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Partner Piece: Management Representation from Marriott Harrison LLP

September 16, 2024

Partner Piece – Management Representation

 

By Daisy Divoká, M&A Partner at Marriott Harrison LLP

 

The essential need for separate representation for management in PE-backed M&A deals

Private equity-backed (PE) buyouts are complex transactions, involving multiple stakeholders with differing objectives. In these deals, management teams find themselves in a delicate position — torn between their past relationship with the sellers and their future alignment with the new PE investors. This dual loyalty creates inherent risks and potential conflicts of interest, making separate representation for management not just a good idea, but a necessity.

Navigating conflicting interests

The interests of sellers and PE buyers often diverge, especially when it comes to issues like sale price, transition terms, and equity stakes. Sellers are typically focused on maximising the value of their exit, while the PE buyer is looking for the best possible terms for long-term value creation. Caught in the middle, management teams face concerns over their continued role, employment terms, and their own equity incentives. Having their own legal counsel allows management to focus on safeguarding its future within the new company structure, particularly when negotiating key provisions like leaver terms, share incentives, and employment agreements.

Increasing negotiating power

Separate legal representation gives management the power to negotiate independently from the buyer and seller, ensuring their voice is not drowned out by larger parties. This is especially important when it comes to negotiating future equity incentives, bonuses, and employment terms, all of which are critical for management’s long-term engagement with the business. With their own legal advisor, management teams are better equipped to secure favourable outcomes that align with their financial goals and professional roles. This is especially relevant for equity incentives. In many PE-backed deals, management’s compensation is tied to future company performance, often through shares or options that align with the company’s growth trajectory, striking a balance between risk and reward.

Building trust with PE buyers

Private equity firms often depend heavily on management teams to drive the future success of the business they’re acquiring. Separate legal representation for management not only protects the team but also signals to PE buyers that management is committed to the process and well-advised. This transparency fosters a healthier working relationship between the buyer and management, reducing the chances of future disputes and aligning expectations early on.

In many cases, the cost of separate legal counsel is covered by the buyer or the newly formed company, which further encourages collaboration. When this happens, it demonstrates a commitment to fair dealings and sets the stage for a productive and long-lasting partnership. With independent advice, management teams are more likely to engage fully and confidently, knowing their interests are safeguarded.

Protecting confidential information and fiduciary obligations

Management is often privy to sensitive company information during a transaction, making it critical that their personal interests are protected. There’s a risk that confidential information could be compromised, or management could inadvertently breach their fiduciary duties to the company. Separate representation assists management with balancing their duty to the company with their personal interests in the newly structured business.

Compliance with Solicitors’ Conduct Rules

Solicitors are bound by strict rules to act in the best interests of their clients, which makes it difficult — if not impossible — for a single firm to represent both the management team and the seller or buyer in a PE-backed transaction. In situations where the interests of the seller, buyer, and management diverge significantly, separate legal representation for management is not only advisable but often a legal necessity.

Conclusion: Separate representation as a best practice

Separate legal representation for management in PE-backed M&A transactions is becoming widely recognised as best practice. It allows management teams to protect their interests, gain negotiating power, and foster stronger relationships with PE buyers. Ultimately, this approach creates a more balanced and transparent transaction process, benefiting all parties involved. By ensuring that management is fully and independently represented, both the deal and the post-transaction environment are set up for greater long-term success.

 

Get in touch

Marriott Harrison is a specialist law firm, partnering with leaders, entrepreneurs and investors to make smart, informed decisions.

Our expertise is rooted in M&A and venture capital deals, spanning legal advisory and transactional needs for SMEs, private equity and venture capital houses, growth capital funds, banks and high net worth individuals. Established and operating from our base in London, we work alongside management teams building and scaling exceptional companies across the UK, Europe and the US, delivering the strategic insight they require to make bold, informed decisions.

If you would like more information, please contact Daisy Divoká at daisy.divoka@marriottharrison.co.uk.

Visit us at marriottharrison.com

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