Private Equity In The Crosshairs

Author:Mr Roger Lane and Courtney Worcester
Profession:Foley & Lardner

Law360, New York (July 11, 2012, 12:26 PM ET) -- As matters presently stand, it is shaping up to be a long year for private equity firms. The continued European crisis, speculation on whether countries will withdraw from or be forced out of the Eurozone, and conflicting economic data have, among other factors, caused uncertainty as to whether the world is on a continuing path to recovery, or headed back into recession. All of this is clearly weighing on the financial markets and impacting decision-makers at companies large and small.

Consequently, corporations continue to hoard cash and take a "wait and see" approach, rather than putting the money to use in M&A activity. Through the first half of the year, private equity firms have been involved in a total of 364 mergers and acquisitions in the United States and Canada, as the M&A market in North America is turning out to be less robust than had been hoped for at the start of the year.

Further, even when M&A transactions do occur, private equity firms are drawing unwanted attention from shareholder lawsuits challenging various aspects of these transactions. In addition, in the wake of the Dodd-Frank Act, private equity firms are facing enhanced regulation and more public disclosure obligations. The U.S. Securities and Exchange Commission has also indicated that private equity is an industry upon which the SEC intends to focus this year.

And then there is the impending presidential election. Presumptive Republican nominee Mitt Romney's previous work at Bain Capital has been, and likely will continue to be, a focus of political ads that seek to cast all private equity firms as "vulture capitalists." All of this public attention and regulatory scrutiny cannot be comfortable for an industry that, in general, seeks to avoid the spotlight and does not subscribe to the maxim that "there is no such thing as bad press."

Amid this flurry of information and activity, the first six months of the year have nonetheless provided insight into certain specific legal hurdles and challenges that private equity firms are likely to be faced with in the coming months.

Challenges to Valuation Methodologies

Until recently, the SEC appeared more focused on hedge funds than private equity firms generally. That has now changed. Robert B. Kaplan, co-chief of the SEC Enforcement Division's Asset Management Unit effectively confirmed the SEC's increased interest when he commented recently that the private equity...

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