Regulation of Private Equity - Backed Leveraged Buyout Activity in Europe

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.

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

JEL Classification: G30, G38, K22