Some PE sponsors give rollover participants and possibly other members of the target entity`s management team the opportunity to invest together in the target company and/or other PE sponsor portfolio investments. In most cases, these direct investment opportunities are considered positive by investors, since the investor`s economic return is not reduced by the compound interest paid by his fund to the PE sponsor. A possibility of co-investment should be considered as any other potential stake in a business. Rollover participants will want to ensure that there is a mandatory tax allocation and that there is no obligation to make additional contributions, guarantee debts or provide loans to the company. Fortunately, these “red flags” are not typical of stock rollover transactions with financial buyers. If the objective is a C company, management, which transfers equity to the buyer, will often contribute to a holding LLC in exchange for LLC units. The contribution of the shares to the holding company LLC would not be taxable to the extent that the stock is exchanged for shares of LLC. Holding LLC would then abandon a temporary merger subsidiary (either Corporation or LLC) and the other target shareholders would be triggered in a reverse taxable merger. The second stage of the cash-out merger is often used to prevent all target shareholders from accepting a share sale. After the transaction, the HOLDING company of LLC could facilitate the completion of additional acquisitions and allow the issuance of profit shares. Our experience as a sales representative suggests that PE companies in the 2019 A.M. market often have a strong desire to include Rollover-Equity in compiling acquisition financing as part of their full equity participation.
These PE companies are also looking for ways to stand out from their more than 7,000 peer-peer companies when competing for a deal. These factors can lead to advantageous business conditions for sellers and creativity on the part of PE companies in structuring attractive rollover-equity agreements. For example, a spokeswoman for a recent enZ capital link mentioned that her PE company had recently entered into an agreement that included a function in which the PE company compared each rollover share with the option to purchase an additional share, effectively allowing rollover participants to achieve a “2-for-1” return on their rollover. In the case of a rollover transaction, the financial stake can be quite high. The introduction of more than 20% of the value of a target company often represents a very significant share of the total capital in a debt-financed buyback transaction. Faced with these issues, the rollover structuring and negotiation process tends to favour owners and legal professionals and taxpayers who have expertise, who have the structuring and negotiation of share rollovers. If the buyer intends to combine the target transaction with the buyer`s greater activity, the management team`s due diligence efforts should extend to the existing business. Rollover participants should ask the purchaser for insurance, guarantees and commitments similar to those usually given to investors in a company`s preferred action, but the reality is that in many stock bearing transactions, this investor protection is lacking.