Required reading

1. EU: Second Company Law Directive, art. 23

2. D: AktG, §§ 56, 57, 71a, 71d, 291 III, 308, 311

3. UK: CA 2006, secs. 677–683

4. US: Uniform Fraudulent Transfer Act, §§ 1–8

Using the target's assets to pay for the purchaser's plans

Introduction

What is a leveraged acquisition?

In Chapters 24 and 25, we looked at the regulation of takeover offers, focusing on required disclosure and the timing and scope of bids, as well as the actions that boards may take to block such offers. This chapter turns to the special problems connected with bids that are financed with debt, particularly debt secured by the assets of the target corporation or assumed by the target when it is merged into a successful bidder. Such a leveraged acquisition is usually referred to as a “leveraged buyout” or LBO, and has been defined as “a shorthand expression describing a business practice wherein a company is sold to a small number of investors, typically including members of the company's management, under financial arrangements in which there is a minimum amount of equity and a maximum amount of debt.” The debt is usually incurred, secured or assumed by the target company itself. As we have discussed at length in Chapter 6, the word “leverage” refers to an increase in the proportion of fixed obligations (here, debt) in the capital structure to maximize the stream of earnings per share of the equity interests.