Question: Case Study: You are working as a solicitor in the corporate department of Little & Titchfield law firm.

Legal Aspects of Corporate Finance 7LLAW031W                                                       

Case Study

You are working as a solicitor in the corporate department of Little & Titchfield law firm. You have been instructed by Margaret and Paul (“the Managers”), the two directors of Shakespeare Ltd (“SL”), a company that runs English language courses in London. SL is a wholly owned subsidiary of Marco Polo Plc (“MPP”). MPP is the holding company of a group of companies operating in the travel industry.

Following the Covid pandemic and its impact on travel, SL have been struggling financially. Rather than invest money to rebuild SL’s business, MPP have decided to sell the company for around £5 million and concentrate on rebuilding their other core businesses.

The Managers have been running SL for the last 15 years and feel strongly that the company could flourish once again with the right amount of investment and some fresh ideas. They have plans to widen the type of courses on offer and to diversify into selling their own range of language training resources.

The Managers have already been in discussion with MPP to negotiate a possible management buy-out and are in the process of seeking out external investors. They have approached Austen Investments LLP (“AIL”), a private equity firm who are willing to invest £2 million in shares and loan notes on the basis that they secure an exit after 4-5 years. AIL’s preferred exit route is by way of an initial public offering.

SL’s bank Wordsworth Bank Plc (“WBP”) are prepared to lend another £2 million, secured on the assets of SL and any investment and acquisition vehicle. The Managers have also been able to secure personal loans of a total of £500,000. The remaining £500,000 (to reach the sale price of £5 million) is to be financed either by additional mezzanine finance or by way of an investment in shares by Paul’s sister.

The Managers have asked you to advise on the following:

1. Would buying shares in SL be a good investment?

2. How should the Managers finance the remaining £500,000? What would be the benefits and drawbacks of debt vs equity finance?

3. If the deal goes ahead, how might it be structured to accommodate the interests of all parties?

4. What provisions and safeguards are AIL and WBP likely to ask for and why?

5. What regulations will need to be considered in the event of an initial public offering?