MBO case study

Our clients were a two-member management team of a group structure of which the wholly owned trading subsidiary was a fast-growing, innovative coffee wholesale business also dealing in tea, cocoa and spices, and operating cafes. They wished to carry out a management buyout (MBO) to acquire the entire shareholding of the parent company (Target) from its sole shareholder and founder (Seller), who was also a director alongside our clients.

To conduct the MBO, the management team created a new holding company (Holdco), through which the shares were acquired, and which became the parent of the Target after completion. The MBO was to be financed through a loan taken out by the Target together with investments of new shareholders who were invited to subscribe for shares simultaneous to the MBO.

At initial negotiations conducted with the Seller in relation to the acquisition, of which we were not part of, the management team had agreed not to require any legal or financial disclosure on the Target.  The disclosure requirement was waived partly due to the management team believing that as they had been directors of the subsidiary over the last few years, they were aware of the affairs of the group.

When Gannons were engaged to assist with the MBO, acting upon the instructions that no disclosures were being made, we negotiated to obtain indemnities on behalf of the Holdco, the Target, and the subsidiary. Our objective was to ensure the management team were fully protected and no tax implications or claims arose from historical matters.

During the course of our negotiations, it transpired that the Target was created consequent to a reconstruction exercise of a previous group structure consisting of investment holding and trading companies owned or controlled by the Seller.

We advised the management team it would be prudent to seek at least limited disclosure relating only to this historical reconstruction exercise because, despite their knowledge of the inner workings of the present structure, they were not fully cognizant of the tax implications the reconstruction could potentially give rise to.  We sought and received disclosure from the Seller’s solicitors and discovered that the several subsidiaries were the subjects of demergers and share exchanges carried out to separate the investment activities from the trading operations. These disclosures also provided comfort to our client’s for being in the knowledge that historical matters of the Target were in order.

How we assisted

Gannons negotiated the tax covenants and upon discovering certain anomalies, sought limited disclosure on matters of concern and thereby ensured the management teams’ interests were protected. 

Issues faced

Due to the management team having negotiated with the Seller to waive due diligence and disclosure, we were constrained in the extent to which we could fully review and negotiate on the tax covenants, given also that our instructions did not initially require conducting due diligence and obtaining disclosure.