the same basis So far as restric6ve covenants are
as the majority shares, i.e Good leaver/bad leaver provisions are concerned = in order to be
for the same considera6on oVen quite complicated because the enforceable, they must be
per share, same date of par6es will want to make sure that the reasonable in scope (i.e
sale etc. provisions cover all eventuali6es and geographic scope, business and
although it may appear fair that a dura6on) and must go no further
manager should lose out if he acts than what is necessary to protect
badly and is dismissed (e.g for the legi6mate interest. Important
misconduct), any manager who is to note that these restrict each
, actually in his posi6on is likely to be manager personally but also
arguing fiercely that he has been protect managers against each
dismissed in breach of contract! other.
The provision will be ac6vated when a Restric6ve covenants are
manager leaves the employment of important and poten6ally
Newco 1. powerful protec6on for Newco1
but have 2 poten6al weaknesses:
There are various reasons why a 1/ if a court holds that their scope
manager could leave the company, i.e goes beyond what is necessary
death, long term illness, dismissal for for protec6ng the company’s
incompetence, misconduct etc. legi6mate business interests =
Each manager has 2 roles: one as an void
employee/other as a shareholder. 2/ if Newco1 commits a breach of
® Provisions in the employment the service agreement (i.e for
agreement rela6ng to restric6ve dismissing a manager in breach of
covenants/garden leave clauses contract) then the manager will
will take effect when the no longer be bound by the
manager leaves the company’s restric6ve covenants.
employment but these
provisions have NO EFFECT on Repea6ng the RC in the
the manager’s posi8on as a investment agreement may help
shareholder! overcome these weaknesses.
® So – one of the aims of the 1/ case law suggests that RC are
good leaver/bad leaver more likely to be enforceable in
provisions is to deal with the an investment agreement than in
manager’s posi6on as a a service contract. This is because
shareholder so that he cannot it is thought there is more
remain as a shareholder aVer he bargaining power between
has ceased to be an employee. par@es dealing with each other
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