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Regulation of Private Equity - Backed Leveraged Buyout Activity in Europe


Eilis Ferran


University of Cambridge - Faculty of Law; European Corporate Governance Institute (ECGI)

May 2007

ECGI - Law Working Paper No. 84/2007

Abstract:     
Private equity-backed leveraged buyout activity in European markets has risen to unprecedented levels in recent years. This has yielded significant economic benefits but it has also prompted deepening concerns about excessive leverage, conflicts of interest, market abuse and general lack of transparency. For policymakers the challenge is to maintain a balance between these competing considerations so that economically worthwhile activity can take place but abusive conduct that is socially wasteful is effectively curtailed. Recent initiatives, such as the European Commission's 2005 Green Paper and 2006 White Paper on investment funds and the UK Financial Services Authority's 2006 paper on private equity, indicate that responses to this challenge are being actively developed.

This article reviews key recent regulatory changes in Europe which, though not necessarily conceived with the private equity-backed leveraged LBO segment of the market specifically in mind, may have significant repercussions for it. The article also considers the market's experience with Article 23 of the Second Company Law Directive on financial assistance, a provision that has been only lightly affected by recent reforms. Superficially, Article 23 appears to address one of the classic agency problems in LBOs, namely, that of target company assets being stripped to service the debt incurred for the acquisition and to provide a quick return to the bidders. However, in reality the LBO market has found ways round Article 23. A conclusion that can be drawn from this gap between appearance and reality is that in determining whether new measures should be added to the corpus of EC law in order more effectively to curb abuse and excess in LBOs, no-one should be under any illusion that there already is robust protection, in the form of Article 23.

Number of Pages in PDF File: 37

Keywords: leveraged buyouts, European company and securities law, action plans, financial assistance

JEL Classification: G30, G38, K22

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Date posted: May 30, 2007  

Suggested Citation

Ferran, Eilis, Regulation of Private Equity - Backed Leveraged Buyout Activity in Europe (May 2007). ECGI - Law Working Paper No. 84/2007. Available at SSRN: http://ssrn.com/abstract=989748 or http://dx.doi.org/10.2139/ssrn.989748

Contact Information

Eilis Ferran (Contact Author)
University of Cambridge - Faculty of Law ( email )
10 West Road
Cambridge CB3 9DZ
United Kingdom
+ 44 1223 338335 (Phone)
+ 44 1223 338340 (Fax)

European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
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