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Management Arrangements in Private Equity Transactions

Management Arrangements in Private Equity Transactions . Julie Jones, Ropes & Gray LLP Pamela Baker, Sonnenschein, Nath and Rosenthal LLP ALI-ABA Executive Compensation Seminar June 21, 2007. The Basics -Equity Arrangements. “Rollover” Equity Structuring Issues Tax Free Rollover

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Management Arrangements in Private Equity Transactions

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  1. Management Arrangements in Private Equity Transactions Julie Jones, Ropes & Gray LLP Pamela Baker, Sonnenschein, Nath and Rosenthal LLP ALI-ABA Executive Compensation Seminar June 21, 2007

  2. The Basics -Equity Arrangements • “Rollover” Equity • Structuring Issues • Tax Free Rollover • IRC Section 409A • IRC Section 424 • Securities Law Concerns • Section 5 exemptions • Avoiding tender offer rules • 10b-5 disclosure issues • Market Terms

  3. The Basics -Equity Arrangements • The “New” Equity Pool • Types of awards • 409A issues • Size of pool • Holdback • Participants • Exercise price • Determining fair market value

  4. The Basics -Equity Arrangements • The “New” Equity Pool (cont) • Vesting terms • Time based • Performance based – common triggers: • EBITDA • MoM • IRR • Acceleration events • Change of control (single vs. double trigger) • Certain types of employment termination

  5. The Basics -Equity Arrangements • Exercisability following employment termination • Cashless exercise/tax withholding

  6. The Basics -Equity Arrangements • Common concerns: • Liquidity issues • Complexity of capital structure • Extraordinary events • Transaction and management fees

  7. Typical shareholder rights provisions • Puts/calls • Transfer restrictions • Drag-Along • Tag-Along • Preemptive rights • Registration rights

  8. Compensation Arrangements • Severance levels • Bonus protection • Non-compete • 280G gross-up • Retention bonuses

  9. Process Issues • For going private transactions, several issues affect timing of when management arrangements are negotiated: • Rule 13e-3 transaction • Proxy disclosure • Delaware case developments, including Netsmart • Section 13(d) disclosure

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