SRS 2010 Deal Points Study

M&A Deal Terms Study | 1 www.shareholderrep.com 2010 SRS M&A Deal Terms Study | 1 www.shareholderrep.com © 2010 Shareholder Representative Services LLC. All rights reserved.


2010 SRS M&A Deal Terms Study An analysis of deal terms in private-target

M&A transactions

© 2010 Shareholder Representative Services LLC. All rights reserved.



About SRS|Shareholder Representative Services

SRS is the leading expert in professionally managing the post-closing process to safeguard selling shareholders' interests in M&A transactions. On deals valued in aggregate in excess of $10 billion, SRS has represented more than 400 VC and private equity firms and over 10,000 shareholders. We have more knowledge and experience in serving as a shareholder representative than anyone else.

Professional As shareholder representative, SRS professionally manages the entire post-closing process, including the management of escrows, earn-out negotiations, the handling of claims, disputes and litigation, communications with the acquirer and, ultimately, distribution of escrow funds.

Independent By engaging SRS, there are no conflicts of interests. With state-of-the-art monitoring and communications systems, shareholders have ready access to all relevant information with full knowledge their interests are being protected.

Experienced The professionals at SRS are lawyers, accountants, bankers and entrepreneurs whose sole focus is shareholder representation. Our experience allows us to quickly slip into deals, even at the final hour. Our expertise allows us to deliver on our customer promise – to simplify the post-closing process and maximize the timely return of sale proceeds to shareholders.

For more information visit: www.shareholderrep.com



The SRS M&A Deal Terms Study surveys the terms of 88 private-target acquisition agreements in transactions for which SRS served as the shareholder representative.

The agreements surveyed date from July 2007 through July 2010.

Slides that compare the results of this Study to those of the 2009 Private Target Mergers & Acquisitions Deal Points Study conducted by the American Bar Association (ABA) have been included for those topics with respect to which SRS believed the data displayed an interesting trend or variance.

Overview of M&A Deal Terms Study Sample

The findings presented herein do not necessarily reflect the views of SRS. Further, the terms of the agreements surveyed in this Study were drafted in a myriad of ways and may not fit precisely into the categories included in this Study. Therefore, the drafters of the Study made frequent and various judgment calls to categorize provisions in a meaningful way. As a result, the conclusions presented in this Study may be subject to important qualifications that are not expressly articulated herein.



What’s Different The underlying deals for this Study come from a different pool of transactions than those used in prior studies. Specifically, our Study surveyed deals on which SRS has been engaged as the shareholder representative, most of which are not publicly reported. We do not believe our data is better or worse than other studies. Rather, it simply represents the results from a different sampling of transactions. Our hope is that having multiple data points on these issues from the various studies will give deal professionals greater knowledge in negotiating and advising clients.

Process This Study is the result of a comprehensive analysis of the terms of all surveyed deals. All findings were analyzed and reviewed by attorneys, accountants and professional staff internally at SRS. When a discrepancy surrounding an interpretation of a term arose from two primary independent reviewers, the matter was escalated to a third reviewer. All results were also separately reviewed by senior staff members.

Future Studies SRS plans to release subsequent studies on an annual or bi-annual basis. We also plan to add results related to what happens after closing and why. We appreciate any thoughts or feedback you may have.

About this Study



Escrow size/period   2/3s of deals have escrows in excess of 12 months   59% of deals have escrows in excess of 10% of deal value

Post-closing purchase price adjustments   2/3s of deals have post-closing purchase price adjustments

Survival period   95% of deals have carveouts to the survival period so that certain types of claims can be brought well into the future

Earnouts   25% of deals have earnouts   1/3 of earnouts have periods in excess of 5 years   59% of deals allow the buyer to offset indemnity payments against earnouts

Summary of Key Findings



SRS Study Sample Overview – By Transaction Value*

Less than $25M 29%

$25M-$50M 17%

$50M-$100M 14%

$100M-$150M 12%

$150M-$200M 14%

$200M and above 14%

* Transaction values do not include earnouts.



SRS Study Sample Overview – By Industry

Biopharmaceuticals 5%

Telecommunications & Networks

8%

Computer Hardware & Electronics

20%

Consumer & Business Products

2%

Consumer & Business Services

17% Greentech

1%

Media & Entertainment 5%

Medical Devices & Equipment

6%

Other Healthcare 3%

Information Technology & Software

33%



Table of Contents I.   Financial Provisions....................................................................................................9

a.  Post-Closing Purchase Price Adjustments ...........................................................................10 b.  Earnouts ..................................................................................................................17

II.   Pervasive Qualifiers..................................................................................................24 a.  Material Adverse Effect.................................................................................................25 b.  Knowledge Standards....................................................................................................34

III.   Target’s Representations, Warranties, and Covenants........................................................36 a.  No Undisclosed Liabilities...............................................................................................37 b.  Compliance with Law Representation ................................................................................39 c.  10b-5/Full Disclosure Representation.................................................................................41 d.  Covenants.................................................................................................................43

IV.  Conditions to Closing.................................................................................................48 a.  Accuracy of Target’s Representations.................................................................................49 b.  Buyer’s MAC Condition..................................................................................................57 c.  No Legal Proceedings Challenging the Transaction.................................................................59 d.  Legal Opinions............................................................................................................61 e.  Appraisal Rights..........................................................................................................62

V.  Indemnification.......................................................................................................64 a.  Sandbagging ..............................................................................................................65 b.  No Other Representations/Non-Reliance.............................................................................67 c.  Survival/Time to Assert Claims........................................................................................69 d.  Types of Damages/Losses Covered....................................................................................72 e.  Baskets....................................................................................................................74 f.  Double Materiality Scrape..............................................................................................82 g.  Caps........................................................................................................................84 h.  Indemnification as Exclusive Remedy.................................................................................86 i.  Escrows/Holdbacks ......................................................................................................88 j.  Stand-Alone Indemnities................................................................................................91 k.  Reductions Against Buyer’s Indemnification Claims.................................................................92

VI.   Dispute Resolution ...................................................................................................93 a.  Waiver of Jury Trial .....................................................................................................94 b.  Alternative Dispute Resolution ........................................................................................95

VII.   Glossary of Terms.....................................................................................................97



Financial Provisions



Financial Provisions >

Post-Closing Purchase Price Adjustments The “Adjustment Amount” (which may be a positive or negative number) will be equal to the amount determined by subtracting the Closing Working Capital from the Initial Working Capital. If the Adjustment Amount is positive, the Adjustment Amount shall be paid by wire transfer by Seller to an account specified by Buyer. If the Adjustment Amount is negative, the difference between the Closing Working Capital and the Initial Working Capital shall be paid by wire transfer by Buyer to an account specified by Seller.

“Working Capital” as of a given date shall mean the amount calculated by subtracting the current liabilities of Seller… as of that date from the current assets of Seller… as of that date. The Working Capital of Seller as of the date of the Balance Sheet (the “Initial Working Capital”) was ______ dollars ($_____).

(ABA Model Asset Purchase Agreement)



Post-Closing Purchase Price Adjustments (SRS/ABA Comparison)

Includes Adjustment Provision

68%

No Adjustment Provision

32%

0%

73%

43%

2%

30%

23%

2%

77%

29%

6%

19%

26%

Earnings

Working Capital

Debt

Assets

Cash

Other

SRS

ABA

(Subset: includes adjustment)

Adjustment Metrics*

Includes Adjustment Provision

79%

No Adjustment Provision

21%

SRS

ABA


* 42% of the post-closing purchase price adjustments in this Study were based on more than one metric; for example, both a Working Capital and Debt adjustment, or both a Working Capital and Closing Cash adjustment.



Post-Closing Purchase Price Adjustments – Working Capital Excludes Tax-Related Items

“Adjusted Working Capital” means current assets minus current liabilities; provided, however, that “Adjusted Working Capital” excludes from current assets all tax assets and excludes from current liabilities all tax liabilities.





Tax-Related Items Excluded

from Calculation 33%

Tax-Related Items Not

Excluded from Calculation

67%

Tax-Related Items Excluded

from Calculation 15%

Tax-Related Items Not

Excluded from Calculation

76%

Indeterminable 9%

Post-Closing Purchase Price Adjustments – Working Capital Excludes Tax-Related Items

(SRS/ABA Comparison) (Subset: deals with working capital purchase price adjustment)

SRS ABA



Post-Closing Purchase Price Adjustments – Methodology for Preparation of Closing Balance Sheet

(SRS/ABA Comparison) (Subset: deals with post-closing purchase price adjustment)


GAAP 20%

GAAP Consistent with Past Practices

54%

Other 13%

Silent 13%

GAAP 24%

GAAP Consistent with Past Practices

39%

Other* 30%

Silent 7%

SRS ABA



Post-Closing Purchase Price Adjustments – Separate Escrow (SRS/ABA Comparison)

(Subset: deals with post-closing purchase price adjustment)

Includes Separate Escrow

8%

No Separate Escrow

92%

True-Up Payment from

Indemnity Escrow

93%

Payment Not from Indemnity

Escrow 7%

Includes Separate Escrow

20%

No Separate Escrow

80%

True-Up Payment

from Indemnity

Escrow 64%

Payment Not from Indemnity

Escrow 15%

Silent 21%

(Subset: no separate escrow)

SRS

(Subset: no separate escrow)

ABA




Post-Closing Purchase Price Adjustments – Threshold

(Subset: deals with post-closing purchase price adjustment)

Purchase Price Adjustment Paid Only if Exceeds

Threshold 18%

Purchase Price Adjustment

Amount Need Not Exceed a

Threshold 82%




Earnouts

* Examples: receipt of regulatory approvals, attainment of post-closing contracts, product launches.

Includes Earnout

25%

No Earnout 75%

(Subset: includes earnout)

EARNOUT METRICS


41%

5%

13%

41%

Revenue

Earnings/EBITDA

Combo of Above

Milestone Events*



Earnouts – Period of Earnout

(Subset: deals with earnouts)

9%

9%

27%

5%

9%

9%

32%

<12 months

12 months

12 - 24 months

24 months

36 months

36 - 60 months

>60 months




Earnouts – Buyer’s Covenants as to Acquired Business (SRS/ABA Comparison) (Subset: deals with earnouts)

Included 14%

Not Included 86%

SRS Covenant to Run Business in Accordance with Past Practice


Included 29%

Not Included 55%

Indeterminable 16%

ABA Covenant to Run Business in Accordance with Past Practice



SRS Covenant to Run Business to Maximize Earnout

Included 10%

Not Included 74%

Indeterminable 16%

Included 23%

Not Included 77%


Earnouts – Buyer’s Covenants as to Acquired Business (SRS/ABA Comparison) (Subset: deals with earnouts)

ABA Covenant to Run Business to Maximize Earnout



Earnouts – Acceleration and Offsets (Subset: deals with earnouts)

Yes 32%

No 68%

Express Yes 59%

Express No 9%

Silent 32%

Does the Earnout Expressly Accelerate on a Change of Control?

Can Buyer Offset Indemnity Payments Against Earnout?




Earnouts – Additional Provisions

Provision Intended to Ensure Earnout Not Treated as a Security The right of Seller to a portion of the Earnout Amount, if any, shall not be represented by a certificate or other instrument, shall not represent an ownership interest in Buyer or the Business and shall not entitle Seller to any rights common to any holder of any equity security of Buyer.

Express Disclaimer of Fiduciary Relationship Nothing in this Agreement creates a fiduciary duty on the part of Buyer to Seller in respect of the Earnout.




Earnouts – Additional Provisions (Subset: deals with earnouts)

Included 23% Not Included

77% Included

5% Not Included 95%

Provision Intended to Ensure Earnout Not Treated as a Security

Express Disclaimer of Fiduciary Relationship




Pervasive Qualifiers



Definition of “Material Adverse Effect”

“Material Adverse Effect” means any result, occurrence, fact, change, event or effect that has a materially adverse effect on the business, assets, liabilities, capitalization, condition (financial or other), results of operations or prospects of Target.

Pervasive Qualifiers >



Definition of “Material Adverse Effect” (SRS/ABA Comparison)

(Subset: MAE defined)

"Prospects" Included

23%

"Prospects" Not Included

77%

SRS ABA


"Prospects" Included

38%

"Prospects" Not Included

62%



Definition of “Material Adverse Effect” – Forward Looking Standards

“Material Adverse Effect” means any result, occurrence, fact, change, event or effect that has, or could reasonably be expected to have, a materially adverse effect on the business, assets, liabilities, capitalization, condition (financial or other), results of operations or prospects of Target.




Definition of “Material Adverse Effect” – Forward-Looking Standards

(Subset: deals with MAE definition)

* Agreements in the “Other” category use a combination of “could” and “would” or some other forward-looking standard.

Yes 68%

No 32%

"Would Be" 61%

"Could Be" 22%

Other* 17%

(Subset: forward-looking standard)

Is MAE Forward-Looking?




Definition of “Material Adverse Effect” – Carve Outs

“Material Adverse Effect” means …, except to the extent resulting from (A) changes in general local, domestic, foreign, or international economic conditions, (B) changes affecting generally the industries or markets in which Company operates, (C) acts of war, sabotage or terrorism, military actions or the escalation thereof, (D) any changes in applicable laws or accounting rules or principles, including changes in GAAP, (E) any other action required by this Agreement, or (F) the announcement of the Transactions.




Definition of “Material Adverse Effect” – Carve Outs (SRS/ABA Comparison)



Definition Includes

Carve Outs 79%

No Carve Outs Included

21%

Definition Includes

Carve Outs 92%

No Carve Outs Included

8%

SRS ABA



Definition of “Material Adverse Effect” – Carve Outs


100%

91%

56%

69%

70%

40%

54%

58%

Economic Conditions

Industry Conditions

Actions Required by Agreement

Announcement of Deal

War or Terrorism

Financial Market Downturn

Changes in Law

Changes in Accounting




Definition of “Material Adverse Effect” – Carve Out(s) Qualified by Disproportionate Effect

“Material Adverse Effect” means …, except to the extent resulting from (A) changes in general local, domestic, foreign, or international economic conditions, (B) changes affecting generally the industries or markets in which Company operates, (C) acts of war, sabotage or terrorism, military actions or the escalation thereof, (D) any changes in applicable laws or accounting rules or principles, including changes in GAAP, (E) any other action required by this Agreement, or (F) the announcement of the Transactions (provided that such event, change, or action does not affect Company in a substantially disproportionate manner).




Definition of “Material Adverse Effect” – Carve Out(s) Qualified by Disproportionate Effect

(Subset: deals with MAE definition with carve outs)

At Least One Carve Out

Qualified by Disproportionate

Effect 88%

No Carve Outs Qualified by

Disproportionate Effect 12%




Knowledge – Standards

Actual Knowledge “Knowledge” means the actual knowledge of the directors and officers of Target.

Constructive Knowledge (Role-Based Deemed Knowledge) “Knowledge” means the knowledge of the directors and officers of Target and other individuals that have a similar position or have similar powers and duties as the officers and directors of Target, including, in the case of such officers, the knowledge of facts that such officers should have after due inquiry.




Knowledge – Standards (SRS/ABA Comparison)

* 17% include more than one constructive knowledge element, e.g., role-based deemed knowledge and an express investigation requirement.

ABA

Constructive Knowledge*

85%

Actual Knowledge

13%

Knowledge Not Defined

2%

SRS

42%

36%

6%

12%

9%

Express Investigation - Reasonable or Due Inquiry

Express Investigation - Reasonable or Due Inquiry of Knowledgeable

Persons

Express Investigation - Other

Role-Based Deemed Knowledge

Other

(Subset: constructive knowledge)

Constructive Knowledge

68% Actual

Knowledge 25%

Knowledge Not Defined

7%

14%

63%

24%

6%

Express Investigation - Reasonable or Due Inquiry

Express Investigation - Other

Role-Based Deemed Knowledge

Other




Target’s Representations, Warranties, and

Covenants



“No Undisclosed Liabilities” Representation

Buyer-Favorable Formulation Target has no liability except for liabilities reflected or reserved against in the Balance Sheet or the Interim Balance Sheet and current liabilities incurred in Target’s ordinary course of business since the date of the Interim Balance Sheet.

Target-Favorable Formulation Target has no liability of the nature required to be disclosed in a balance sheet prepared in accordance with GAAP except for…

Target’s Representations, Warranties, and Covenants >



“No Undisclosed Liabilities” Representation

Includes Rep 97%

Rep Not Included

3%

Knowledge Qualified

1% Not

Knowledge Qualified

99%

"All Liabilities" (Buyer-

Favorable) 73%

"GAAP Liabilities" (Target-

Favorable) 27%

(Subset: includes rep)




Compliance with Law Representation

[To the Sellers’ knowledge,] the business of Target [has been and] is being conducted in compliance with all applicable laws.




Compliance with Law Representation (SRS/ABA Comparison)

* Does not test whether notice of investigation requirement appears in other representations.

14%

84%

23%

81%

18%

71%

18%

59%

Knowledge Qualified

Covers Present AND Past Compliance

Includes Notice of Investigation*

Includes Notice of Violation

SRS ABA




“10b-5”/Full Disclosure Representation

“10b-5” Formulation No representation or warranty or other statement made by [Target] in this Agreement, the Disclosure Letter, any supplement to the Disclosure Letter, the certificates delivered pursuant to Section 2.7(a) or otherwise in connection with the Contemplated Transactions contains any untrue statement or omits to state a material fact necessary to make any of them, in light of the circumstances in which it was made, not misleading.

Full Disclosure Formulation Seller does not have Knowledge of any fact that has specific application to Seller (other than general economic or industry conditions) and that may materially adversely affect the assets, business, prospects, financial condition or results of operations of Seller that has not been set forth in this Agreement or the Disclosure Letter.

(ABA Model Asset Purchase Agreement)




“10b-5”/Full Disclosure Representation

"10b-5" Formulation

Only 44%

"10b-5" AND Full Disclosure

Formulation 9%

Rep Not Included

47%

Full Disclosure Formulation

Only 0%

Both Knowledge Qualified

12% “10b-5” (Only) Knowledge Qualified

0%

Full Disclosure (Only)

Knowledge Qualified

75%

Neither Knowledge Qualified

13%

Knowledge Qualified

21% Not

Knowledge Qualified

79%

(Subset: “10b-5” AND full disclosure formulation)

(Subset: “10b-5” formulation only)




Covenants – Target’s Duty to Update for Breaches of Representations and Warranties*

* Disregards the Study sample’s deals that were simultaneous “sign-and-close.”

** These deals generally eliminate Buyer’s right to indemnification for the updated matter if Buyer chooses to waive the relevant closing condition or does not exercise an existing or newly provided right to terminate the transaction because of the update. Includes deals where Buyer and Target agree to negotiate effect on indemnification rights in good faith.

Express Duty to Update

Buyer 90%

Silent 10%

No 100%

Yes 0%

No 90%

Yes** 10%

Is Duty to Update Limited to Information Required to Have Been Disclosed at Signing?

Is Buyer’s Right to Indemnification Limited for Updated Matters?

(Subset: express duty)




Covenants – Notice of Breaches*

* Disregards the Study sample’s deals that were “simultaneous sign-and-close.”

Target Expressly Required to Notify Buyer of Breaches

80%

Target Not Expressly Required to Notify Buyer of Breaches

20%




Covenants – No Shop/No Talk

No Shop/No Talk Between the date of this Agreement and the Closing Date, Company shall not . . . (i) solicit, initiate, consider, encourage or accept any proposal or offer that constitutes an Acquisition Proposal or (ii) participate in any discussion, conversation, negotiation or other communication regarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way, assist or participate in, facilitate or encourage the submission of, any proposal that constitutes, or could reasonably be expected to lead to, an Acquisition Proposal.

Fiduciary Exception Notwithstanding the foregoing . . . the Company Board may withhold, withdraw, amend or modify its recommendation to the Company Shareholders if it determines in good faith by resolution duly adopted, after consultation with outside legal counsel, that it is required to do so in order to comply with its fiduciary duties to the Company Shareholders under applicable law.




Covenants – No Shop/No Talk*


** Subset disregards direct stock purchase deals.

Includes No-Shop/No-Talk

Provisions 98%

Not Included 2%

Includes Fiduciary Exception

22%

No Fiduciary Exception

78%

(Subset: includes No-Shop/No Talk**)




Covenants – No Shop/No Talk (SRS/ABA Comparison)


Includes No-Shop/No-Talk Provisions**

98%

Not Included 2%

Includes No-Shop/No-

Talk Provisions**

86%

Not Included 14%

SRS ABA



Conditions to Closing*




Accuracy of Target’s Representations – When Must They Be Accurate?

Single point in time: at closing Each of the representations and warranties made by Target in this Agreement shall have been accurate in all respects as of the Closing Date as if made on the Closing Date.

Two points in time: at signing and at closing Each of the representations and warranties made by Target in this Agreement shall have been accurate in all respects as of the date of this Agreement, and shall be accurate in all respects as of the Closing Date as if made on the Closing Date.

Conditions to Closing >



Accuracy of Target’s Representations – When Must They Be Accurate?

* Includes deals with both “at signing” and “at closing” requirements as well as deals with solely an “at closing” requirement.

At Closing* At Signing

Includes "At Signing"

Requirement 70%

Not Included 30%

Includes "At Closing"

Requirement 99%

Not Included 1%




Accuracy of Target’s Representations – How Accurate Must They Be?

Accurate in all respects Each of the representations and warranties made by Target in this Agreement shall have been accurate in all respects as of the Closing Date as if made on the Closing Date.

Accurate in all material respects Each of the representations and warranties made by Target in this Agreement shall have been accurate in all material respects as of the Closing Date as if made on the Closing Date.

MAE qualification Each of the representations and warranties made by Target in this Agreement shall be accurate in all respects as of the Closing Date as if made on the Closing Date, except for inaccuracies of representations or warranties the circumstances giving rise to which, individually or in the aggregate, do not constitute and could not reasonably be expected to have a Material Adverse Effect.





(inclusion of materiality qualifiers)

"In all respects" 3%

"In all material respects"

61%

MAE 36%

"In all respects" 1%

"In all material respects"

62%

MAE 37%







(MAE qualifier with capitalization carve out)

The representation and warranty set forth in Section 3.3 (Capitalization) shall be accurate in all [material] respects as of the Closing Date as if made on the Closing Date. Each of the other representations and warranties made by Target in this Agreement shall be accurate as of the Closing Date as if made on the Closing Date, except for inaccuracies of representations or warranties the circumstances giving rise to which, individually or in the aggregate, do not constitute and could not reasonably be expected to have a Material Adverse Effect.





(MAE qualifier with capitalization carve out) (Subset: deals with MAE qualifier)

Includes Capitalization Rep Carve Out

35%

Not Included 65%

Includes Capitalization Rep Carve Out

38% Not Included 62%







(“double materiality” scrape)

Each of the representations and warranties made by Target in this Agreement shall be accurate in all respects as of the Closing Date as if made on the Closing Date, except for inaccuracies of representations or warranties the circumstances giving rise to which, individually or in the aggregate, do not constitute and could not reasonably be expected to have a Material Adverse Effect (it being understood that, for purposes of determining the accuracy of such representations and warranties, all “Material Adverse Effect” qualifications and other materiality qualifications and similar qualifications contained in such representations and warranties shall be disregarded).





(“double materiality” scrape) (Subset: deals with materiality/MAE qualifiers)

Includes "Double

Materiality" Scrape

96%

Not Included 4%

Includes "Double

Materiality Scrape”

92%

Not Included

8%

*Includes deals with both “at signing” and “at closing” requirements as well as deals with solely an “at closing” requirement.





Buyer’s MAC Condition

Stand-Alone: Since the date of this Agreement, there has not been any Target Material Adverse Change.

“Back-Door” “absence of changes” representation

Since the Balance Sheet Date, there has not been any Target Material Adverse Change.

plus “bring down” formulation of “accuracy of representations” conditions.




Buyer’s MAC Condition

Stand-Alone MAC Condition Only 36%

Back-Door MAC Condition Only 10%

Both 53%

Neither 1%




No Legal Proceedings Challenging the Transaction

There will not be pending [or threatened] any action, suit, or similar legal proceeding brought by any Governmental Entity [or third party] challenging or seeking to restrain or prohibit the consummation of the Transactions.




No Legal Proceedings Challenging the Transaction

(Subset: includes condition)

Includes Condition

91%

Condition Not

Included 9%

Any Legal Proceeding 72%

Governmental Legal Proceedings Only

28%




Legal Opinions (Non-Tax) of Target’s Counsel (All deals: includes simultaneous sign-and-close deals)

*Typically as a condition to closing, but includes opinions required in a “closing deliveries” covenant.

Required* 67%

Not Required 33%




Appraisal Rights (Available or Exercised)* (SRS/ABA Comparison)

* Includes only merger deals. ** 17% of deals did not include an express appraisal rights condition, but did include a condition specifying a minimum percentage of shareholder votes approving the merger.

SRS ABA

Includes Appraisal Rights Condition**

79%

Condition Not Included

21%

Includes Appraisal

Rights Condition

57%

Condition Not Included

43%




Up to 3 percent

14%

>3 to 8 percent

54%

>8 to 10 percent

23%

>10 percent 9%

Appraisal Rights Not Available to Specified Percentage of Holders

41%

Appraisal Rights Not Exercised by Specified Percentage of Holders

22%

Appraisal Rights Neither Available To Nor Exercised By Specified Percentage

of Holders 37%

Up to 3 percent

4%

>3 to 8 percent

44%

>8 to 10 percent

36%

>10 percent 16%

Appraisal Rights – Condition Threshold (Subset: deals with appraisal rights condition)

(Subset: appraisal rights not available)

(Subset: appraisal rights not exercised)

Up to 3 percent

23%

>3 to 8 percent 54%

>8 to 10 percent

15%

>10 percent 8%

(Subset: neither/nor)




Indemnification



“Sandbagging”

Pro-Sandbagging The right to indemnification, reimbursement or other remedy based upon any such representation [or] warranty . . . will not be affected by . . . any Knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of … such representation [or] warranty….

(ABA Model Stock Purchase Agreement)

Anti-Sandbagging No party shall be liable under this Article for any Losses resulting from or relating to any inaccuracy in or breach of any representation or warranty in this Agreement if the party seeking indemnification for such Losses had Knowledge of such Breach before Closing.

Indemnification >



“Sandbagging” (SRS/ABA Comparison)

SRS ABA Pro-

Sandbagging Provision Included

39%

Anti-Sandbagging

Provision Included

8%

Silent 53%

* For purposes of this Study, “pro-sandbagging” is defined by excluding clauses that merely state, for example, that Target’s representations and warranties “survive Buyer’s investigation” unless they include an express statement that Buyer’s knowledge acquired outside of any investigation made pursuant to the agreement impacts Buyer’s post-closing indemnification rights.

Indemnification >

Pro-Sandbagging Provision Included*

58%

Anti-Sandbagging Provision Included

5%

Silent 37%



“No Other Representations”/Non-Reliance

Buyer acknowledges that Target has not made and is not making any representations or warranties whatsoever regarding the subject matter of this Agreement, express or implied, except as provided in Section 3,[and that it is not relying and has not relied on any representations or warranties whatsoever regarding the subject matter of this Agreement, express or implied, except for the representations and warranties in Section 3].

Indemnification >



Not Included 64%

"No Other Reps" or Express Non-

Reliance Provision Included

36%

Only "No Other Representations"

Clause 72%

Only Non-Reliance Clause

6%

Both "No Other Representations" and Non-Reliance

Clause 22%

“No Other Representations”/Non-Reliance

(Subset: includes either or both provisions)

Indemnification >



Survival/Time to Assert Claims

10.1 SURVIVAL All representations, warranties … in this Agreement, the Disclosure Letter, the supplements to the Disclosure Letter, the certificate delivered pursuant to Section 2.4(a)(v), and any other certificate or document delivered pursuant to this Agreement will survive the Closing…

10.5 TIME LIMITATIONS If the Closing occurs, Sellers will have no liability (for indemnification or otherwise) with respect to any representation or warranty … unless on or before ______________ Buyer notifies Sellers of a claim specifying the factual basis of that claim in reasonable detail to the extent then known by Buyer…

(ABA Model Stock Purchase Agreement)

Indemnification >



Survival/Time to Assert Claims* (generally)

* These periods apply to representations and warranties generally; specific representations and warranties are often carved out from these periods.

Indemnification >

0%

0%

1%

35%

11%

40%

0%

11%

2%

Silent

Express No Survival

<12 months

12 months

>12 to <18 months

18 months

>18 to <24 months

24 months

>24 months



Survival/Time to Assert Claims – Carve Outs to Survival Limitations (SRS/ABA Comparison)*

60%

66%

65%

69%

11%

36%

9%

30%

13%

23%

32%

74%

56%

75%

74%

62%

39%

64%

31%

44%

33%

34%

28%

27%

14%

37%

34%

36%

Taxes (Rep)

Capitalization (Rep)

Ownership of Shares (Rep)

Due Authority (Rep)

Employee Benefits/ERISA (Rep)

Due Organization (Rep)

Environmental (Rep)

Broker's/Finder's Fees (Rep)

Title to/Sufficiency of Assets (Rep)

No Conflicts (Rep)

Intellectual Property (Rep)

Fraud

Intentional Breach of Seller's/Target's Reps

Breach of Seller's/Target's Covenants

SRS

ABA

* Matters subject to carve outs survive longer than the time periods applicable to representations generally. 5% of deals had no carve outs.

Indemnification >



Expressly Included

4%

Expressly Excluded

47%

Silent 49%

Expressly Included

42%

Expressly Excluded

6%

Silent 52%

Expressly Included

27%

Expressly Excluded

15% Silent 58%

Expressly Included

1%

Expressly Excluded

47%

Silent 52%

Types of Damages/Losses Covered (SRS/ABA Comparison)

SRS ABA Diminution in Value

Punitive Damages

Indemnification >

Diminution in Value

Punitive Damages



Expressly Included

7% Expressly Excluded

25% Silent 68%

Expressly Included

8%

Expressly Excluded

36%

Silent 56%

Expressly Included

8%

Expressly Excluded

43%

Silent 49%

SRS ABA Incidental Damages

Consequential Damages

Incidental Damages

Consequential Damages

Types of Damages/Losses Covered (SRS/ABA Comparison)

Indemnification >

Expressly Included

8% Expressly Excluded

18% Silent 74%



Baskets

Deductible Sellers shall not be required to indemnify Buyer for Losses until the aggregate amount of all such Losses exceeds $300,000 (the “Deductible”) in which event Sellers shall be responsible only for Losses exceeding the Deductible.

First Dollar Sellers shall not be required to indemnify Buyer for Losses until the aggregate amount of all such Losses exceeds $500,000 (the “Threshold”) in which event Sellers shall be responsible for the aggregate amount of all Losses, regardless of the Threshold.

Combination Sellers shall not be required to indemnify Buyer for Losses until the aggregate amount of all such Losses exceeds $500,000 (the “Threshold”) in which event Sellers shall be responsible only for Losses in excess of $300,000 (the “Deductible”).

Indemnification >



Baskets (SRS/ABA Comparison)

SRS ABA

No Basket 1%

Deductible 32%

First Dollar 65%

Combination 2%

No Basket 5% Deductible

47%

First Dollar 36%

Combination 12%

Indemnification >



Baskets as % of Transaction Value (Subset: deals with baskets)

Indemnification >

48%

38%

13%

1%

≤0.5%

>0.5% to 1%

>1% to 2%

>2%



Baskets as % of Transaction Value (statistical summary) (Subset: deals with baskets)

Indemnification >

Basket Type Mean Median Minimum Maximum

Deductible (sample size 28)

0.96% 0.51% 0.08% 6.25%

First Dollar (sample size 57)

0.60% 0.54% 0.09% 2.00%

All Baskets (other than

Combination) (sample size 85)

0.72% 0.55% — —



Baskets – General Coverage* (Subset: deals with baskets)

* Carve outs for individual representations and warranties, fraud, and intentional breaches of representations and warranties are addressed on next slide.

100%

26%

25%

Breaches of Seller/Target Reps and Warranties

Breaches of Seller/Target Covenants

Other Indemnity Claims

Indemnification >



Baskets – Carve Outs (SRS/ABA Comparison) (Subset: deals with baskets*)

* 5% of deals with baskets had no carve outs.

Indemnification >

70%

69%

66%

52%

36%

34%

8%

7%

14%

6%

85%

66%

57%

35%

55%

57%

37%

40%

24%

23%

22%

15%

59%

41%



Due Authority (Rep)

Taxes (Rep)





No Conflicts (Rep)

Environmental (Rep)

Fraud


SRS

ABA



Baskets – Eligible Claim Threshold (Subset: deals with baskets)

Sellers shall not be required to indemnify Buyer for any individual item where the Loss relating to such claim (or series of claims arising from the same or substantially similar facts or circumstances) is less than $15,000.

Indemnification >



Baskets – Eligible Claim Threshold (Subset: deals with baskets)

Includes Eligible Claim Threshold

14%

No Eligible Claim Threshold

86%

Indemnification >



“Double Materiality” Scrape (materiality qualification in reps disregarded)

Materiality qualification in reps disregarded for all indemnification-related purposes

For purposes of this Article VIII (Indemnification), the representations and warranties of Target shall not be deemed qualified by any references to materiality or to Material Adverse Effect.

Materiality qualification in reps disregarded for calculation of damages/losses only

For the sole purpose of determining Losses (and not for determining whether or not any breaches of representations or warranties have occurred), the representations and warranties of Target shall not be deemed qualified by any references to materiality or to Material Adverse Effect.

Indemnification >



“Double Materiality” Scrape (materiality qualification in reps disregarded)

(Subset: deals with baskets)

(Subset: includes “double materiality” scrape)

For Determining

Damages Only 51%

For Determining Breach AND

Damages 41%

For Determining Breach Only

8%

Includes "Double

Materiality" Scrape

69%

Not Included 31% “Double Materiality” Scrape

Limited to Calculation of Damages or Losses?

Indemnification >



Cap Amounts as % of Transaction Value (SRS/ABA Comparison)

(Subset: deals with determinable caps)

SRS ABA

Mean Median Minimum Maximum

21.72% 11.19% 1.23% 100%

Indemnification >


13.68% 11.76% 6.25% 30.00%

17%

25%

37%

17%

4%

0%

0%

29%

19%

16%

14%

13%

4%

5%

<10%

10%

>10% to 15%

>15% to 25%

>25% to 50%

>50% to <Purchase Price

Purchase Price

SRS

ABA



Cap Carve Outs (SRS/ABA Comparison) (Subset: deals with determinable caps)

68%

65%

66%

51%

32%

27%

8%

6%

10%

19%

28%

91%

70%

51%

49%

33%

49%

48%

29%

33%

15%

10%

21%

22%

13%

66%

38%

27%



Due Authority (Rep)

Taxes (Rep)




Environmental (Rep)


No Conflicts (Rep)

Intellectual Property (Rep)

Fraud


Breach of Seller's/Target's Covenants

SRS ABA

Indemnification >



Indemnification as Exclusive Remedy for Breaches of the Agreement*

Exclusive Remedy 93%

Non-Exclusive Remedy

0%

Silent 7%

Indemnification >

* Subject to carve-outs as addressed on the next slide.



Indemnification as Exclusive Remedy – Carve Outs (SRS/ABA Comparison)

(Subset: deals with indemnification as exclusive remedy)

91%

66%

49%

21%

69%

27%

35%

7%

Fraud

Intentional Misrepresentation

Equitable Remedies*

Breach of Covenants

SRS ABA

* Equitable remedies beyond “specific performance of obligations under this agreement.” Examples: reformation, rescission.

Indemnification >



Escrows/Holdbacks

Escrow/Holdback Included

95%

Escrow/Holdback Not Included

5%

Indemnification >



Escrows/Holdbacks as % of Transaction Value* (SRS/ABA Comparison)

(Subset: deals with determinable escrows/holdbacks)

Indemnification >

2%

0%

14%

25%

40%

15%

2%

2%

16%

10%

27%

16%

16%

9%

1%

0%

Up to 5%

>5% to 7%

>7% to <10%

10%

>10% to 15%

>15% to 20%

>20% to 25%

>25%

SRS

ABA

* 82% of SRS deals with escrows/holdbacks had a cap equal to the amount of the escrow/holdback; 50% of ABA deals had the same.



Escrows/Holdbacks as % of Transaction Value (SRS/ABA Comparison)

(Subset: deals with determinable escrows/holdbacks)

Indemnification >


SRS 13.02% 11.76% 3.45% 29.00%

ABA 10.51% 9.93% 1.23% 37.30%



Stand-Alone Indemnities*

* Items for which indemnification is specifically provided regardless of indemnification for general breaches of representations and warranties.

Indemnification >

1%

5%

61%

78%

43%

56%

55%

43%

13%

9%

8%

5%

17%

41%

3%

Environmental

ERISA

Taxes

Payments to Dissenting Shareholders

Litigation

Accuracy of Closing Certificates

Transaction Expenses/Change in Control Payments

Adjustments to Purchase Price

IP Matters

Regulatory Matters

Excess Parachute Payments Under 280G

Third-Party Consents

Fraud and Willful Misrepresentation

Other

None



Reductions Against Buyer’s Indemnification Claims

Reduction for Tax Benefits Reduction for Insurance Proceeds

Express Requirement that Buyer Mitigate Losses?

Expressly Included

19%

Silent 81%

Expressly Included

74%

Silent 26%

Yes 16%

Silent 84%

Indemnification >



Dispute Resolution



Dispute Resolution >

Waiver of Jury Trial Provision

Included 70%

No Waiver of Jury Trial Provision

30%

Waiver of Jury Trial Provision

Included 51%

No Waiver of Jury Trial Provision

49%

SRS ABA

Waiver of Jury Trial (SRS/ABA Comparison)



Includes General ADR

Provision 31%

No General ADR Provision

69%

Alternative Dispute Resolution (“ADR”)*

* ADR provisions that generally cover disputes under acquisition agreement (rather than those limited to specific disputes such as purchase price adjustments or earnouts).

(Subset: includes provision)

Binding Arbitration

100%

Mediation 0%

Mediation then

Binding Arbitration

0%




Alternative Dispute Resolution (“ADR”) (Subset: deals with general ADR provisions)

Specified Arbitrator(s) Arbitration Expenses

American Arbitration Association

59%

Judicial Arbitration &

Mediation Services

41%

Other 0%

Loser Pays 33%

Expenses Apportioned

15%

Determined by Arbitrator

37%

Evenly Split 8%

Silent 7%




Glossary of Terms



Glossary of Terms >

10b-5 Rule 10b-5 is an SEC rule that prohibits any act or omission resulting in fraud or intentional deceit (scienter) and relied upon by the injured party in connection with the purchase or sale of a security. A “10b-5 Representation” is a catch-all representation in the merger agreement modeled from the SEC rule but without the scienter or reliance requirement, expanding buyer’s ability to claim breach of the agreement.

Appraisal Rights The statutory right available in most states to a corporation’s minority shareholders who object to a merger to have a fair price of their stock determined in a judicial proceeding and to require the corporation to repurchase their stock at that price. Appraisal rights are usually not available unless the shareholder meets certain requirements, such as voting against the merger or abstaining from voting.

Arbitration A method of alternative dispute resolution whereby a dispute, with the consent of the parties, is submitted to a neutral person or group for a decision. Usually includes a full evidentiary hearing and presentations by attorneys for the parties. The merger agreement may provide that the arbitrator’s decision be binding or non-binding.

Basket The basket is the threshold claim amount that must be reached before the seller becomes liable for the buyer’s losses. Typically, baskets function in one of two ways. Under a “deductible” basket, the seller is only liable for damages in excess of the threshold amount. If the agreement includes a “first dollar” basket, the seller is liable for all damages once the threshold amount has been reached.

Cap The maximum recovery a buyer may obtain for indemnification claims. Many agreements include separate caps for different types of breaches.

Closing Date The date on which the transaction is consummated, i.e., the date on which the purchase price is paid and the merger occurs.



Glossary of Terms >

Consequential Damages Damages that are not a direct result of an act, but a consequence of the initial act. To be awarded consequential damages, it typically must be shown that the damages were a foreseeable result of the initial act.

Covenant Covenants are actions that must be taken or not taken by the parties. In a merger agreement, covenants may require the parties to take actions both before and after the closing.

Diminution in Value Damages that result from the loss in value to an asset or enterprise. In the context of a merger, it typically refers to a loss that results from a decrease in value due to a breach of the merger agreement.

Earnout A provision stating that the selling shareholders will obtain additional consideration if the seller or surviving company reaches certain milestones. Examples include revenue targets, receipt of regulatory approvals, etc.

Escrow/Holdback A portion of the merger consideration that is deposited with a neutral third party (in the case of an escrow) or withheld by the buyer (in the case of a holdback) to be applied towards potential future indemnification claims by the buyer. After a specified period of time (the survival period) any consideration remaining in the escrow or holdback account is released to the selling shareholders.

Incidental Damages Damages that are awarded as compensation for the buyer’s commercially reasonable expenses resulting from a breach by the seller. Examples include the costs of handling, shipping, and replacing faulty inventory, costs associated with restatement of the seller’s financials, and the costs associated with bringing the seller into compliance with applicable regulations.



Glossary of Terms >

Indemnification Where one party (typically the seller) to an agreement reimburses the other (typically the buyer) for any losses they incur as a result of the transaction.

Mediation A form of alternative dispute resolution where the parties attempt to negotiate a settlement with the assistance of a neutral third party. Unlike arbitration or litigation, the resulting agreement, or lack thereof, is wholly controlled by the parties.

Punitive Damages Damages awarded to an injured party that go beyond what is necessary to compensate them for their losses and which are intended to punish the wrongdoing party.

Representations and Warranties Representations are statements of fact by the seller regarding the condition of its business, covering virtually all aspects of the company. Warranties are the seller’s assurances to the buyer that the representations are true, and that if they are not, the buyer will be entitled to seek legal remedies.

Sandbagging Where a party may seek indemnification for the other party’s breach of the merger agreement even if the non-breaching party had knowledge of the breach prior to closing.

Signing Date The date on which the merger agreement is signed by the principal parties. Closing typically, but not always, occurs on a later date.

Survival The time period after closing in which the buyer may make a claim against the seller or selling shareholders for breach of their representations, warranties and covenants. The time period is usually shorter than the applicable statute of limitations.



Legal >

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DISCLAIMER

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Documents

SRS 2010 Deal Points Study