Private Equity Minority Investments - Universität St.Gallen

Part One: Introduction and Theoretical Foundationsincreasing focus on strategic initiatives and operational improvements togenerate returns as opposed to relying solely on leverage effects andmultiple expansions. To ensure that the envisioned strategies for enhancingfirm value are actually implemented in the future, PEMIs tend to expect anddemand significant voice in corporate decision making, especiallyconcerning strategic decisions. Secondly, during the last investment cycleending in 2007, in theory and practice, private equity investors’ voicerelatedrights received comparatively little attention mainly becauseleverage had been widely available at favorable terms, so that private equityinvestors had the means to buy majority stakes and receive voice de factowithout entering into complex negotiations to obtain special protectionrights. Today, with broadening focus on minority investments, interest hasturned to the legal options through which private equity investors canprotect their interests as minority shareholders. Thirdly, from a legalperspective, exit rights largely rely on contractual arrangements with thenegative side effects of limited duration and enforcement uncertainty.Shareholders’ agreements are also the principal tool for PEMIs to securevoice in corporate decision making, but the options for securing voice at thecorporate level via the articles of association and the organizationalregulations, and thereby enhance the duration and enforceability of thevoice-related agreements, are also manifold. Fourthly, an unplanned, earlyexit is a protection measure of last resort as the abandonment of the projectis not the hoped-for outcome if it involves a degree of loss or at the veryleast, unfulfilled return expectations. Conversely, voice is a preventivemeasure of protection that allows PEMIs to actively influence corporatedecision making throughout the investment period. 25 Voice-related rightshelp prevent fallouts between the shareholders from occurring in the firstplace, or if they cannot prevent them, voice-related rights help solve theseconflicts rather than enabling the PEMI to ‘cut and run’. 26 Hence, voice isimportant as it allows the PEMI to protect and grow an investment. Forthese reasons, this dissertation focuses on voice and voice-related measures.Yet, the author recognizes that the effectiveness of voice also relies oninformation and exit rights that strengthen the effectiveness of voice. 27By focusing on voice and touching upon access to information and exitrights, three primary questions shall be addressed in this dissertation: (i) Towhat extent does prevailing Swiss law grant PEMIs voice in corporatedecision making, access to information, and exit rights? (ii) What potentialdeficits in terms of voice, access to information, and exit should PEMIs252627See HIRSCHMAN, p. 37.See HAYMANN, p. 26.For more details, see Section VI.B.2.6