10.5 Private Equity and Refinancing 387the distributions to shareholders in public limited-liability companies (such as plc,
AG, SA and SE). In addition, a high gearing and the risk of insolvency are likely
to limit the amount of distributable funds according to the national provisions of
Member States’ company laws.
One of the most important ways to address legal concerns is to ensure that the
target has only one shareholder (a squeeze-out right may be used) and, if the target
was a listed company, to take it private (delisting). The target’s shares will usually
be owned by a limited partnership (after the merger of the special purpose com-
pany that was the buyer and the target). As there are no external minority share-
holders claiming equivalent treatment or the furtherance of the long-term interests
of the firm, it is easier to decide on distributions to the limited partnership, and it
is easier for the limited partnership to make payments to its own owners (private
equity investors).
From the perspective of the private-equity firm, there is an agency problem be-
tween the private-equity firm (the principal) and the target’s board (the agent).
Because of the thin line between making extreme distributions to owners (which is
legal) on one hand, and making payments that lead to the company’s insolvency
(which is prohibited and may lead to civil remedies, criminal sanctions, or both)
on the other, the role of the target’s board is crucial.
The private-equity firm could address this agency problem by ensuring that the
board consists of its own people. However, this might expose them to liability in
the event that the board does not comply with its legal obligations.
Alternatively, the private-equity firm could mitigate: the liability risk by ap-
pointing executive members and “independent” members; and the agency problem
by giving those executives a substantial block of shares in the target and remuner-
ating outside board members well.
As a result, the limited partnership is thus the sole shareholder, unless the top
managers of the target company have been given a block of shares in order to
align their interests with those of the private-equity firm and make them friendlier.
In particular: financial assistance by the company. The Second Company Law
Directive prohibits the provision of financial assistance to those who might want
to acquire the company’s shares. A company “may not advance funds, nor make
loans, nor provide security, with a view to the acquisition of its shares by a third
party” (for exceptions, see section 20.4).^271
The wording of the Directive is so broad that it could ban some leveraged buy-
outs because the assets of the acquired company would, in fact, be the security for
the acquisition. Interestingly, the original rationale for the prohibition of financial
assistance in England was the prevention of “asset-stripping” takeovers or lever-
aged buy-outs.^272
(^271) Article 23(1) of Directive 77/91/EEC (Second Company Law Directive).
(^272) See Armour J, Share Capital and Creditor Protection: Efficient Rules for a Modern
Company Law, Modern L R 63 (2000) p 368; Enriques L, Macey JR, Creditors Versus
Capital Formation: The Case Against the European Legal Capital Rules, Cornell L R 86
(2001) p 1181.