A preferred equity purchase agreement (PEPA) is an agreement that governs the terms and conditions of the purchase of preferred equity in a business. Preferred equity is a type of ownership that gives investors certain rights and benefits over common equity holders, such as priority in receiving dividends and a higher claim on assets in the event of liquidation.
PEPAs are commonly used in private equity transactions, where investors are looking to invest in a company without taking on the risk and control associated with common equity ownership. In a PEPA, the investor typically agrees to purchase a certain number of shares of preferred equity in the company, in exchange for a set price and a set of terms and conditions.
One of the key features of a PEPA is the rights and preferences of preferred equity holders. These may include the right to receive dividends before any distributions are made to common equity holders, the right to vote on certain matters, and the right to receive a higher amount of proceeds in the event of a liquidation or sale of the company. These rights and preferences are often negotiated between the investor and the company, and may vary depending on the specific terms of the PEPA.
Another important aspect of a PEPA is the purchase price and payment terms. The purchase price may be based on a valuation of the company, or may be a fixed amount negotiated between the parties. Payment terms may include a lump sum payment at closing, or may be structured as a series of payments over time.
PEPAs may also include representations and warranties from both the company and the investor. These may include representations and warranties related to the company’s financial statements, operations, and legal compliance, as well as representations and warranties related to the investor’s ability to purchase and hold the preferred equity.
In addition, PEPAs may include provisions related to the transferability of the preferred equity, restrictions on the company’s ability to issue additional equity, and other terms and conditions that are specific to the transaction.
Overall, a preferred equity purchase agreement is a key document in private equity transactions, and should be carefully negotiated and drafted to ensure that both parties understand their rights and obligations under the agreement. If you are considering investing in a privately-held company, it is important to consult with experienced legal and financial advisors to help you navigate the complex terms and conditions of a PEPA.
