Case Study Interviews: Good things to know!!

[Alice G]

Hi everyone,

I wanted to post this because I wanted a place to collate lots of terms and tips and know hows for case study interviews. I’m thinking along the lines of sharing the knowledge we have that we can all keep in mind for these more technical interviews (think A&O and HSF)

here are the things I’ve learned that can be useful along the way regards terms and contractual features:

Tax covenants (tax liability allocation)
Warranties, indemnities and representations (hedge against risk)
Restrictive covenants (an example of this is a non-compete clause which can stipulate that a former employee of the target can’t work for a competitor or set up a competing business in the same industry for a certain timeframe)

those are the ones I’ve picked up but I am non-law! If any of you guys have any pointers it would be great to share the knowledge! Have a great Friday everyone!!

 

[A98]

Hey Alice, this is great! Here are some others:

Non-disclosure/confidentiality agreement: formed between buyer and seller to keep info private
Assignment: transfer of a right from one person to another
Novation: transferring a party's right and obligations to a third party
Lock-out agreement: specified term for exclusivity between buyer and seller in M&A (I think this or something similar is also used for IPOs so that SH can't sell their shares before the company is listed (?))

 

[Alice G]

Hey Alice, this is great! Here are some others:

Non-disclosure/confidentiality agreement: formed between buyer and seller to keep info private
Assignment: transfer of a right from one person to another
Novation: transferring a party's right and obligations to a third party
Lock-out agreement: specified term for exclusivity between buyer and seller in M&A (I think this or something similar is also used for IPOs so that SH can't sell their shares before the company is listed (?))

fantastic!! thank you for these - they're super helpful!!!

 

[Daniel Boden]

I'd add a couple here that we were made aware of on my Weil scheme:

Drag-along rights
A drag-along right is a provision that enables a majority shareholder to force a minority shareholder to join in the sale of a company. The majority owner doing the dragging must give the minority shareholder the same price, terms, and conditions as any other seller. Drag-along rights are designed to protect the majority shareholder.

Key Takeaways:

• Drag-along rights are in place during investment negotiations between a company's majority shareholders and minority shareholders.
• Drag-along rights help eliminate minority owners and sell 100% of a company's securities to a potential buyer.
• Although this provision protects majority shareholders from blocked sales, minority shareholders can realize favourable sales terms that may not otherwise be available.

Tag-along rights
Tag-along rights also referred to as "co-sale rights," are contractual obligations used to protect a minority shareholder, usually in a venture capital deal. If a majority shareholder sells his stake, it gives the minority shareholder the right to join the transaction and sell their minority stake in the company. Tag-alongs effectively oblige the majority shareholder to include the holdings of the minority holder in the negotiations so that the tag-along right is exercised.

Key Takeaways:

• Tag-along rights are contractual obligations to protect a minority investor in a startup or company.
• Tag-along rights are mainly used to ensure that the stake of minority stakeholders is considered during a company sale.
• They ensure greater liquidity for minority shareholders.
• The minority investors are entitled to the same price and conditions as the majority investor when the shares are sold.

(Source: Investopedia)

 

[Alice G]

I'd add a couple here that we were made aware of on my Weil scheme:

Drag-along rights
A drag-along right is a provision that enables a majority shareholder to force a minority shareholder to join in the sale of a company. The majority owner doing the dragging must give the minority shareholder the same price, terms, and conditions as any other seller. Drag-along rights are designed to protect the majority shareholder.

Key Takeaways:

• Drag-along rights are in place during investment negotiations between a company's majority shareholders and minority shareholders.
• Drag-along rights help eliminate minority owners and sell 100% of a company's securities to a potential buyer.
• Although this provision protects majority shareholders from blocked sales, minority shareholders can realize favourable sales terms that may not otherwise be available.

Tag-along rights
Tag-along rights also referred to as "co-sale rights," are contractual obligations used to protect a minority shareholder, usually in a venture capital deal. If a majority shareholder sells his stake, it gives the minority shareholder the right to join the transaction and sell their minority stake in the company. Tag-alongs effectively oblige the majority shareholder to include the holdings of the minority holder in the negotiations so that the tag-along right is exercised.

Key Takeaways:

• Tag-along rights are contractual obligations to protect a minority investor in a startup or company.
• Tag-along rights are mainly used to ensure that the stake of minority stakeholders is considered during a company sale.
• They ensure greater liquidity for minority shareholders.
• The minority investors are entitled to the same price and conditions as the majority investor when the shares are sold.

(Source: Investopedia)

Amazing!!! Thank you Dan - this is great!

 

[W]

Then you have introductory docs such as term sheets (which set out initial agreements) but are non-binding usually found in corporate and finance side of transactions

Can anyone explain locked-box and completion accounts?

 

[A98]

I'd add a couple here that we were made aware of on my Weil scheme:

Drag-along rights
A drag-along right is a provision that enables a majority shareholder to force a minority shareholder to join in the sale of a company. The majority owner doing the dragging must give the minority shareholder the same price, terms, and conditions as any other seller. Drag-along rights are designed to protect the majority shareholder.

Key Takeaways:

• Drag-along rights are in place during investment negotiations between a company's majority shareholders and minority shareholders.
• Drag-along rights help eliminate minority owners and sell 100% of a company's securities to a potential buyer.
• Although this provision protects majority shareholders from blocked sales, minority shareholders can realize favourable sales terms that may not otherwise be available.

Tag-along rights
Tag-along rights also referred to as "co-sale rights," are contractual obligations used to protect a minority shareholder, usually in a venture capital deal. If a majority shareholder sells his stake, it gives the minority shareholder the right to join the transaction and sell their minority stake in the company. Tag-alongs effectively oblige the majority shareholder to include the holdings of the minority holder in the negotiations so that the tag-along right is exercised.

Key Takeaways:

• Tag-along rights are contractual obligations to protect a minority investor in a startup or company.
• Tag-along rights are mainly used to ensure that the stake of minority stakeholders is considered during a company sale.
• They ensure greater liquidity for minority shareholders.
• The minority investors are entitled to the same price and conditions as the majority investor when the shares are sold.

(Source: Investopedia)

Hi Daniel,

How are these rights used in a PE context? Because PE firms have a majority stake, is it correct to say that in the case of drag along rights, it allows the PE firm(managers/sponsors) to sell the portfolio company and force other minority shareholders (not part of the PE fund) to sell as well?

Also are these two rights usually inserted together?

 

[Christopher Ho]

Hi Daniel,

How are these rights used in a PE context? Because PE firms have a majority stake, is it correct to say that in the case of drag along rights, it allows the PE firm(managers/sponsors) to sell the portfolio company and force other minority shareholders (not part of the PE fund) to sell as well?

Also are these two rights usually inserted together?

It is possible, but it would depend on the specific deal and the company's articles of association. I don't believe that those terms automatically arise.

In any case, PE houses often seek 100% shareholding so I suspect it's not a question that arises often. I imagine that PE houses are a lot more concerned during purchases - whether shareholders of its target company have drag-along rights (so they don't have to worry about a small number of stubborn shareholders).

 

[Christopher Ho]

Then you have introductory docs such as term sheets (which set out initial agreements) but are non-binding usually found in corporate and finance side of transactions

Can anyone explain locked-box and completion accounts?

Locked-box: The price agreed upon by the seller and buyer is fixed, which provides both sides with certainty about cashflow. There is a concept of 'permitted leakage', which refers to specific costs that can be deducted from that agreed price, but these costs have to be identified.

Completion accounts: Accounts that consider costs incurred after agreement but before completion. Those costs are then deducted from the agreed price.

 

[Daniel Boden]

Hi Daniel,

How are these rights used in a PE context? Because PE firms have a majority stake, is it correct to say that in the case of drag along rights, it allows the PE firm(managers/sponsors) to sell the portfolio company and force other minority shareholders (not part of the PE fund) to sell as well?

Also are these two rights usually inserted together?

It is possible, but it would depend on the specific deal and the company's articles of association. I don't believe that those terms automatically arise.

In any case, PE houses often seek 100% shareholding so I suspect it's not a question that arises often. I imagine that PE houses are a lot more concerned during purchases - whether shareholders of its target company have drag-along rights (so they don't have to worry about a small number of stubborn shareholders).

Yeah, Chris here has explained it well, this mainly happens in the more usual public and private M&A and is more common in venture capital acquisitions I believe.

E.g. In 2019, Bristol-Myers Squibb Company and Celgene Corporation entered into a merger agreement under which Bristol-Myers Squibb will acquire Celgene in a cash and stock transaction valued at approximately $74 billion.

According to the agreement, Bristol-Myers Squibb majority shareholders will own 69% of the combined entity; and Celgene shareholders will own the remaining 31%. Celgene shareholders will receive one Bristol-Myers share and $50 for each Celgene share.

In terms of drag-along rights, minority shareholders will be "dragged along" in the deal so that the acquiring company can own the majority of shares. The minority shareholders will receive the same agreement terms as the majority shareholders. (Investopedia)

 

[W]

Locked-box: The price agreed upon by the seller and buyer is fixed, which provides both sides with certainty about cashflow. There is a concept of 'permitted leakage', which refers to specific costs that can be deducted from that agreed price, but these costs have to be identified.

Completion accounts: Accounts that consider costs incurred after agreement but before completion. Those costs are then deducted from the agreed price.

Thanks

re locked box, why would some costs be deducted?

 

[A98]

Yeah, Chris here has explained it well, this mainly happens in the more usual public and private M&A and is more common in venture capital acquisitions I believe.

E.g. In 2019, Bristol-Myers Squibb Company and Celgene Corporation entered into a merger agreement under which Bristol-Myers Squibb will acquire Celgene in a cash and stock transaction valued at approximately $74 billion.

According to the agreement, Bristol-Myers Squibb majority shareholders will own 69% of the combined entity; and Celgene shareholders will own the remaining 31%. Celgene shareholders will receive one Bristol-Myers share and $50 for each Celgene share.

In terms of drag-along rights, minority shareholders will be "dragged along" in the deal so that the acquiring company can own the majority of shares. The minority shareholders will receive the same agreement terms as the majority shareholders. (Investopedia)

Thanks Dan,

Sorry to be a pain, but what did you mean in terms of the merger agreement?

 

[Daniel Boden]

Thanks Dan,

Sorry to be a pain, but what did you mean in terms of the merger agreement?

As in the minority shareholders will sell their shares at the same value as the majority shareholders' shares.

 

[Christopher Ho]

Thanks

re locked box, why would some costs be deducted?

The locked-box refers to a set price, which the purchaser is obliged to pay in full. The costs ('permitted leakage') that might be deducted from this figure include dividends, short-term expenditures, and any operating costs that are payable in the interim. This is so that purchasers, having already committed to a set price, can deduct any outflows from the price that they actually pay at completion (and don't over-pay).

https://www.grantthornton.be/global...nisms---completion-accounts-or-locked-box.pdf

This may be useful!

 

[A98]

As in the minority shareholders will sell their shares at the same value as the majority shareholders' shares.

Thank you!!

 

[Laura T]

I’d also like to add that for listed companies, many jurisdictions will actually have a compulsory ‘squeeze out’ mechanism that is triggered when the offerer acquires a specified percentage of equity (usually 90 or 95 percent) after a public offer of the target company. This allows the offerer (who becomes the new majority shareholder) to acquire ownership of the outstanding shares by squeezing out the remaining shareholders at a fair price (often the offer price).

Many takeover regulations will balance this with a ’sell-out’ right that allows the remaining shareholders to require that the offerer buys out their shares.

So they operate in a very similar way as drag along/tag along

 

[Alice G]

I’d also like to add that for listed companies, many jurisdictions will actually have a compulsory ‘squeeze out’ mechanism that is triggered when the offerer acquires a specified percentage of equity (usually 90 or 95 percent) after a public offer of the target company. This allows the offerer (who becomes the new majority shareholder) to acquire ownership of the outstanding shares by squeezing out the remaining shareholders at a fair price (often the offer price).

Many takeover regulations will balance this with a ’sell-out’ right that allows the remaining shareholders to require that the offerer buys out their shares.

So they operate in a very similar way as drag along/tag along

Very good knowledge to know I agree!! Thank you for sharing this

 

[Aurochschiette]

Entire agreement clause (came up on an open day exercise): the contract contains the entirety of the agreement between the parties (meant to aid contractual certainty).

 

[W]

Entire agreement clause (came up on an open day exercise): the contract contains the entirety of the agreement between the parties (meant to aid contractual certainty).

Also generally seen as a boilerplate clause

 

[W]

When it comes to writing a letter to a client or respondent, how would you structure the commercial points?