Key Provisions in M&A Agreements

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KEY PROVISIONS IN M&A AGREEMENTSPrivate Company M&A Boot Camp 2016

Premier date: February 24, 2016

Premier Date: February 24, 2016

Private Company M&A Boot Camp 2016

KEY PROVISIONS IN M&A AGREEMENTS

2© 2016 DailyDAC, LLC d/b/a/ Financial Poise™

© 2016 DailyDAC, LLC d/b/a/ Financial Poise™

WE WOULD LIKE TO TAKE THIS OPPORTUNITY TO THANK OUR SPONSORS

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 4

meet the facultyPANELISTS

Aarthi Belani Jones DayNick Heinz Mercer CapitalRobert Londin Jaspan Schlesinger LLPDavid Lorry Versa Capital Management LLC

MODERATOR Peter Feinberg,Hoge Fenton


Practical and entertaining education for business owners and executives, accredited

investors, and their legal and financial advisors. For more information, visit

www.financialpoise.comDISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD

NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.

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about this webinarAlthough every deal is different, understanding any purchase/sale agreement will help you understand other purchase/ sale agreements. Stated another way, most M&A documents include a similar set of sections and use a similar vocabulary. This webinar explains what provisions are commonly included in M&A documents and discusses how buyers and sellers approach these provisions differently. It also highlights how M&A agreements differ depending on whether the assets being bought and sold are equity of a company or the assets of a company.

about this series

Corporate transactions (or “deals”) include many types of transactions. One of the most significant types of transactions a company can enter into is a deal to buy another company or to sell itself. This type of deal, a M&A (merger and acquisition) deal, typically requires more work from accountants and attorneys than do many other deals. This webinar series features leading M&A attorneys and other “deal” professionals speaking at a fairly basic level about key provisions in merger and acquisition transactions, including those relating to the purchase price, representations and warranties, post-closing covenants, closing conditions, indemnification and critical boilerplate. All of these issues are discussed in plain English, and while the series is valuable for seasoned professionals in many fields (law, accounting, investment banking, etc.) who practice in this area, it is also easily understandable for business owners who have not previously been through this process.

As with all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes, and listeners will enhance their knowledge of this area whether they attend one, some, or all of the programs.


episodes in this series

EPISODE #1 Structuring and Planning the M&A Transaction 1/27/2016

EPISODE #2 Key Provisions in M&A Agreements

2/24/2016

EPISODE #3 The M&A Process

3/23/2016

EPISODE #4 Special Issues in M&A Deals 4/27/2016

EPISODE #5 Negotiating a M&A Deal

6/1/2016

EPISODE #6 Post-Closing Business Integration

6/22/2016

Dates above are premier dates; all webinars also available on demand



OUTLINE

1. Purchase Price2. Representations and Warranties3. Post-Closing Covenants4. Closing Conditions5. Indemnifications6. Choice of Law/Venue/Dispute Resolution


A COUPLE OF QUICK CAVEATS

1. Key provisions which are key will vary from transaction to transaction. What we will be discussing today is not meant to be an exhaustive list, rather a survey of provisions of general importance to both parties

2. There are important distinctions between stock transactions, asset purchases, and mergers (and even then, among different types of mergers). You should assume, though, for purposes of our presentation today, that our conversation will apply to all types of these transactions unless otherwise stated


PURCHASE PRICE GENERALLY

1. How much are sellers getting at closing vs. what’s deferred?

2. What’s the risk in what’s deferred?

3. Cash vs. stock

4. Capital gains vs. ordinary income (allocation)

5. Is all stock/are all assets of selling company being sold?


PURCHASE PRICE AT CLOSING VS. FUTURE PAYMENTS (THE “WHEN”)

1. General rule for sellers in a cash transaction: get as much as soon as you can

2. Depending on interest rate, if any, in note, Sellers lose time value of money

3. However, spreading out payments over multiple tax years may help sellers arbitrage tax liability


PAYMENTS OF PURCHASE PRICE SUBSEQUENT TO THE CLOSING (THE “IF”)

1. Sellers can’t be sure of Buyer’s post-closing economic condition, and if Sellers are unsecured creditors (see below), other parties might have superior rights to payments

2. Sellers cannot closely monitor buyer’s operations post-closing and cannot ensure payments will be made to them, even if Buyer is able to do so

3. Seller protections:a. Securityb. Guarantyc. Letter of credit

4. Convertibility of note


CASH VERSUS STOCK

1. Buyers often seek to pay Sellers in stock of the buying company

2. This can be a plus for Sellers in that it could be a tax free transaction (unless and until the stock in buyer is actually sold) if meeting certain statutory requirements. The stock also offers the possibility of appreciation

3. But stock may be subject to restrictions on resale (or essentially impossible to sell at all if the company is private) as well as market risk


CAPITAL GAINS VS. ORDINARY INCOME TAX CONSEQUENCES

1. Buyers will typically want Sellers, particularly those who have had an active role in running the business prior to the closing, to both continue with the business in some role and to refrain from competing with it after the transaction closes (see slides on post-closing covenants)2. The money paid to Sellers for employment/consulting and non-competition will be taxed at ordinary income tax rates (as opposed to money paid for stock in a stock purchase and certain assets in an asset purchase)3. Payments for physical assets such as inventory and equipment in an asset sale will also be taxed at ordinary income tax rates4. It may be advantageous for Sellers to receive less on the top line if they can receive capital gains tax treatment for a higher percentage of the consideration they receive


RECAPITALIZATIONS AND REORGANIZATIONS

1. Some buyers, particularly financial buyers like private equity firms, prefer to buy less than 100% of the stock of a target company, desiring to retain existing management with an equity stake in the company2. In some of these instances, a buyer will come in as a preferred stock holder with enhanced rights and protections3. In a best case scenario, existing management will remain incentivized and have more resources to grow the business as it moves forward


The Three Practical Considerations of Representations and Warranties : Due Diligence Aid, The Bringdown, and Indemnity/Purchase Price Adjustment

A) Due Diligence Aid

1) Helps Buyer; 2) Helps Buyer and Seller confirm purchase price.

B) The Bring down - “Are we good to close?” C) Basis for Indemnification


Types of Representations and WarrantiesA) Transaction Generally (good standing, capacity, authorization, enforceability, no conflicts, etc).B) More Seller/Target Specific (but not industry specific) - litigation, financial statements, taxes, ERISA, labor matters . . . types of generic representations and warranties that apply to virtually any Target.C) Industry Specific - Licenses, Permits, Regulatory, etc.D) Target Specific - material contacts, Top 20 suppliers, Top 20 customers (raises disclosure concern; NDA)E) The Catchall; 10b-5.


Other Considerations

A) Who makes the representations and warranties (tie to indemnity) B) Joint and Several

1) Tied to indemnity 2) If deal falls apart after signing (recourse)


Knowledge Qualifier

3) Actual Knowledge 4) Implied/imputed knowledge 5) Due inquiry prong 6) Entity’s “Knowledge” relative to that of its management team or senior executives.


Materiality Qualifier?

1) Quantify? 2) MAC Relationship


CLOSING CONDITIONS, GENERALLY1. Closing conditions, like they sound, are an obligation (which can be waived) for each party to the other party’s obligation to close the transaction2. Closing conditions will only be of importance in a two step transaction, that is, when the signing and closing are not simultaneous3. Closing conditions are more likely to put an onus on Sellers than Buyers4. Many of the conditions should be automatic, such as delivery and execution of ancillary agreements and corporate records and are firmly in the control of the party with the obligation5. Others, such as certificates of good standing, certified copies of articles or lien searches, require third parties, but should be things about which the Seller can feel confident


OPEN ENDED CLOSING CONDITIONS

1. Gives a party, usually the Buyer, an “out” for something which may be amorphous and/or small2. Examples are Buyer being satisfied with its due diligence in its sole discretion, Seller’s representations and warranties being true and complete in all respects, no material adverse change in Seller’s operations, and Buyer receiving financing for the transaction3. Sellers may not be able to get rid of all of these conditions, but they can push back against the number and scope of them, such as requiring Buyer to complete due diligence prior to signing


POST-CLOSING COVENANTS

1. Post-closing covenants require the action of one party, usually the Seller, to act in certain ways to assist the Buyer in transitioning the business it has purchased and/or to act or refrain from acting to help the Buyer preserve the value in the business it purchased2. Many of these actions are non-controversial, such the Seller’s assistance in transitioning customers, suppliers or employees or the parties working together on tax filings3. Most contentious of the post-closing covenants are usually the covenant not to compete and the related non-solicitation covenants


COVENANTS NOT TO COMPETE1. Seller (in asset purchase transactions) and/or its shareholders (in stock purchase transactions and mergers) in a non-compete agreement agree not to seek employment or act as investors in enterprises which compete with the Buyer2. May be placed in purchase agreement or in standalone document3. Very much a creature of state law; may need to be governed by the state where the employee is located even if the transaction itself is governed by another law (see choice of law slide)4. Enforceability against small shareholders or non-shareholding employees needs to be considered closely; misuse of covenant could subject Buyer to damages for restraint of trade5. Seller will ideally get a guaranteed employment during the length of the non-compete so that it will have some income source while the restrictions are in effect


NON-SOLICITATION AGREEMENTS

1. Non-solicitation agreements or covenants are the slightly less obtrusive cousin to non-compete agreements2. Non-solicitation agreements generally limit or prevent the selling company and/or its shareholders from seeking business from the selling company’s customers and recruiting the selling company’s employees3. Also very sensitive to state law considerations4. May be limited if a Seller’s contact pre-dated his employment with selling company or if a potentially interested employee or customer contacts a restricted Seller on his/her/its own


INDEMNIFICATION

1. The indemnification provisions are most typically how buyer is compensated for damages it suffers, most often from Sellers’ breaches of the representations

2. One of the most intensely negotiated parts of a M&A agreement

3. Key issues are limitations (time, dollar amounts), process and scope


SURVIVAL (TIME LIMITS) OF REPRESENTATIONS AND WARRANTIES

Most typically 1-2 years; completion of audit cycle

Statute of limitations [plus three months] for certain representations and warranties

In perpetuity for core representations and warranties regarding ability to enter into the acquisition agreement and enforceability

Survival tail added (for period during which there may be disputes)


BASKETS AND CAPS (DOLLAR LIMITS) Basket/Threshold (Amount % & Types)

1) Tipping 2) Non-Tipping (Pure Deductible) 3) Split Basket 4) “Non-Basket Losses”

Indemnity Cap 1) Customary Percentages 2) “Non Cap Losses”


INDEMNITY MECHANICS3) Holdback 4) Escrow (always better to be the party holding the money) 5) Holdback Note (offset) 6) Offset against Earn-out (if applicable)


MISCELLANEOUS ISSUES1. Joint and several liability

2. Role of insurance, tax and other recoveries

3. Exclusivity of remedy


KEY BOILERPLATE PROVISIONS1. Found at the end of the agreement

2. Most are non-controversial and provide commonsense rules for interpreting the contract (e.g., entire agreement, severability, etc.)

3. Some provisions may very much affect the way disputes are resolved or even if the parties will seek dispute resolution at all


CHOICE OF LAW1. Choice of law determines the substantive law to be used for dispute resolution2. While the laws of states are much more similar than different, there may be differences on interpretation of key provisions, such as disputes between a company and shareholders or between a company and its employees3. Parties sometimes choose the law of a neutral forum such as Delaware, with a well-established and well-known body of corporate law4. Some matters, particularly relating to employees, may not permit venue to be permitted enforcably designated, instead being compelled by where the employee is primarily based


VENUE1. Venue is the physical locale where jurisdiction over disputes between the parties is to be resolved2. In transactions in which parties are from different states (or perhaps even more so, different countries), each party will generally want its home state venue to be the place where disputes are resolved for reasons of familiarity , advantage and cost3. For a Seller, designating its home state can act as a de facto second basket, since the Buyer may not want to incur the cost and time of bringing a small action in a foreign setting4. Would a neutral forum without ties to the transaction accept jurisdiction?


MANNER OF DISPUTE RESOLUTION1. Arbitration (e.g., AAA or JAMS) often used because of perceptions of confidentiality, predictability and speed

2. Litigation, either with or without compulsory mediation

3. Waiver of right to jury trial

More About The Faculty: D

PETER [email protected]

Peter Feinberg has almost 25 years’ experience representing primarily middle market companies in all aspects and many sectors of merger and acquisition transactions. Mr. Feinberg has successfully closed well over 100 merger and acquisition transactions, representing buyers and sellers, public and privately held companies, multinational firms, family owned businesses and private equity firms. He practices in Silicon Valley at Hoge Fenton Jones & Appel, a more than 60 year old, 40+ attorney firm. He has previously been a partner at Thelen Reid & Priest and Ferrari Ottoboni and has worked in house at NetApp and Clorox. 36© 2016 DailyDAC, LLC d/b/a/ Financial Poise™



AARTHI [email protected]

Aarthi Belani is an associate at the Silicon Valley office of Jones Day. She focuses on M&A, joint ventures, and social enterprise and impact investment. Prior to joining Jones Day, Aarthi was on the in-house legal team covering strategy and corporate development at Credit Suisse in New York. She also advised on U.S. legal, regulatory, and compliance matters. In addition, Aarthi was a member of the Sustainability Network, a Credit Suisse OneBank (cross-divisional) initiative to develop impact investment products. Aarthi was an associate in the New York office of Cleary Gottlieb Steen & Hamilton for the first five years of her private practice career, prior to which she was a Junior Fellow at the Institute for International Law and Justice at NYU School of Law, where she attended law school. She is a director of Bidoun, a not-for-profit publishing, curatorial, and educational initiative that prints a quarterly magazine showcasing art and culture from the Middle East. She also has been a director of Keep a Child Alive, a pediatric AIDS nonprofit. Aarthi attended Stanford University as an undergraduate.

mailto:[email protected]



NICK [email protected]

Nicholas J. Heinz joined Mercer Capital in 2000 and serves as a senior vice president. Nick also leads Mercer Capital’s Transaction Advisory Group.Nick has extensive experience in providing valuation and corporate advisory services for purposes including mergers and acquisitions, fairness opinions, solvency opinions, employee stock ownership plans, buy-sell agreements, estate and gift tax planning and compliance matters, and corporate planning and reorganizations.

Over his career, Nick has provided transaction-related consulting services to numerous clients on both the sell-side and buy-side of transactions. Such consulting has included the delivery of transaction opinions, such as fairness opinions and solvency opinions, and strategic advisory related to transaction pricing and execution.Nick has broad industry experience and has developed specific industry expertise in multiple industries through dozens of engagements over his tenure at Mercer Capital.

Professional ActivitiesThe American Society of AppraisersThe ESOP Association, New South ChapterThe National Center for Employee OwnershipThe Financial Consulting GroupProfessional DesignationsAccredited Senior Appraiser (The American Society of Appraisers)EducationDuke University, Durham, North Carolina (B.A., 2000)



ROBERT [email protected]

Robert Londin is a partner at Jaspan Schlesinger LLP. He is in the Firm's Corporate and Commercial Transactions Group. Mr. Londin counsels numerous companies in connection with their mergers and acquisitions (both strategic and financial), financing needs and the execution of their business plans; financial concerns and underwriters in capital markets transactions; emerging-growth companies in the early stages of their business plans; seed capital and venture capital clients in connection with the formation of their investment vehicles and making of their portfolio company investments; borrowers and lenders in secured financings; and companies and highly compensated executives in connection with their executive compensation and separation arrangements.Mr. Londin serves as general counsel to many clients and their senior executives and advisory boards. This general corporate representation covers the resolution of day-to-day legal issues as well as strategic planning and business development extending to acquisition and financing concerns. He also represents technology and emerging-growth clients in connection with their Internet website development, strategic alliances, technology licensing, mergers and acquisitions, corporate finance, venture capital, Federal securities law matters, banking transactions and general corporate needs.Mr. Londin’s clients range from large institutions to individuals and sole proprietors, and include investment banking concerns, private investment vehicles, publicly traded companies, closely held businesses, high ranking executives, Internet ventures, software developers, telecommunications concerns, high technology/computer companies, and publicly traded companies.Prior to joining Jaspan Schlesinger LLP as a partner in 2004, Mr. Londin was an equity partner at a prominent New York City law firm and, prior thereto, an associate at a major Wall Street law firm.


DAVID [email protected]

David Lorry is a Managing Director at Versa Capital. David has more than 20 years of business and legal experience advising clients in a range of industries, helping them solve a variety of business issues and execute business transactions. David began his professional career as an attorney, practicing corporate, insolvency and commercial law for seven years, after which he became an investment banker. David has experience with bankruptcy, mergers and acquisitions, capital raising, commercial lending, general corporate transactions, and related matters.David received his undergraduate degree from Duke University, cum laude, and earned his law degree from George Washington University – National Law Center, with Honors.


EisnerAmper. Let's Get Down to Business®

EisnerAmper LLP is a leading full-service advisory and accounting firm, and is among the largest in the United States. We provide audit, accounting, and tax services, as well as corporate finance, internal audit and risk management, litigation services, consulting, private business services, employee

benefit plan audits, forensic accounting, and other professional advisory services to a broad range of clients across many industries. We work with high net worth individuals, family offices, closely held businesses, start-ups, middle market and Fortune 500 companies. EisnerAmper is PCAOB-registered and provides services to more than 200 public companies and to thousands of entities spanning the hedge, private equity, brokerage and insurance

space in the financial services marketplace. As companies grow we help them reach their goals every step of the way. With offices in New York (NY), New Jersey (NJ), Pennsylvania (PA), California (CA), and the Cayman Islands, and as an independent member of Allinial

Global, EisnerAmper serves clients worldwide.




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Important Notes

• THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY.

• IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.

• YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.