388 10 Exit of Shareholders
In practice, however, this rule has not hindered takeovers by private-equity
firms. This is because the subsequent merger of the target with the special purpose
company that is the buyer is not regarded as a prohibited form of financial assis-
tance (section 20.4).
Trade sale or IPO? If the distributable assets of the target have already been
distributed to owners, the private-equity firm is less dependent on the outcome of
the sale for profits. However, the private-equity firm will want to increase profits
and get a good price for the target’s shares. It is important to decide how to sell the
shares. The usual alternatives include an IPO and a trade sale. Shares can also be
sold to another private-equity firm, or there can be a share exchange or merger.
If the takeover was very large, an IPO will in practice be the only exit form.
First, a large competitor might be unable to buy the target because of competition
laws (Chapter 14). Second, another private-equity firm would not be able to refi-
nance the transaction because the target will be loaded with debt and have a very
lean balance sheet. For this reason, there might not be a market for very large pri-
vately-owned companies.^273
10.6 Walking Away.....................................................................................
Investors do not always make a profit. In seed finance, most exits take the form of
complete write-offs. It is part of normal banking practice to write off bad debts.
Many trade debts must be written off as a credit loss. Walking away is therefore
one of the most common forms of exit (see section 8.2).
IFRS. One of the oldest accounting principles in most jurisdictions is that assets
must not be carried at more than the amount that the entity expects to recover from
their use or sale. This impairment principle is included in every IFRS that deals
with assets.^274
Insolvency laws and liability. Where the investor is a controlling shareholder of
a company, it may be more difficult for it just to write off the investment and walk
away. First, the investor may have given personal guarantees for the debts of the
company and can therefore be made personally liable according to their terms.
Second, insolvency laws, the existence of fiduciary duties, or the doctrines of “lift-
ing the veil” or “Durchgriff” may sometimes make a controlling shareholder per-
sonally liable to the company or its creditors where the investor can be said to
have abused the company’s assets or caused the company’s insolvency. In some
cases, the parent can be made responsible for subsidiary corporations.^275 Third, the
investor or its board members or managers may also have participated in the gov-
(^273) See, for example, Große Beteiligungsfonds in der Ausstiegsfalle, FAZ, 25 July 2006
p 17.
(^274) See Cairns D, The Use of Fair Value in IFRS, Accounting in Europe 3(1) 2006 pp 5–22.
(^275) Generally, see Hofstetter K, Parent Responsibility for Subsidiary Corporations: Evaluat-
ing European Trends, ICLQ 39 (1990) pp 576–598. In the US, the Bank Holding Com-
pany Act lays down a “source of strength” obligation that can require a holding com-
pany to inject capital into ailing bank subsidiaries.