3 questions to smart minds

Minority interests in family businesses

For this 3 questions to Dr. Steffen Oppenländer

Photo: Dr. Stef­fen Oppenländer
19. Septem­ber 2018

Private equity inves­tors are incre­asingly parti­ci­pa­ting as mino­rity share­hol­ders in larger family busi­nesses. Examp­les include Carlyle’s invest­ment in Schön Klini­ken and EQT’s invest­ment in Otto Bock. Such a merger holds oppor­tu­ni­ties for both the company and the finan­cial inves­tor. In parti­cu­lar, the often diffe­rent invest­ment hori­zons of exis­ting share­hol­ders and finan­cial inves­tors require special crea­ti­vity in the draf­ting of contracts. 

For this 3 ques­ti­ons to Dr. Stef­fen Oppen­län­der, Part­ner at Milbank

1. What moti­ves do family busi­nesses have for taking on a private equity investor?

The decisive factor for taking on a finan­cial inves­tor is typi­cally medium-term corpo­rate goals, for the imple­men­ta­tion of which the company or its share­hol­ders want to secure the support of a profes­sio­nal inves­tor. This could be, for exam­ple, going public, the chan­ces of success of which are to be maxi­mi­zed through opera­tio­nal impro­ve­ments. Other medium-term goals may include inter­na­tio­nal expan­sion or growth through acqui­si­ti­ons. In all these cases, finan­cial inves­tors can make a signi­fi­cant contri­bu­tion with their tran­sac­tion expe­ri­ence and broad network of indus­try experts. In addi­tion, special finan­cial burdens can also trig­ger the search for a finan­cial inves­tor, for exam­ple to finance a sever­ance payment to a depar­ting share­hol­der. — Typi­cally, howe­ver, the focus is less on the aspect of reve­nue gene­ra­tion than on the goal of the company’s contin­ued deve­lo­p­ment while retai­ning the control of the entre­pre­neur or the entre­pre­neu­rial family.

2. What issues typi­cally arise when ente­ring as a mino­rity shareholder?

As with any busi­ness acqui­si­tion, the parties must agree on the terms of acqui­si­tion, inclu­ding seller warran­ties and indem­ni­ties, in the case of a mino­rity inte­rest. In view of the joint conti­nua­tion of the company, there is a risk poten­tial here that should not be unde­re­sti­ma­ted. This is because the asser­tion of claims, for exam­ple for breach of vendor warran­ties, regu­larly strains the rela­ti­onship between the parties and can thus jeopar­dize the successful joint further deve­lo­p­ment of the company. Secu­ring any warranty claims with the help of a so-called S&I insu­rance can be an elegant solu­tion for this.

In addi­tion, the nego­tia­ti­ons regu­larly focus on the finan­cial investor’s rights of co-deter­mi­na­tion and the possi­bi­lity of initia­ting an exit from the invest­ment. The central issue in the rights of co-deter­mi­na­tion is often the budget. The finan­cial inves­tor will at least insist on a veto right here if the propo­sed budget devia­tes signi­fi­cantly from the busi­ness plan under­ly­ing the tran­sac­tion. In addi­tion, the inves­tor will demand a say in the appoint­ment of the manage­ment board in particular.

3. What conse­quen­ces do co-deter­mi­na­tion rights have for the company?

First of all, the parties must agree on the scope of the co-deter­mi­na­tion rights. Of course, these depend to a large extent on the amount of the invest­ment in the indi­vi­dual case. Legal guiding prin­ci­ples, in parti­cu­lar the typi­cal blocking mino­rity of 25%, can at best provide a start­ing point for the discus­sions. Of course, the outcome of nego­tia­ti­ons also depends on the compe­ti­tive situa­tion. If seve­ral bidders are in the running, the exis­ting share­hol­ders will be more likely to succeed in enfor­cing redu­ced co-deter­mi­na­tion rights. In addi­tion, there is the ques­tion of the legal conse­quen­ces of a right of co-deter­mi­na­tion, in parti­cu­lar veto rights. In the inte­rests of all parties invol­ved, the over­ri­ding goal must be to avoid a contin­ued mutual blockade. Ther­e­fore, it is neces­sary to find appro­priate mecha­nisms to over­ride veto rights. Finan­cial inves­tors will regu­larly seek a so-called put option, i.e. the obli­ga­tion of the exis­ting share­hol­ders to acquire the finan­cial investor’s share­hol­ding at the latter’s request in the event of conti­nuing diffe­ren­ces of opinion on central issues. Such a right, in turn, will only be accep­ta­ble to compa­nies and exis­ting share­hol­ders under special circum­s­tances in view of the asso­cia­ted finan­cial burdens.

About Dr. Stef­fen Oppenländer

Stef­fen Oppen­län­der is a member of the Corpo­rate Prac­tice Group at MILBANK in Munich. He advi­ses private equity funds and compa­nies on complex dome­stic and cross-border invest­ments, acqui­si­ti­ons and joint ventures. In addi­tion to tran­sac­tional work, Stef­fen Oppen­län­der advi­ses family entre­pre­neurs and busi­nesses, in parti­cu­lar on succes­sion issues.

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