Divisive Mergers and Impact on Fund Financings

Ann Richardson Knox and Christopher A. Davis

Introduction

Private equity and other types of investment funds (“Funds”) often utilize financing to more quickly access funds for investments, working capital and other purposes. Such financing products include both facilities secured by a Fund’s investment assets or the net asset value of the equity in such assets (“NAV Facilities”) and subscription-backed credit facilities. Subscription-backed credit facilities, sometimes referred to as “capital call” or “capital commitment” facilities (each a “Subscription Facility” and together with NAV Facilities, “Facilities”), are secured by pledges of the contractual rights of the Fund to require its investors to pay in capital to the Fund from time to time, which rights arise from the Fund’s organizational documents. The ability of a Fund to utilize such Facilities and the extent to which the contemplated security for a particular Facility is feasible requires careful review and consideration of the Fund’s governing agreement, usually a limited partnership (“LP”) or limited liability company (“LLC”) agreement.

While prior issues of the Market Review discussed updates in technology relating to Series LPs and LLCs and their impact on Facilities, this article focuses on recent changes in the laws relating to business entities that permit such entities to consummate transactions informally known as divisive mergers (each, a “Divisive Merger”). Such Divisive Merger statutes permit business entities to divide into multiple entities and to allocate liabilities and assets of the dividing entity amongst surviving entities. While other states were first in passing Divisive Merger statutes, this article focuses mainly on the recent changes in Delaware law, as most Funds organized in the United States are formed in Delaware.

Because Divisive Mergers permit business entities to restructure their assets and liabilities more easily, they can create problems for lenders (“Lenders”) in...