A management buyout is a corporate acquisition where a company is bought by the members of its management (CEO, CFO, COO, CHRO, CBDO, CIO, CMO, CAE, CRO etc.). In Hungary, such transactions are typically financed from bank loans, where the steps of the process must be agreed with the financing bank’s lawyers.
The process begins with a due diligence review of the target company. This is a not undertaken on behalf of the buyers, because the members of the management will know the company better than the seller. Instead, the review will focus on legal and financial matters on the bank’s behalf, because the bank will want to know the target company’s contract portfolio, its finances and profitability, and the risks associated with financing the transaction.
The bank’s indicative offer is followed by a number of preparatory steps. For example, the members of the management will have to establish an SPV, typically a limited company. The SPV will act as the buyer in the management buy-out and will take out the bank loan. In a management buyout, the financing bank will usually not lend an amount that equals the full price and will require the members of the management to contribute a part of the price. Therefore, the relevant amount must be contributed to the registered capital and the capital reserve at the establishment of the SPV. If the members of the management have already established an SPV, the bank will require them to increase its capital due to the provision of the contribution.
Another important step in preparation for the buyout is that the members of the management should conclude a shareholders’ agreement to regulate post-closing ownership matters.
Once the necessary steps are completed, the seller and the buyer(s) can sign the sale and purchase agreement, but it will not take effect immediately. There are many conditions that must be met before the agreement can take effect, including the signing of the loan agreement between the bank and the buyer(s), the charging of the shares held by the managers in the SPV and of the target company’s assets in favour the bank, the assignment of the target company’s claims to the bank, agreement by the mangers to act as surety, the bank’s issue of an irrevocable promise of loan disbursement, etc.
The document that serves to give effect to the sale and purchase agreement is typically signed at the financing bank’s offices. If both the seller and the buyer opens an account with the bank, the financial side of the deal will be completed in a matter of moments.
Many legal steps remain after the buyout is completed. The newly acquired company’s founding document must be modified, because it must include the new owner, which must also be recorded in the Company Register. The new shareholders’ list will also state that the new owner’s share is charged in favour of the bank.