How can you ensure that your private equity exit agreement is enforceable?

Private equity (PE) exit agreements are complex and often subject to disputes and litigation. Whether you are a PE fund selling a portfolio company or a founder or management team buying out the PE stake, you need to ensure that your exit agreement is enforceable and protects your interests. Here are some key aspects to consider when drafting and negotiating your PE exit agreement.

1 Deal structure

The deal structure of your PE exit can affect the enforceability of your agreement. For example, if you opt for a share sale, you may face more liabilities and warranties than if you choose an asset sale. You also need to consider the tax implications, regulatory approvals, and third-party consents that may apply to your deal. You should consult with your legal and financial advisors to determine the optimal deal structure for your exit.

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2 Representations and warranties

Representations and warranties are statements of fact or promises that each party makes to the other in the exit agreement. They cover various aspects of the business, such as financial performance, legal compliance, contracts, intellectual property, and employees. If a representation or warranty turns out to be false or inaccurate, the party that relied on it can seek remedies, such as indemnification, rescission, or specific performance. To ensure that your representations and warranties are enforceable, you should make them clear, accurate, and consistent with the due diligence findings. You should also disclose any exceptions or qualifications in a disclosure schedule.

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Ian Mann

BVI / Cayman Islands - litigator
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During my practice I have found that initial drafts of the reps and warranties often miss the financial statements. You must have provision as a buyer to ensure that the seller represents and warrants that the provided financial statements are accurate, complete, and prepared in accordance with applicable accounting principles. It includes representations regarding the absence of undisclosed liabilities or material adverse changes in the financial condition of the business. Without this, future litgation is going to be hamstrung.

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3 Indemnification and escrow

Indemnification is the process of compensating the party that suffers a loss or damage as a result of a breach of the exit agreement. Escrow is the mechanism of holding a portion of the purchase price in a separate account until certain conditions are met or disputes are resolved. Both indemnification and escrow are common ways to allocate risks and protect the parties in a PE exit. To ensure that your indemnification and escrow provisions are enforceable, you should specify the scope, duration, and limits of the indemnity obligations, as well as the terms and conditions of the escrow release.

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Ian Mann

BVI / Cayman Islands - litigator
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In my experience of drafting and negotiating indeminifcation provisions, you have to ensure that the indemnification provision covers a broad range of potential claims, damages, losses, liabilities, and expenses. It should address both third-party claims and direct claims between the parties to the contract. Be creative and consider every possible consequence - and therefore what needs to be covered.

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4 Dispute resolution

Dispute resolution is the method of resolving any conflicts or claims that may arise from the exit agreement. It can include negotiation, mediation, arbitration, or litigation. Each dispute resolution method has its own advantages and disadvantages, such as cost, speed, confidentiality, and enforceability. To ensure that your dispute resolution clause is enforceable, you should choose the most suitable method for your situation, as well as the governing law and jurisdiction that will apply to your exit agreement.

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Ian Mann

BVI / Cayman Islands - litigator
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I have persaonally noticed that deal lawyers can be very focused on the deal itself: the sale and the consideration. Often, however, there is not enough attention paid to the dispute resolution clauses in the contract. Dispute resolution clauses in a contract are intended to provide a mechanism for resolving disputes that may arise between the parties. The specific details of a dispute resolution clause can vary depending on the nature of the contract and the preferences of the parties involved. However, here are some key elements that dispute resolution clauses commonly cover: choice of forum, governing law, and choice of litigation or arbitration.

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5 Post-closing obligations

Post-closing obligations are the duties and responsibilities that each party has to fulfill after the completion of the exit transaction. They can include delivering documents, transferring assets, making payments, providing assistance, or complying with covenants. If a party fails to perform its post-closing obligations, the other party can seek remedies, such as damages, injunctions, or termination. To ensure that your post-closing obligations are enforceable, you should make them specific, measurable, and time-bound. You should also monitor and document the performance of the post-closing obligations.

Ensuring that your PE exit agreement is enforceable can help you avoid or minimize disputes and litigation, as well as safeguard your rights and interests. By paying attention to the deal structure, representations and warranties, indemnification and escrow, dispute resolution, and post-closing obligations, you can draft and negotiate a solid and effective exit agreement.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Douglas AMBER

Retired Lawyer
(edited)
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Three things. First, I’m a lawyer, but I’m not your lawyer. Opining on an agreement’s enforceability without knowing all of the facts and lots of details is beyond foolish. For most, the best course of action is: hire a competent lawyer (an actual human being) with proper licensure, and ask them for help. Second, when’s the last time you heard a lawyer use the word “ensure” in a sentence containing either: complexity, conflicting laws, dispute resolution, litigation, or private equity, etc? Never? 🧐 Third, there’s a reason why lawyers who do complex work are expensive. It’s difficult and fraught with liability and other peril. Trying to get free advice on the internet is, too. It can ruin one’s life.

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How can you ensure that your private equity exit agreement is enforceable?

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1 Deal structure

2 Representations and warranties

3 Indemnification and escrow

4 Dispute resolution

5 Post-closing obligations

6 Here’s what else to consider

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