Private Company Acquisition Agreements:

Drafting Reps, Warranties, Covenants and

Closing Conditions

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

The audio portion of the conference may be accessed via the telephone or by using your computer's

speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.

WEDNESDAY, APRIL 25, 2018

Presenting a live 90-minute webinar with interactive Q&A

William Price, Growth Law, Sometown, Ill.

Iain Wood, Partner, Akin Gump Strauss Hauer & Feld, Washington, D.C. & Dallas

Tips for Optimal Quality

Sound Quality

If you are listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory, you may listen via the phone: dial

1-866-570-7602 and enter your PIN when prompted. Otherwise, please

send us a chat or e-mail sound@straffordpub.com immediately so we can address

the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing Quality

To maximize your screen, press the F11 key on your keyboard. To exit full screen,

press the F11 key again.

FOR LIVE EVENT ONLY

Continuing Education Credits

In order for us to process your continuing education credit, you must confirm your

participation in this webinar by completing and submitting the Attendance

Affirmation/Evaluation after the webinar.

A link to the Attendance Affirmation/Evaluation will be in the thank you email

that you will receive immediately following the program.

For additional information about continuing education, call us at 1-800-926-7926

ext. 2.

FOR LIVE EVENT ONLY

Program Materials

If you have not printed the conference materials for this program, please

complete the following steps:

• Click on the ^ symbol next to “Conference Materials” in the middle of the left-

hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

FOR LIVE EVENT ONLY

Enforcing Your

Deal

Presenter: William A. Price, Attorney at

Law, www.growthlaw.com

5

Part I: Contract

Terms

CONTAINING

Reps and

Warranties

6

Contract Representations and

Warranties I: Essentials

• Duly organized entity in good standing

• Authority in signer and company to do deal

• Capital structure permits deal: clause also defines whose votes needed: complete corporate book attached, with permissions

• No third party rights or liens that could prevent or void the deal

• Good title to all property in deal

7

Representations and

Warranties II: Enforceable

Financials

• Financial statements accurate, current, follow GAAP

• Real property, capital equipment, other asset schedules are accurate

• Equipment is in good repair except for ordinary wear and tear

• All taxes paid, no returns due, no tax authority liabilities/investigations pending

8

Representations and

Warranties III: Disclosures

• No undisclosed liabilities

• Complete A/R schedule is attached

• Complete A/P schedule is attached

• All taxes paid, no returns due, no tax authority liabilities/investigations pending

• No questionable payments/illegal operations

• Finders fees for deal n/a or scheduled

9

Representations and

Warranties IV: No Material

Changes

• No material adverse change in business

• No sales not in ordinary course

• No casualty loss beyond defined amount

• No change in managers or other key employees

• No liability settled or incurred not in ordinary course

10

Representations and

Warranties V: No Material

Changes, Continued

• No change in a/p outside of ordinary course

• No debt or other obligation beyond $ limit

• No delay of dividend or other capital

return/change of capital structure

• No change in employment contracts or terms

• No other material non ordinary agreements

11

Representations and

Warranties VI: Intellectual

Property

• Company IP (patents, trademarks, copyrights, trade secrets, etc…) is all current/still protected

• Company owns all IP/no 3d party permission needed to use same

• No infringement by Company of 3d party IP rights

• No IP royalties or other payments due

• No IP claims or other litigation pending or known

12

Representations and

Warranties VII: Contracts And

Claims

• Complete schedule of material contracts attached

• No lawsuits or administrative actions pending, settlements in force, judgments due (or scheduled)

• Insurance contracts and schedules are in force as attached

• No product liability or warranty claims known or likely

• Employee benefit plans and relations good/in compliance, plans scheduled, no strikes or claims likely (or scheduled)

13

Part II:

Contract Terms

LIMITING Reps

and Warranties

14

Representations and

Warranties Limits

• Routine Lawyer Argument/Negotiation

• Big Firms Argue For ABA Percentage Loss

Limits For all Reps And Warranties: Small

For No Limits

• Additional Terms To Protect Seller

15

ABA Terms Survey

• Annual Or Biennial Survey

• Deals Covered Usually $10 million plus in

amount/annual sales of companies

involved

• Firms Surveyed Are National/Big Regional

Law

16

ABA Private Target Deal Points

Survey 2017

• 2016 and 2017 (Q1, Q2) deals

• Covers acquisitions of privately held targets

by publicly held buyers

• 139 deals, from $30 to $500 million, average

size $176.2 million

17

ABA Terms Survey 2017

• Representations and Warranties Insurance

was present in 29% of deals

• Post-Closing Purchase Price Adjustments

present in 86% of deals

• Separate escrow for purchase price

adjustment up 20%, use in addition to

indemnifications escrow

18

ABA Terms Survey 2017

• 95% of indemnification limits were where 1% or less of deal value involved: average 0.79%

• 15% of deals required violations to be “material”

• Cap on indemnification 6% if R&W insurance present, 15% average in other deals

19

ABA Terms Survey 2017

• 1/3 of all Escrows/Holdbacks Sizes were 3% or less of deal value

• Buyer Remedies were not limited to Escrows/Holdbacks

• 90% of deals limited non-fundamental warranties to 18 months or less

20

GF Data Terms Survey Q1 2018

• Indemnification caps on $10-250 million PE sponsored transactions fell from 15.9% to 12.1%

• This was most frequent in $50-250 million space, where R&W insurance used in 65% of tranxations

• R&W insurance overall up to 42% of all deals, from 7.7% in 2016

21

SRS Acquicom Survey 2017

• Study of 795 acquisitions 2013-2016

• Separate escrow for purchase price adjustment up to 39% in 2016 deals, from 25% in 2015

• Survival period for reps and warranties down to 16 months from 18 (less used for fundamental R&W)

• No anti-sandbagging (no fail if closed despite misrepresentation) in 2016 agreements

22

SRS Acquicom Survey 2017

“No Reliance” or “no other representations” (escept those in deal packets) or other measures vs fraud outside of deal terms actively negotiated, sellers not very successful in inserting

• “Material Adverse Effect” standard to get damages for R&W violations up to 43% of 2016 deals, from 31% 2015

• Management carveouts to let seller management get % despite liquidation preferences common

23

Additional Reps And Warranties

Limits Terms To Protect Sellers

• CBS Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496 (1990) a warranty is a promise of indemnity if a statement of fact is false. A promisee does not have to believe that the statement is true. Indeed, the warranty's purpose is to relieve a promisee from the obligation of determining a fact's truthfulness. “No Sandbag” eliminates this protection for buyers with some evidence showing deal problems. Note terms not much used, per Acquicom 2016 survey.

24

Purchase Price Escrows To

Protect Buyers

• Escrow Of Purchase Price Amount For Post-Closing Adjustments/Rep and Warranty Claims Period

• Note limits on amounts to 3% of deal in many cases, but other remedies cumulative

25

R&W Insurance

• In addition to escrows, a recent trend has been for parties to use insurance to cover breaches of the representations and warranties from a third party insurance provider (i.e., R&W Insurance).

• Typically a buyer will obtain the coverage of the seller’s representations and warranties; however, sellers do on occasion obtain the coverage for their own piece of mind or to have a ‘walk-away’ deal.

• In order to obtain the coverage, buyer or their counsel will prepare a diligence memo summarizing any key findings that will be shared with the insurance provider and their counsel and typically have several calls to discuss such findings.

• Known items are typically excluded and only unknown risks are covered.

• Other typical carve outs include environmental matters, governmental contracts, governmental investigations and AML issues, taxes and other deal specific items.

26

© 2015 Akin Gump Strauss Hauer & Feld LLPakingump.com

Part III – Covenants and Closing Conditions

Iain WoodPartner, Akin Gump Strauss Hauer & Feld LLPiwood@akingump.com

28

Representations &Warranties

Covenants(Pre-Closing & Post-Closing)

Conditions Indemnification

As of a date prior to date of Purchase

Agreement (e.g., date of financial

statements)

Date of Purchase Agreement

Period between signing and

closing & post-closing

At closing –necessary to

satisfy or waive in order to close

Post-closing obligation covering

breaches of pre-and post-closing items, including

post-closing covenants

Timeline (The Four Horsemen of Contracts)

Pre-Closing Covenants

Required to the extent not a simultaneous sign and close

Majority of covenants are covenants of the seller and/or the target

Covers events and actions to occur between signing and closing, such as:

Efforts to close/satisfy closing conditions

Conduct of the business (affirmative and negative covenants)

Continued due diligence, access and inspection rights (including Phase I and/or II)

Required consents and approvals (e.g., third-party, governmental and/or equity holder consents)

Anti-trust approvals, including HSR and similar filings

Exclusivity; No shop

Updates to disclosure schedules and changes in circumstances

Employment and benefit plan matters

Financing matters

D&O insurance matters (equity and merger transactions only)

29

Post-Closing Covenants

Covers events and actions to occur following the closing, such as:

Further assurances

Changes of name

Maintenance of and access to books and records

Delivery of remaining consents and approvals

Restrictive covenants (i.e., non-compete, non-solicit, and confidentiality covenants)

Removal of assets/transfer of assets from other facilities or locations

Tax matters

Other deal specific covenants (e.g., transition services, accounts receivable, excluded assets)

30

Negotiated Points and Considerations

As with representations and warranties, covenants are typically limited by qualifying language (e.g., dollar thresholds, carve-outs and schedule exceptions, the use of materiality or material adverse effect qualifiers, the use of efforts standards, and/or references to prior past practice or the ordinary course of business)

These qualifications and the covenants and the degree to which they are negotiated depend on the specifics of the transaction and the parties

For example, a transaction in a consolidated industry may have increased anti-trust scrutiny and as a result the standards and efforts required to obtain anti-trust approval will be subject to additional negotiation

The interaction between termination rights and break-up fees also effects the negotiations with respect to the pre-closing covenants

Certain covenants can give rise to indemnification for events not under a party’s control (e.g., the covenants regarding the conduct of the business, updates to schedules and similar matters)

This is significant as covenants are treated outside of the typical basket and cap limitations in the indemnity that would apply to representations

31

Other Considerations

Scope of continued due diligence and access – in particular with respect to environmental matters and indemnification related to such diligence and access

Efforts required to satisfy closing conditions, including efforts standard and required actions (e.g., efforts to seek or assist in satisfying conditions, reasonableness required with respect to consents or approvals, etc.)

Anti-trust approvals and efforts required to obtain approvals (“Hell or High Water” standard, best efforts, divestitures, etc.)

No shop provisions and requirement to obtain equity holder approval, in particular as it relates to potential fiduciary duty issues for public companies

Effect of updates to disclosure schedules on closing conditions and indemnification

Financing matters and requirements to obtain financing and/or alternative financing

32

Conditions

Roadmap for closing deliveries and events required to occur prior to closing

Typical closing conditions include:

Bring down of representations, warranties and pre-closing covenants to a specified standard

Delivery of consents and approvals, including anti-trust approvals and equity holder approval (varying constructs – all required consents, specified consents, or mix).

Absence of governmental or third party actions prohibiting the transaction

Delivery of executed closing deliveries and transaction documents

Financing availability

Completion of diligence

Material adverse effect

33

Negotiated Points and Considerations

Limitations and Qualifications:

Standard of condition – in all respects, in all material respects, in all respects except to the extent not resulting in an material adverse effect?

Scope of condition – certain conditions are limited by the scope of the delivery for such condition (i.e., all material consents)

Key negotiated points

Standard of condition

Scope of condition

Waiver of conditions and deemed waiver

Who controls the condition (i.e., Who can waive the condition? Which of the parties must act in order to satisfy the condition)?

What is the remedy if a condition is not met (refuse to close, break-up fee, right to extend the time period)?

34

Part IV: Dispute

Resolution

Options

35

Representations And

Warranties Insurance

• 800 or so of 40K plus deals worldwide in

2014: Significant increases year over year:

65% of $50-250m deals, GF data 2018

• Premium 2-5% of amount protected,

usually the purchase price

36

Alternative Dispute Resolution

• Arbitration clauses are very common in business contracts: avoids “home court” advantage if there is a dispute: Review where arbitration could occur, too: travel is expensive

• Only 17% of ABA survey 2013 deals made loser pay arbitration costs

37

Alternative Dispute Resolution

• Some parties leave IP dispute resolution to courts/USPTO, not inexpert arbitrators

• Note Bunge v. Northern Trust Co (623 N.E.2d 785, 252 Ill.App.3d 485, 191 Ill.Dec. 195, IL Ap. 4 Dist 1993): Courts enforce wording vs drafter of warranty: General warranty of validity does not require word “infringement” for patent infringement to be breach of warranty

38

Fraudulent Transfer Lawsuits

• Later-discovered seller or related party transfers

• Uniform statute, attorney’s fees and other relief beyond contract possible

• 2 year statute of limitations (from event, or discovery of fraud, varies)

39

Sue The Intermediaries

• Business valuation opinions, opinions of counsel, accounting statements all produce litigation

• Note Geaslen v. Berkson, Gorov & Levin, Ltd., (581 N.E.2d 138, 220 Ill.App.3d 600, 163 Ill.Dec. 187, IL Ap. 5 Dist 1991): Professional has “duty of care” in preparation of opinion, not one of investigation beyond scope of opinion

40

Sue Interlopers, Or Win On

Reps And Warranties If Seller

Waffles

• Third parties often decide to take over a seller if they hear about a deal: CF Texaco v. Pennzoil intentional interference w. contract tort $8+ billion damages, punitives

• But CF. Indeck v. Norweb, (735 N.E.2d 649, 316 Ill. App.3d 416, 249 Ill.Dec. 45, , IL Ap. 1 Dist 2000): Seller warranty breached when 3d party right of first refusal (agreement disclosed, not exercise of same) exercised: no 3d party interference, since just exercising rights

41

Questions?

William A. Price

Attorney at Law, www.growthlaw.com

1-800-630-4780

wprice@growthlaw.com

42