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Focus on Private Equity – October 2014

McDermott Will & Emery has released the October 2014 issue of Focus on Private Equity, which provides insight on issues surrounding private equity transactions and the investment life cycle across industries. Articles in this issue include:

Proposed EU Merger Review of Non-Controlling Minority Shareholding Acquisitions: Challenges and Opportunities for Private Equity
A recently proposed plan to reform EU Merger Regulation could expand the scope of transactions subject to prior notification. For the first time, minority shareholding acquisitions that do not lead to a change in control could be subject to prior notification to the European Commission. The proposed expansion of the Merger Regulation’s jurisdiction could significantly impact businesses.
Read the full article.

IPO Market Offers Attractive Exit Alternative for Sponsor-backed Companies
The strong IPO market offers private equity sponsors an attractive alternative to the sale of a portfolio company. However, the IPO process is complex, and must be structured properly at the outset. This article discusses some of the most significant structural considerations sponsors must consider in order to be in the position to obtain the maximum benefit from an IPO.
Read the full article.

Venture Funds: Don’t Fear the LLC

It has long been the case that venture funds (classified as partnerships for tax purposes) have insisted that limited liability companies (LLCs) taxed as partnerships convert to C corporations prior to the consummation of a venture financing.   Most commonly, there are three rationales given for this requirement: (1) certain venture fund limited partners are tax exempt institutions or foreign investors and prohibit the venture fund from allocating Unrelated Business Taxable Income or Effectively Connected Income to such types of limited partners that likely would result from an investment directly into an LLC, (2) venture funds are focused on the potential of a future initial public offering (IPO) and the most common vehicle to an IPO is a C corporation and (3) executive talent expects to be issued stock options and are not familiar with the more complex equity issued by an LLC.

Perhaps though it is time to revisit this long held investment philosophy.  Showing flexibility in investment structure may make a venture fund more attractive to the founders of an LLC then other funds less willing to be creative.  Often times founders of LLCs wish to retain the flow through tax treatment benefits they receive, especially in an early financing round after which the founders will retain a significant ownership percentage.  The tax benefits received by the founders as a result of maintaining the LLC structure include: (1) the founders pay a single level of tax on the profits of the business (in a C corporation there are two levels of tax on the distributed profits of the business, which would result in less after tax distributions to the founders) and (2) the active founders can often utilize the losses of the business on their individual returns thereby offsetting other gains they may have.  There are other tax benefits of the LLC structure as well.  If there is a sale of a company structured as an LLC, then the company may be able to deliver a partial step up in the basis of the LLC’s assets to an acquirer, which has real economic value.  And contrary to the commonly held belief that the new management team that the venture fund plans to attract expects to be issued stock options, the LLC has a more tax efficient way of issuing management equity in the business, through profits interests, and this gives management the potential of capital gains rates on gains rather than ordinary income, which arises with respect to stock options.

And LLCs aren’t so bad for venture funds.  First, these days there are a lot fewer IPO exits for venture funds than there used to be and a sale of the business has become a more common path to liquidity.  Second, as mentioned above, an LLC will provide a better structure for delivering at least a partial step in the basis of the LLC’s assets to an acquirer thereby potentially delivering more exit value.  Third, LLCs are creatures of contract unlike corporations and this allows the venture fund [...]

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Welcome to McDermott’s Corporate Deal Source Blog

Where have all the transactions gone?  The first quarter has quietly passed by.  Just a few weeks ago, looking through the pipeline, one could see almost unimpeded to the other side, relatively empty as the bankers say.  But hope exists, as suddenly activity seems to be reemerging.  We call it letter of intent flow (more poetically, LOI Flow).  The beginnings of real transactions.  Concurrently with these beginnings, we launch our inaugural Corporate Deal Source Blog.  And perhaps timing is on our side and we are well positioned to ride the next wave of deal activity from its very beginning.

We set out here to provide commentary, not intended for other lawyers, but for our clients and those we hope will find benefit from becoming our clients.  Our goal is to dialogue as much as one can in the blogosphere and that our followers will help drive our content through comment and suggestion.  The Corporate Deal Source Blog aims to be a professional, yet light-hearted source of pertinent information.  Some posts will be pithy updates of the LOI Flow, announcements and important releases; others will be more comprehensive analysis of meaningful changes in law, pitfalls in transacting globally or recent trends in private equity buyouts.  We will also cover issues affecting family office direct investing, corporate finance, real estate transactions and other topics of interest.  But all well tied with a common theme: deal-making and the people who make them.

With that, we invite you to follow Corporate Deal Source—a must for any true deal-maker.  We promise to excite as much as any band of lawyers possibly can.