Letter From The Editors

Identifying and managing risk is an essential concern for private equity funds. Some risks, like the upheaval brought on by the COVID-19 pandemic, are novel and arrive with little warning. Many others, however, can be spotted in advance, through policy pronouncements or developments in case law, giving agile investors an opportunity to revise strategy and, where possible, to take appropriate countermeasures.

In our 2020 Private Equity Report – Year-End Review and Outlook issue, we noted the uncertainty that came with a new administration in Washington. In the months since then, a clearer picture has emerged of the challenging antitrust environment that dealmakers now face, both in the United States and abroad. Recent developments under Delaware case law have also affected risk assessment by private equity investors. Sponsors can no longer make formerly safe assumptions regarding the redemption of preferred shares or certain M&A litigation risks with respect to minority investments. Other disputes illustrate that a private equity fund’s ability to pursue arbitration against a foreign state under investment treaties may be adversely affected by the fund’s structure.

In this issue of the Debevoise Private Equity Report we hope that our review of the shifting risk landscape is helpful as you plan your own risk mitigation strategies.

• Getting Private Equity Deals Done in the Current Antitrust Environment
  M&A transactions are facing heightened scrutiny from regulators in Washington and around the world. Sponsors are being asked by the FTC to discuss their pipeline and industry track record, “warning letters” are injecting unquantifiable but real risk into deal timelines, and the EU is now examining deals that fall below the Merger Regulation thresholds. Takeaways from a recent Debevoise webinar for private equity leaders highlight the key obstacles to getting deals done.
• Preferred Equity Redemption Rights: “The Bitter and the Sweet”
  Private equity investors have relied on preferred equity in deal structures since long before the recent spate of PIPE transactions. But while the redemption rights of preferred equity may seem on the surface to be similar to debt, a recent case before the Delaware Court of Chancery serves as a reminder that the reality is more complex and that those rights are not absolute. Astute investors in preferred securities can strengthen those rights through provisions in the preferred equity’s terms.
• Risk of Imputed Control in Delaware Shareholder Litigation
  Recent cases in Delaware make it clear that significant minority investors in publicly traded companies without voting control can no longer assume that they are free from being labeled a controller in M&A litigation. The procedures outlined in the 2014 MFW case provide a roadmap private equity firms can use to mitigate that risk when entering a transaction involving a publicly traded company.
• Fund Structuring and Investment Treaty Protections
  All disputes regarding foreign investment are challenging, but those involving a claim against a foreign government raise unique issues for private equity funds. Investment treaties can provide important protections to foreign investors that can be enforced though international arbitration against the government in question. However, the extent to which private equity investors can rely on those protections greatly depends on the fund structure.