The Importance of Board Takeover Provisions for Independent Sponsors

There’s a lot that companies need to consider when deciding to pursue independent financial backing. 

The decisions companies make when striking deals almost always come back to control — a factor that has a significant impact on the future of the company. Depending on how much control the backer negotiates, different scenarios could lead to backers gaining significant veto rights, board control, or a total loss of management fees.

The process is complex and involves many moving pieces. That’s why we brought Alexander Horn and Anne Croteau — seasoned independent sponsor deal negotiators — on today’s episode of the podcast.

“A financial investor is going to want to have some control over any big corporate decision above a certain monetary threshold. [But] they don't want to get into the day-to-day and they don't want to get into the nitty-gritty … that's not their focus. It takes them away from their main focus, which is finding additional investment,” says Anne. 

On this week’s episode of Deal-by-Deal, Anne and Alex walk us through what considerations should be made when discussing independent sponsor deals and what’s at stake.

Featured Guests

Name: Alex Horn

Title: Partner at McGuireWoods

Specialty: Alex is focused on private equity and other finance transactions. In the past, he has represented business development companies (BDCs), small business investment companies (SBICs), and other private debt funds.

Connect: LinkedIn 

Name: Anne Croteau

Title: Partner at McGuireWoods

Specialty: Anne is focused on private equity and other financing transactions, mergers and acquisitions, and general corporate matters. She has represented lenders in first lien, unitranche, second lien and mezzanine credit facilities, equity co-investments, and kickers. She has experience advising on intercreditor relationships, capital structures, and complex restructurings.

Connect: LinkedIn

Acquired Knowledge

Top takeaways from this episode 

★    Negotiations are all about control. Different types of partners will have different outcomes and control issues: a family office might offer pure equity while a lender like a small business investment company will instead require significant equity backing. The type of partner will determine the level of control it has over your company: for example, large-scale and influential financial backers are likely to require significant control of your board as well as asking for veto rights and involvement in major financial decisions.

★    Corporate sponsors generally don’t want to be involved in management. While corporate sponsors might have a significant amount of control, they don't want to be involved in the daily details. An independent sponsor’s main job is to find good investments.

★    Consider the interests of every financial backer. Dealing with equity backers and debt financial backers could result in conflicts of interest if the interests of all parties are not taken into consideration when these deals are initially made. In some cases, management fees could be lost or a debt could go into default.

Episode Insights

[00:29] Meet our guests: Anne and Alex, longtime partners at McGuireWoods, join us on the podcast to discuss a topic that comes up in every deal: determining fair distribution of control between independent sponsors and capital providers.The issue was a recent point of discussion at the 2022 McGuireWoods Independent Sponsor Conference.

[01:40] The basics: Anne and Alex explain the two typical kinds of partners involved in independent sponsor deals. Each comes with its own unique control issues.

[03:13] The desire for control: Anne explains when independent sponsors will expect significant control of a company, particularly when making sizable investments.

[05:50] Veto rights: How should independent sponsors think about and negotiate veto rights with sponsored parties? Can different circumstances call for different veto rights? What’s the proper scope?

[08:53] Board takeovers: It’s possible for financial backers to take over the board of the company they are supporting, but it doesn’t happen right away. So what triggers takeovers? And what should sponsors keep in mind when negotiating these types of provisions?

[14:28] When both parties agree: It is possible for board takeovers to be a mutually agreed upon decision. Anne’s seen this particularly in lower to middle market companies.

[17:27] Backer involvement: Corporate sponsors don’t always want to have deep involvement in the management of a company. Ann and Alex explain why.

[21:56] Management fees can be fragile: If independent sponsors lose control, management fees can be significantly reduced or completely shut off. Alex and Anne explain what kind of financial impact they can have and what companies should consider when drawing up a loan agreement.

[29:06] Regaining control: Can independent sponsors get control back after losing it? Under what conditions is that possible? Anne has been asking herself these questions amid some recent cases. She tells us why the loss of control is often a “one-way switch.”

[33:14] Connect with us online: To learn more about today's discussion and our commitment to the independent sponsor community, please visit our website.

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