Management Buyout Achieves Objectives for Exiting Sellers

Case Study

Walker Foster’s Corporate Law team has provided expert legal representation for the managers of an electrical and mechanical engineering business, helping them to complete a successful management buyout (MBO) that achieved the sellers’ objectives efficiently.

The Challenges

Walker Foster was called upon to advise the directors of the trading business’s holding company in the sale of £1.5 million in shares to the management team’s newco. The trading company was a wholly-owned subsidiary of the holding company, and the shareholders of the holding company were seeking an exit.

They had already negotiated some detailed heads of terms with the management team, who agreed to purchase the shares from the company, using a newco as the vehicle for the purchase. A significant concern for the shareholders of the selling company was the need to obtain security for substantial deferred payments due over a period of years. They were keen to ensure that the management team offered limited personal guarantees in respect of those payments, and that they held security over the trading vehicle and the newco in respect of the deferred payments. They were also concerned to mitigate the effect of any warranties, and to avoid indemnities.

An added element was that the seller was to be wound up post-completion. The benefit of the contract documentation was to be assigned to the individual shareholders of the selling company, so that the deferred payments would be received by them after the liquidator assigned the benefits of the contract to them.

How Walker Foster Helped

We were selected for this case because one of the company’s directors was aware of our Northallerton office and our service offering. Walker Foster was not initially instructed to be substantially involved in a due diligence exercise, but as it became clear that due diligence would be more substantive than initially thought, Walker Foster became involved in that exercise.

Thereafter, Walker Foster was responsible for drafting and negotiating transaction documents, including substantial amendments to the share purchase agreement and production of the disclosure letter and several of the ancillary security documents. The security chosen by the client was debentures against the trading company and the newco that held all the shares in the trading company, and personal guarantees limited in amount from the two new shareholders of the newco.

The provisions regarding assignability of contract were carefully drafted to allow the selling company/liquidator to assign the benefit of the contracts to the shareholders of the selling company prior to its dissolution. There were several interactions with the accountant who had structured the matter with the sellers, and with the liquidator who would be dealing with the assignments.

The Outcome

Although the management team were familiar with the day-to-day trading aspects of the business, the MBO process proved to be complex, with the due diligence exercise in particular being more comprehensive than might be expected in an MBO.

With Walker Foster’s assistance, this was completed successfully, and the client’s objectives were successfully achieved. The share sale proceeded to completion, and subsequently the benefits of the contracts were assigned to the shareholders of the selling company personally by the liquidator.

Our corporate team was ultimately able to deliver a successful exit from a long-established business for the sellers, with our clients commenting: “Many thanks for getting this deal over the line.”

If you are seeking to exit or purchase a business through an MBO, don’t hesitate to get in touch. Walker Foster has considerable experience in acting for sellers and buyers, and can provide you with expert legal guidance.

Learn more about how we can assist you with business sales and purchases, or get in touch with us today.